Corporation tax straddling periods – what to look out for
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
2 October 2023
As corporation tax computations start to be prepared for year ends following the change in corporation tax rates, we consider the rules for companies with year ends straddling 31 March 2023.
Following various fiscal announcement u-turns, the new corporation tax rates took effect from 1 April 2023. Whilst relatively straight-forward for companies with a 31 March 2023 year end (in that their March 2023 corporation tax computation will be based on the old rates and their March 2024 corporation tax computation will be based on the new rates), the position can be a bit more complicated for companies with year ends which straddle 31 March 2023.
What changes took effect from April 2023?
A new corporation tax rate of 25% has applied since 1 April 2023 for companies with augmented profits above £250,000, with the rate for companies with augmented profits below £50,000 remaining unchanged at the previous rate of 19% (now known as the standard small profits rate). Marginal relief is available for companies with taxable profits between £50,000 and £250,000, which applies an effective marginal rate tax rate of 26.5%.
The term ‘augmented profits’ is defined in section 18L CTA 2010 as the company's taxable total profits of the accounting period plus non group dividends.
It's worth remembering that the reintroduction of the associated companies rules means that the £50,000 and £250,000 thresholds will be shared between companies under common control, as opposed to the previous position where tax thresholds were only shared between companies in a 51% group. This article considered the technical issues to refamiliarise yourself with in respect of the associated companies rules.
Regardless of the level of profits, to qualify for both the 19% standard small profits rate and marginal relief, it is necessary under sections 18A and 18B CTA 2010 respectively for the company to be resident in the UK and not be a close investment-holding company in the period. Section 18N CTA 2010 explains that a close investment-holding company is any close company (as defined in section 439 CTA 2010), unless it exists wholly or mainly for one or more of the stated permitted purposes. The main permitted purposes noted are carrying on a trade or trades on a commercial basis and land let to an unconnected party. Our recent article on corporation tax and liquidations considered some of the specific issues to be mindful of in respect of companies entering liquidation.
How will profits be taxed for year ends which straddle 31 March 2023?
Where a company’s year end does not coincide with 31 March 2023, section 8 CTA 2009 requires profits to be pro-rated between the two corporation tax financial years. This is not new legislation, it just hasn’t been relevant for a few years given that the 19% rate was in place since April 2017 for most companies.
If we take the example of a company with a 31 December 2023 year end, this will effectively be treated as two different notional accounting periods, with profits time apportioned between them: 1 April 2023 to 31 December 2023.
The profits apportioned for the period 1 January 2023 to 31 March 2023 should be taxed at 19%. The £50,000 and £250,000 thresholds are annual limits, so profits apportioned for 1 April 2023 to 31 December 2023 would be subject to a reduced lower limit of £37,671 (275/365 x £50,000) and reduced upper limit of £188,356 (275/365 x £250,000) when considering if the standard small profits rate or marginal relief apply. These limits would be further shared between any associated companies that the company may have post 1 April 2023, as per above.
How are chargeable gains taxed for an accounting period which straddles 31 March 2023?
Chargeable gains are taxed in the same way as trading profits for the purposes of the apportionment between the two notional periods straddling 31 March 2023.
Section 4 CTA 2010 explains the process to be followed when determining the applicable rate of corporation tax. This starts with finding the company’s total profits from the accounting period and deducting any amounts which can be relieved against those profits. Section 4(3) then explains that chargeable gains (after deduction of capital losses or capital losses brought forward) are to be included in the total profits to be apportioned between the two notional accounting periods – they are not charged in the notional accounting period in which they arise.
Is it possible to change a company’s accounting period?
The change in corporation tax rates does not alter the ability of a company to change its accounting period. In some cases, this could affect the tax payable on income and gains arising before 31 March 2023, which would not be subject to the new corporation tax rates if the company’s year end was changed to 31 March 2023.
Guidance on gov.uk explains the process of changing a company’s year end. It is possible for a company to shorten its accounting period as many times as it likes, with the minimum reduction of one day. It is only possible to lengthen a company’s financial year to a maximum of 18 months (longer if the company is in administration) and this can normally only be done once every five years.
Decisions on changing a company’s year end should take account of a range of factors, so any potential corporation tax savings may be less important than non-tax factors that will vary between businesses. It’s also worth bearing in mind that reducing a company’s year end will accelerate the company’s corporation tax payment date, as this is based on the accounting year end date.
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