From 1 April 2023, the corporation tax rate will be increasing from 19% to 25% for companies with taxable profits over £250,000.
Companies with taxable profits of less than £50,000 will continue to pay tax at 19%. Those companies with profits between £50,000 and £250,000 will be eligible for marginal relief however the effective rate of tax becomes 26.5% due to the way the calculation works.
Is it worth changing your company’s year end?
If your business tends to have cyclical profits and or is going to realise a large gain in an accounting period that will straddle 1 April 2023, it could be worth changing the company’s year-end. Using an example with an accounting period ended 30 September 2023, the effective tax rate across the whole year will be as follows:
- 6 months at 19% + 6 months at 25% (26.5%*) = 22% (22.75%*)
- if its taxable profits exceed £250,000 (*if taxable profits are between £50,000 and £250,000)
However, if the company changed its year end to 31 March 2023 it would pay tax at 19%.
Therefore, if the company’s profits are seasonal, it could be worth changing the company’s year-end in order to save more corporation tax.
Should you shorten your accounting period?
In addition, if the company is forecasting a large gain prior to 31 March 2023, it could well be worth shortening the accounting period.
Companies can shorten their accounting period ends more frequently than extending their year-end date. (There are limitations as to how often companies can lengthen their accounting periods and this can only be done once every five years).
However, this will change the filing date of the accounts and tax computation/return. In the example above, the deadline dates become as follows:
- Accounts filing date becomes 31 December 2023 instead of 30 June 2024
- Tax filing deadline becomes 31 March 2024 instead of 30 September 2024
- Tax payment date becomes 1 January 2024 instead of 1 July 2024 (assuming the company does not pay its tax via the instalments regime)
Impact on super-deduction
Furthermore, in the example above where a company changes its year end to 31 March 2023, it will continue to retain the full benefit of super-deduction and obtain tax relief of 24.7% via the enhanced deduction of 130% of qualifying capital spend.
If the company’s year-end spans 31 March 2023, the transitional rules will apply and it will be necessary to apportion the additional 30% uplift based on the number of days in the company’s accounting period which occur before 1 April 2023.
In the example above where there is an accounting period ended 30 September 2023, there are 182 days before 1 April 2023, and therefore the calculation is as follows:
- 184 / 365 x 30% plus 100% = 115.12% relief (as opposed to 130% relief)
Though it should be noted that the Annual Investment Allowance (AIA) limit has become a ‘permanent’ limit of £1m and has not been reduced in the last Autumn Statement and companies can still make use of this allowance for capital spend incurred from 1 April 2023.
How should you prepare?
Ensure you discuss with your advisors early in the process so that the necessary paperwork can be filed well in advance and tax relief on capital spend is maximised.