Get ready for the April 2023 Corporation Tax rate increases
As a limited company locum Optometrist or practice owner you may (or may not) be aware that from 1st April 2023, corporation tax is rising. In this article, I highlight the changes on the horizon and what you should be considering as part of your tax planning for the rate hike.
What is Corporation Tax and what is changing?
All UK companies must pay Corporation Tax on the profits they generate and submit an annual Corporation Tax Return.
The tax rate for company profits prior to 1st April 2023 was 19% regardless of the amount of profits. From 1st April 2023 this increases to 25% where profits exceed ￡250,000 annually, whilst remaining at 19% if profits are at or below ￡50,000 annually. The main change likely to impact most of you is where your profits are between ￡50,000 and ￡250,000 per annum; profits in this range will be taxed at the marginal rate of 26.5% (yes a whopping increase from the previous 19%).?This will result in a considerable number of small companies having to pay more tax, even if this amounts to just a few hundred pounds per year.
Note: The profits of non-incorporated businesses (so locums trading as sole traders) are taxed via Self-Assessment, not the Corporation Tax process and thus will not be impacted by this hike.
Other than being aware of the increase in the tax rate, careful consideration should be applied around extracting profits. To plan for this by seeking professional advice is highly recommended.
Some additional matters to consider but not limited to are:
Remuneration planning
Several tax traps can be avoided by planning optimum balance between salary and dividends for profit extraction. An example being to defer large salary, bonus and/or pension payments into a later period where the tax rate is known to be higher.
Bringing forward income
With the tax rate increasing so significantly from 1st April 2023, consideration should be given to ways of accelerating recognition of income. There are strict accounting rules which apply on the timing of income recognition so speak to us about what scope is available in your specific circumstances.
Deferring expenditure
If expenditure which is deductible for corporation tax purposes is deferred beyond 31st March 2023, then it could be relieved at higher rates than before. For instance, where it is commercially viable, thought may be given to deferring pension contributions or largescale expenditure on say, a marketing campaign.
Use of tax losses
Consider whether it would be better to carry forward losses against taxable profits made in future accounting periods rather than being set against current profits or carried back against prior year profits. This could ensure the losses are relieved at a maximum of 26.5% rather than 19%.
Capital gains
If a capital asset standing at a gain, such as a property, is to be sold, consider making the sale in a tax accounting period ending before 31st March 2023 so the gain is taxed at 19% rather than at higher rates.
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Associated companies
The income thresholds are reduced in proportion to the number of companies you may have (including companies not based in the UK). However not all companies are associated:
Companies are associated when:
·????????one has control of the other; or
·????????both are under common control and the relationship between the companies is not one of ‘substantial commercial interdependence’
If you have two companies which are deemed to be associated, then the threshold at which you would start to pay marginal rate of tax is reduced to ￡25,000 (half of ￡50,000), meaning the profit level at which a marginal rate will apply could be more easily breached.
A company is associated with another company if one controls the other, or if the same person or group of persons control them both.
Associates’, broadly, means close family. If, for example, there are two brothers or a husband and wife, and one owns all the shares in A Ltd, and the other owns all the shares in B Ltd, then the legislation says that A Ltd and B Ltd are ’associated’ because you have to add the two close family members shareholdings together.
In order to qualify for the concession, there has to be “no substantial commercial interdependence” between the companies. This obviously leads to disputes between tax advisers and HMRC as to the level of ’commercial interdependence’ between potentially ’associated’ companies
What is ‘Commercial Interdependence’?
Along with the draft legislation, HMRC have published draft secondary legislation and guidance, which says two companies are ’commercially interdependent’ if they are:
Summary
If you have questions in regards to any of the above or would like a specialist to assist you with your tax planning, then drop us a message and someone from our team will get back to you.
About the Author:
Mo Chaudhry?is a dual qualified Optometrist and Chartered Accountant and heads the Accountancy department at Locumkit. With his unique background he assists locums to practice owners in the Optical industry with their accounting affairs and helping their businesses.
Mo reflects on his own position as a locum Optometrist and uses that to provide fellow locums, like him on financial advice and his knowledge of the industry first hand to assist multiples with their VAT, payroll and all other accounting needs. It is due to his unique background that he can say he is a specialist for the Optical industry.