Corporation Tax Changes To Know
The corporation tax rate will change from 19% to 25% from the 1st of April 2023 for companies that make a profit over £250 000.
A small profits rate (SPR) has been introduced for companies with profits of £50,000 or less so that they will continue to pay Corporation Tax at 19%.
When I initially heard about this change, I did not think it will affect most of my clients as I help SME’s. But then they brought in this in between rate (as below), and I honestly don’t know what this means and there is NO guidance on what this ‘in between’ rate will be.
Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate. To date I have no idea what that rate is and how it will be calculated.
Watch this space 😊
If your year end falls over the 1st of April 2023 i.e., 30 June 2023, your net taxable profits for the period 1 July 2022 – 31 March 2023 will be taxed at the old rate. And the taxable net profits for the period 1 April 2023 – 30 June 2023 will be taxed at the new rate.
What planning can I do to mitigate this increase in tax rate?
a) Income
Income is accounted for in accordance with the principles of generally accepted accounting principles (GAAP). The general principle is that income arises as and when the work is done or goods are supplied, and not when a business is paid. So not cashflow but accrual basis. It may be possible to accelerate income into an earlier accounting period or defer into a later one, however, accounting policies must be applied on a consistent basis and be in accordance with GAAP.
b) Expenditure
There are different ways a company can influence in which accounting period expenses should be incurred, for instance, expenditure on planned repairs can be timed to fall into either an earlier or later period depending on when the obligation to incur this expense started.
Provisions can be made in the accounts for future costs to accelerate a tax deduction, or a company could review existing provisions to see whether they could be reduced or reversed.
Generally, if a provision is in line with GAAP, then it is allowable for tax purposes unless there are specific rules prohibiting deduction for the expenditure being provided for.
Here are a few areas we suggest you look at:
Bad debts
Debtors should be reviewed in detail so that any impairments or provisions can be made for bad debtors. It is important that evidence is kept showing that the circumstances giving rise to the provision or write-off were in existence at the balance sheet date.
We suggest attaching the documentation to the journal or transaction in your accounting record, to show the support of your decision to either write off bad debt, or raise a provision for bad debt.
Stock
Make sure you consider stock, especially damaged or slow moving/obsolete stock as provisions can be made to decrease the stock value and increase the tax-deductible expense. Regular stock takes are essential, and any write off should be substantiated.
Bonuses
If a company intends to make bonuses, the timing is important to determine which year tax relief may fall into. To accelerate tax relief into a period before the year end, a provision for bonuses can be made, but it must be able to demonstrate that the liability to make the payment existed at the balance sheet date, and the bonuses are paid within 9 months of the year end.
If the liability didn’t exist at the balance sheet date or if payment is deferred until more than 9 months after the year end, the tax relief will arise in the later period.
Pension contributions
Employer pension contributions (including schemes such as SIPP or SASS for directors and their families) are allowable on a paid basis. Relief can be accelerated by ensuring payments are made early just before year end or held back to get relief in the later period.
Need help with any of this? Get in touch!