By Chris Bentley, Tax & Forensic Director
Increase in corporation tax from April 2023
Next year’s increase in corporation tax from 19% to 25% for companies making profits over £250,000 has been well publicised. The rate will remain 19% for companies with profits of less than £50,000, with a sliding scale tax rate in between. However, what is less widely appreciated is how the new rules will impact business owners who have multiple companies.
Operating through more than one company?
Alongside the increase in the corporation tax rate, new “associated companies” rules will be introduced to prevent the fragmentation of businesses to make use of the lower 19% tax rate. Without these rules, a company making profits of £250,000 (tax charged at 25% of £250,000 = £62,500) could be split into five businesses making profits of £50,000 each, paying tax at 19% (5 * tax charge at 19% of £50,000 = £47,500).
The new associated companies rules do not consider the reason why there are multiple companies, instead, they simply divide the £50,000 and £250,000 thresholds for the 19% and 25% tax rates between all of the companies which are treated as associated.
More companies, more tax?
Taking a simple example, Mr Smith operates two companies, A Ltd and B Ltd. These companies make profits of £145k and £5k respectively in the year to 31 March 2024. Mr Jones operates a single company, C Ltd, which makes profits of £150k in the same period. The tax liabilities are shown in the table below.
|Mr Smith||Mr Jones|
|A Limited||B Limited||Total||C Limited|
|Tax payable (£)||36,250||950||37,200||36,000|
The table shows that Mr Smith’s companies pay £1200 more in corporation tax than Mr Jones’s company even though their total profits are the same. In other words, carrying on a business through more companies than is necessary will, from April 2023, often carry a tax cost.
Companies are treated as associated if they are controlled by the same individual or group of individuals, or if they are in a group. They may also be associated if one company has made a loan to another, and in some circumstances, companies owned by one individual may be treated as associated with those owned by another family member.
Given the potentially increased tax burden, the next few months can be used to check which companies are associated and to understand the impact of the increase in the corporation tax rate and the new rules. Business owners may then want to restructure in advance of April 2023 to simplify their operating structures to avoid an overly complex structure giving rise to an unnecessary additional tax burden.