Navigating the New Waters of Corporation Tax

Starting from April 1, 2023, small businesses in Stretford and across the UK will face a new set of rules that could significantly affect how much Corporation Tax they pay. These changes hinge on two critical factors: the profits your business makes and the number of ‘associated’ companies linked to your business. Understanding what qualifies as an ‘associated company’ is now more important than ever, as it directly impacts your Corporation Tax bill.

What’s Changing with Corporation Tax?

Under the new rules effective from April 1, 2023, the Corporation Tax your business owes will primarily depend on your profit levels. Here’s a quick overview:

• Profits above £250,000 will be taxed at 25%.
• Profits of £50,000 or less will see a Corporation Tax rate of 19%.
• For profits between £50,000 and £250,000, the first £50,000 is taxed at 19%, and any amount above this up to £250,000 is taxed at 26.5%.

The Impact of Associated Companies

One of the more complex aspects of the new legislation is how the presence of associated companies affects these thresholds. From April 2023, the profit limits of £50,000 and £250,000 will be divided by the total number of associated companies a business has.

For example, if your company has one associated company, your new thresholds are halved:

• Taxable profits above £125,000 will attract a 25% tax rate.
• Profits of £25,000 or less will be taxed at 19%.
• Profits between £25,000 and £125,000 will be taxed at 19% on the first £25,000 and 26.5% on the remainder.

Practical Examples

Let’s look at how this plays out in real life:

• Company A, with no associated companies and a profit of £100,000, will pay £22,750 in Corporation Tax.
• Company A, with one associated company and the same profit, will owe £24,625, meaning an additional £1,875 due to the association.

What Defines an ‘Associated Company’?

An ‘associated company’ is essentially any company under common control. This means either company is controlled by the same person or group, especially if one owns more than 50% of the share capital or voting power of the other.

Exceptions to the Rule

However, not every company under common control will be considered associated. Exemptions include:

• Dormant companies: Completely excluded from consideration.
• Passive holding companies: These are companies primarily handling dividends from and to shareholders, without engaging in other activities.
• Companies with no substantial commercial interdependence: Even if under common control, without significant commercial ties, companies may not be considered associated.

Looking Ahead

It’s crucial for business owners to understand which of their companies could be considered associated under these new rules. Identifying and possibly minimising commercial interdependence can be a strategic move to reduce your Corporation Tax liability.

At Accounting Solutions Manchester, we’re here to help you navigate these changes. Understanding the specifics of your business and applying these rules effectively can save you significant amounts in taxes. If you’re unsure about how these new rules apply to you or if you want to explore strategies to minimise your tax liability, don’t hesitate to reach out. Together, we can ensure that your business is as tax-efficient as possible under the new regime.

For more advice and personalised guidance, contact us at info@accountingsolutionsmcr.co.uk or call 01618797175. Accounting Solutions Manchester are here to make sure your business continues to thrive under the new Corporation Tax rules!