Imminent tax changes may impact business cashflow - Cathrin Richards, partner at Azets
There have been various tax changes proposed (and reversed) over recent months that it is challenging to keep up at times when considering the tax position for owner managed businesses/business owners.
With the Spring Budget only a month away, there may still be more changes, although the main tax framework that companies will be operating within for the foreseeable future appears finalised.
This means some planning may be possible over the next few months, but there are some pitfalls to be aware of too.
Corporation Tax rates increasing
With the increase in the main Corporation Tax rate to 25% from 1 April 2023, there are additional aspects for companies to consider in assessing their cash tax profile.
If a standalone trading company has profits of under £50,000, it will continue to be taxed at 19%, due to the re-introduction of a "small" company rate. This does not apply to small investment companies, which are subject to the full 25% whatever the profits.
Otherwise, the full 25% only kicks in for a standalone company where taxable profits exceed £250,000; with the effective rate gradually increasing on a sliding scale ("marginal relief") where profits lie between £50,000 and £250,000.
Is your company associated?
If a company is part of a group with 51% subsidiaries, the £50,000 and £250,000 thresholds have to be reduced to reflect the total number of group companies - so if there are 5 companies in the group, only ones which have individual profits of less than £10,000 will continue to qualify for the 19% small companies rate, and the full 25% rate is triggered at profits of £50,000.
However, 1 April 2023 also marks the re-introduction of previous rules on "associated companies", with it not just being group companies that have to be counted for these purposes any more. Instead, companies that are under common control will fall to be associated too - so if either one company owns another, or two companies are under the common control of the same individuals, then they will also have to be aggregated in considering which rate of tax is applicable.
Accelerated timing of tax payments
The new associated company rules may also accelerate the timing of the payments. The current threshold at which companies are required to pay their tax by quarterly instalments (QIP) is £1.5 million. For a group of 5 companies currently treated as associated, this limit is reduced to £300,000, but in cases where an individual owns additional companies outside a group, these will now have to count as well under the new rules, reducing the threshold at which QIP is triggered further. This can mean that companies have to start paying their current year QIP before the tax liability for the prior year is due.
The additional profit thresholds of £10 million (at which companies fall straight into QIP without the usual year's grace) and £20 million (entry to the "very large" QIP regime) are also affected by the extension to the associated company rules.
Annual Investment Allowance
It has been confirmed that the Annual Investment Allowance ("AIA"), allowing qualifying expenditure to be fully written off in the year it is incurred, is to remain at the current level of £1 million. The AIA covers most forms of plant and machinery (including commercial vehicles but not cars), as well as fixtures (such as air con and electrics) within commercial property.
The 100% First Year Allowance for zero-emission vehicles remains in place for purchases of new fully electric cars before 31 March 2025.
The 130% "super-deduction" available for expenditure on most items of new/unused plant and machinery incurred in the period 1 April 2021 to 31 March 2023 has already provided companies with a significant cash flow benefit. It could be tempting to assume accelerating the cash outlay on an item to pre 31 March is beneficial for tax purposes. However, this may not always be the best option.
However, companies expecting to secure the full 130% super-deduction by bringing forward capital expenditure to pre-31 March 2023 may have an unwelcome surprise in some cases. For example, a company with a 30 September 2023 year end incurring £10,000 on a new machine before 31 March 2023 will satisfy the conditions to claim a super-deduction - but this will be at 115%, rather than the full 130%, as only half of the accounting period itself is pre-31 March 2023.
Major changes to R & D tax relief
Many start-up companies have benefitted from the generous tax credits available. Currently, for every £10,000 spent on R&D, an SME obtains an additional 130% deduction of £13,000, and can sometimes claim a cash credit of up to 14.5% of the full enhanced expenditure of £23,000.
From 1 April 2023, the rate is due to fall from 130% to 86%, with the level of credit coming down to just 10%.
To end on a positive note, there is however to be an increase in the rate of R&D relief available to larger entities (or SMEs working on a subcontract or subsidised basis) under the "RDEC" scheme, with this increasing from 13 % to 20 %, and cash credits also being possible to some.
If you'd like to discuss the imminent tax changes, please get in touch with Cathrin Richards or your usual Azets advisor.
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