Group companies – Considerations ahead of the Corporation Tax rise

Corporation Tax (CT) rates are set to rise in the UK from 1 April 2023. From this date, the main rate of CT will increase to 25 per cent for all companies with taxable profits over £250,000.

There will also be a small profits rate for companies with taxable profits of £50,000 or less of 19 per cent, while businesses that fall between these two thresholds will effectively be taxed at 25 per cent, but enjoy a marginal relief based on their specific level of profitability.

Although the future of the Corporation Tax rise is currently up in the air due to pledges made during the Conservative Party leadership contest, it is worth considering what impact this change could have on group companies.

Under the changes to CT, the existing 51 per cent group company test will be replaced by associated company rules.

These rules will determine whether a group should be deemed a large company (taxable profits in an accounting period between £1.5 and £20 million), or a very large company (profits in excess of £20 million) and should make payments through instalments due to this association.

Association is determined according to whether a company has been connected with another company for the 12 preceding months and, whether either, one company has control of the other or both companies are under the control of the same person or group of persons.

These rules apply to a company’s worldwide associations, regardless of their tax residency. However, the associated company rules don’t apply where a company is:

  • Dormant
  • A passive holding company
  • Not substantially dependent on another company.

A potential pitfall

This change affects how companies make CT payments, which could affect cash flow.

For a company that has associated companies, this may mean that they come within the quarterly instalment regime for the first time.

In this case, the first Corporation Tax instalment will be due for payment before the Corporation Tax liability has been paid for the previous year.

Alternatively, a company which is already within the quarterly instalment regime may change from being classed as a “large” company to a “very large company”. This will have the effect of accelerating the quarterly instalment payments by four months.

Careful advanced planning is required to make sure cash flow is not adversely affected by this complex change.

Link: Corporation Tax Rise