The government’s initial forecast expects the increase to raise around £18 billion each year in additional tax revenue.
While at first glance this represents an increase of over 30% in the rate of tax suffered by companies, the 25% rate will only apply to those companies with taxable profits of £250,000 and over (pro-rated for shorter periods). For those companies with taxable profits of up to £50,000 the 19% rate will still apply, and for any with taxable profits which fall in-between a tapered rate will apply.
A return to varying rates of corporation tax means that, for companies whose taxable profits are usually in the region of £50,000 to £250,000, the rate of tax they incur can be significantly impacted by the timing of capital additions and other allowable expenditure.
Mat Waters, a Business Services Partner at our Lowestoft office has identified some areas which business owners may consider if they want to reduce their taxable profits from 1 April 2023 and therefore potentially the rate at which these are subjected to corporation tax.
Capital Expenditure
The timing of investment in new plant and machinery is already one of the basic forms of tax planning most businesses undertake.
With new machinery often being one of the single largest items of expenditure during the year, a business will want to ensure the relevant tax relief is obtained as close to the time of purchase as possible. Spending £40,000 to save up to £10,000 is never a sound tax planning strategy in isolation, but if a company has a plan of its capital expenditure requirements over the next several years as part of the overall business strategy, then it can ensure that these are sourced and procured ahead of each year end. Plant and machinery disposals or trade-ins will also need to be considered as part of this plan as if allowances had previously been claimed for the whole cost of an asset, then its entire sales proceeds could potentially be subject to corporation tax.
Considering additions which attract more generous allowances could also be a sound strategy for reducing taxable profits and potentially the rate at which these are taxed. Taking cars as an example, a new vehicle with CO2 emissions between 1 and 50g/km of CO2 would only attract allowances of 18%, and for those over 50g/km this rate decreases to just 6%. However, if the company were to purchase a new (and unused) fully electric model which would emit 0g/km of CO2 then 100% first year allowances are available.
Pension Contributions
Making pension contributions has long been a staple of personal tax planning, where the gross contributions extend an individual’s basic rate band and therefore reduce the income subjected to the higher rates of tax. These contributions must be made personally to obtain this tax relief though.
While currently popular with company directors given that contributions into a qualifying scheme are an allowable expense against corporation tax (and so a £10,000 contribution into a director’s pension pot will only cost the company £8,100 once tax relief is factored in), these contributions now also present an opportunity to reduce profits charged at the higher or tapered rates of corporation tax.
Utilising pension contributions for these purposes will require careful planning, however, as the pension scheme must have received the monies at the company’s year-end date and so cannot be used retrospectively should final taxable profits end up higher than anticipated. As contributions represent a cash outlay in full, unlike some asset purchases which could be financed over several years, the company will need to look at its working capital requirements for the following year to determine if recognising a tax saving in the current year is worth the reduction in cash reserves.
Bonuses
Unlike the pension contributions mentioned above, bonuses can be accrued within the accounts and so long as these are paid within 9 months of the year-end, they will be allowable against corporation tax.
If looking at issuing a director bonus for example, there are several factors which will need to be considered when weighing up the potential tax saving between the company and the director personally such as the availability of personal allowance and basic rate band, and whether the company qualified for the employment allowance to set off against any employer’s NIC.
Buildings
Often seen as an area where there is little to obtain in the way of tax relief, there are still reliefs to be obtained when purchasing or constructing a commercial property which a company will not want to miss out on.
Within the bricks and mortar are items of plant and machinery which are integral to the building such as electrical systems and lighting, cold water systems, water heating systems, and lifts/escalators or moving walkways. These integral features initially go into a special rate pool which gives 6% tax relief on the value each year, but to reflect their plant and machinery nature, they qualify for Annual Investment Allowance (AIA) and so 100% tax relief can be claimed in the year of purchase. When constructing or purchasing a commercial property, integral features are therefore something which will require special attention or enquiries to identify what can be claimed as part of the construction or what has previously been identified by the vendor.
For commercial property where the construction contracts were entered in to on or after 29 October 2018, structures and buildings allowances may apply which allows an annual deduction of 3% of the cost over 33 1/3rd years (so long as the property is still held) until relief has been claimed on the whole cost.