Tax Talk: A welcome marginal change in corporation tax

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For those who remember Marginal Relief (MR), you were probably excited when the Government announced the changes to the rate of Corporation Tax (CT) in the 2021Budget
From 1 April 2023, there will be a ‘Small’ profits rate of 19% for profits up to £50,000 and a ‘Main’ rate of 25% for profits above £250,000. Between these two limits there will be a ‘Marginal’ rate of 26.5%. This is to ensure that those with profits over £250,000 are taxed at 25%. Let’s take an example of a company with profits of £250,000: the first £50,000 is taxed at 19% and the next £200,000 at 26.5% meaning a total liability of £62,500 (£9,500 plus £53,000) resulting in a rate of 25% with the relevant MR fraction being 3/200ths.

These limits will be apportioned for both short accounting periods and associated companies. There’s an exclusion for property investment companies, while close investment holding companies and non-resident companies will pay the full rate of 25%.

To work out the MR we need to know the augmented profits. These are the profits chargeable to corporation tax plus any exempt distributions received by the company that aren’t excluded. This includes: regular dividends; other distributions in respect of shares; the transfer of assets or liabilities treated as distributions in specie; and bonus issues following repayment of share capital. Dividends received from subsidiaries or other group companies of which the recipient is a 51% group company are excluded.

The MR is calculated as:

(MR fraction x (Upper profit limit – Augmented profits) x Taxable profits) / Augmented profits

Let’s look at an example:

PKF Limited is a standalone company, with a year end of 31 March 2024. It has chargeable profits of £170,000 and dividend income from a non-UK group company of £70,000.

This means that the profits chargeable to corporation tax are £170,000 and the augmented profits are £240,000. Therefore the corporation tax liability can be calculated as follows:

£170,000 x 25%42,500.00
Less: (3/200) *((£250,000 – £240,000) x £170,000/£240,000) (106.25)
The effect of the foreign dividends means that the marginal rate of tax on the excess profit above £50,000 is greater than 26.5%.

£50,000 x 19%    9,500.00
£120,000 @ 27.411%    32,893.75
It should be noted that the profit limits will be divided by the number of associated companies (not the number of 51% group companies) and they’re also reduced if the chargeable accounting period is less than 12 months.

Perhaps it’s time to review group structures for consolidation and elimination of surplus companies where appropriate?

A company (whether UK resident or not) is associated with another company at a particular time if, at that time in the chargeable accounting period one company has control of the other, or both companies are under the control of the same person or group of persons. Control exists where a person exercises, or can exercise, or can acquire direct or indirect control over a company’s affairs. This includes reference to share capital, voting rights, distributable profits and assets available for distribution. However, if there’s no substantial commercial interdependence between the companies, these rules are ignored. Companies that haven’t carried on a trade and passive holding companies are also ignored.

What’s the impact of these changes?

  • Profit extraction strategies will be impacted with the increase in corporation tax rates and these should be reviewed;
  • The increased tax charge will reduce retained earnings and may impact the company’s distribution policy ; and
  • The overall strategies of groups should be reviewed to ensure tax efficiency.