Providing guidance and timely tax advice has never been more important than it is now.
The 2021 Budget revealed a 6% increase in the main corporation tax rate, which started from 1 April 2023, and this will have significant tax implications for business owners.
But that’s not the only change put into action.
So keep reading to make sure you’re up to date and can assist your clients in navigating these tax changes smoothly.
In this article we explain the new tax rates, who is affected and what marginal relief is available, plus new research and development (R&D) tax relief reform, and changes to capital allowances.
Here’s what we cover:
- What is corporation tax?
- What is marginal relief for corporation tax?
- R&D tax relief reform
- Capital allowance changes: Full expensing
- How to support your clients with corporation tax changes
- Final thoughts
What is corporation tax?
Corporation tax is one form of taxation levied by the UK government to generate revenue from business income.
It’s calculated based on the taxable profits of a company, and involves subtracting eligible expenses and deductions from the gross income and gains.
The resulting taxable income is then subject to the current corporation tax rate.
Previous corporation tax rates
From 1 April 2015 to 31 March 2023, a single corporation tax rate applied to all companies. The single tax rate was 20% for the 2015 and 2016 financial years.
This was decreased to 19% between 1 April 2017 and 31 March 2023.
New corporation tax rates
Since 1 April 2023, there are two corporation tax rates:
- The main rate is 25% and applies to companies that make an annual profit of more than £250,000
- The small profits rate of 19% applies to companies that make an annual profit of £50,000 or less.
For accounting periods that straddle 1 April 2023, company profits arising in an accounting period are apportioned on a time basis between the financial years in which the accounting period falls.
To calculate tax payable, you’ll need to prepare separate calculations of the tax charges for profits falling within the period up to and including 31 March 2023 and for the period from 1 April 2023 to the end of the accounting period.
What is marginal relief for corporation tax?
Companies that have annual profits between £50,000 and £250,000 are eligible for marginal relief.
This relief provides these companies a gradual increase in corporation tax rate between the small profits rate and the main rate, so they’re not subject to the full 25%.
If a company’s accounting period is shorter than 12 months, or if there are associated companies, then these limits are reduced proportionately.
How to calculate marginal relief
The threshold is worked out by applying the main rate to taxable profits and then applying a deduction for marginal relief.
HMRC has created a marginal relief calculator on the government website to check a company’s eligibility for relief along with calculating how much marginal relief the company could be entitled to, and an indication of the effective tax rate before and after marginal relief.
Before using the calculator, make sure you have the following client information with you:
- The company’s accounting period start and end dates
- The company’s total taxable profit
- Any distributions from non-group, unassociated companies
- Any associated company details.
R&D tax relief reform
Research and development (R&D) tax relief supports companies working on innovative projects in science and technology.
Advances in the arts, humanities or social sciences (including economics) can’t be claimed, and the project must relate to the company’s current trade or one they intend to start up based on the results of the R&D.
The two different tax relief schemes companies can claim under are:
- The SME scheme, available only to small and medium-sized enterprises (SMEs)
- The R&D expenditure credit (RDEC) scheme, primarily aimed at larger companies but can also be claimed by SMEs in some cases.
Since 1 April 2023, the following rate changes have been applied:
- RDEC rate increased from 13% to 20%
- The SME additional deduction decreased from 130% to 86%.
- The SME credit rate will remain at 14.5% for loss-making SMEs spending 40% of their expenditure on R&D but will be cut to 10% for other companies.
The R&D claims submissions process has also been revamped to tackle abuse of the reliefs.
All claims are to be made digitally. Each claim will also need to be endorsed by a named senior officer of the company, and an additional information form will be required for all claims made on or after 1 August 2023.
The additional information form will require:
- A breakdown of the costs across qualifying categories
- A description of the R&D
- Details of any agent who has advised the company on putting together the claim.
Certain companies will need to notify HMRC in advance of making a claim.
Claim notification will be required where a customer has not made an R&D claim during the period of three years ending with the day before the first day of the claim notification period.
They’ll need to do this digitally and inform HMRC within six months of the end of the period of account to which the claim relates.
Capital allowance changes: Full expensing
Capital allowances are another type of tax relief, allowing a company to deduct some or all of the cost of fixed assets from its profits before paying tax.
Since 1 April 2023, there’s a temporary relief called ‘full expensing’ available to companies for capital expenditure on main rate plant and machinery in the year the expenditure is incurred.
Expenditure must be incurred on the plant or machinery on or after 1 April 2023 but before 1 April 2026.
Companies can deduct the full cost of the qualifying assets from their profits.
This relief is designed to stimulate business capital investment by incentivising a 100% first year allowance. The amount of expenditure that can qualify for this measure is uncapped, which means that the more that is invested, the greater the potential tax savings.
For ‘special rate’ expenditure, which doesn’t qualify for full expensing, a company can instead claim a 50% first-year deduction in the year that expenditure is incurred.
For further information on the difference between ‘main rate’ and ‘special rate’ expenditure, read HMRC’s guidance pages.
How to support your clients with corporation tax changes
Firstly, you should strive to keep your clients well-informed about these changes.
You can do this using multiple channels including email, newsletter and social media updates, online or in-person group trainings, and more informally during month-end or quarter-end catch-ups.
Timely communication is key, as it allows you to explain the implications of these changes and how they may impact your clients’ businesses ahead of their accounting period end.
Encouraging your clients to send in their tax return information early will allow them to have a clear understanding of their tax liabilities well in advance.
This information is crucial for effective financial planning and budgeting.
By knowing their tax obligations early on, clients can allocate funds accordingly, manage cash flow, and avoid any unexpected financial strain.
Take care to identify clients who have set up multiple companies as the marginal tax relief of associated companies under common control will be affected.
The £50,000 and £250,000 limits will be divided by the number of associated companies, and this means the 25% main rate cuts in at a lower level.
After reviewing these clients, you may find it beneficial to eliminate almost dormant companies or consolidate the group into a smaller number of companies.
It’s also important to help your clients take advantage of relevant tax incentives and reliefs offered by the government.
For example, if you’re aware of clients who have been putting off making capital investments in their businesses then you can advise them on the advantages of doing it now.
By understanding the eligibility criteria and requirements for the R&D tax credits and capital allowances, you can assist your clients in maximising the benefits they receive.
It can be a stressful and confusing time for business owners, but tax changes such as these don’t have to be a surprise for your clients as long as you keep them well-informed.
You can even help your clients reduce their tax bills by encouraging them to take advantage of the available tax reliefs.
Your support through corporation tax changes is greatly needed and appreciated by your clients, and will help to build strong business partnerships going forward.
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