Enterprise Newsletter - September 2023

WELCOME

Welcome to our September 2023 Newsletter.

As the summer holidays come to an end attention turns back to business and to getting the most out of the last quarter of the year. We’ve included a handy list of tax deadlines as well as information on what your corporation tax rate is likely to be.

We are living in an ever more digital world with even HRMC are getting in on the act, our Head of Outsourcing and Cloud Darren Jasper looking at how best to digitally engage with HMRC through their online services account.

Interest rates and mortgages have been in the news a lot recently, so it has been an interesting time for Lorraine Balcombe our new mortgage adviser to start at Albert Goodman. For any clients that would like to take advantage of this new service we offer then please do contact Lorraine.

Finally, I’m delighted to report that we have welcomed 25 new trainees to the business, and you may have seen from our social media channels that we have recently become certified as a B Corp. Meaning we meet high ethical, environmental and employer standards.

As always do reach out to your usual Albert Goodman contact if you have any questions.

I hope you find this edition of Enterprise useful.

Mike Cahill Partner

UPCOMING TAX DEADLINES

SEPTEMBER 2023

19th PAYE/CIS liabilities for month ended 5th September 2023 if paying by cheque. File monthly CIS return.

22nd PAYE/CIS liabilities for month ended 5th September 2023 if paying electronically.

OCTOBER 2023

1st Payment of corporation tax liabilities for periods ending 31 December 2022 for small and medium sized companies not liable to pay in instalments.

7th VAT return and payment for August quarter (online).

19th PAYE/CIS liabilities for month ended 5th October 2023 if paying by cheque. File monthly CIS return.

22nd PAYE/CIS liabilities for month ended 5th October 2023 if paying electronically.

NOVEMBER 2023

1st Payment of corporation tax liabilities for periods ending 31 January 2023 for small and medium sized companies not liable to pay in instalments.

7th VAT return and payment for September quarter (online).

19th PAYE/CIS liabilities for month ended 5th November 2023 if paying by cheque. File monthly CIS return.

22nd PAYE/CIS liabilities for month ended 5th November 2023 if paying electronically.

BASIS PERIOD REFORM

Since the introduction of self-assessment in 1996, income tax has been based on the accounting period of a business. Each business can choose the date to which they draw up their accounts, and while many choose 31 March or 5 April, this is not the case for everyone.

Some businesses choose to have a year end date that fits with their specific activity; for example a September year end for a tourism/leisure business, or a December year end for a business whose focus is the festive season.

So what’s happening. Well, basis periods for income tax purposes are being replaced by the “tax year basis”, with transitional rules applying from 6 April 2023. Initially it was thought that these rules were being introduced to tie in with MTD for Income Tax and would be delayed given the MTD delays, but this is not the case.

Basis periods only apply to non-corporate business, so partnerships and sole traders. If you run a business in this way, you maybe affected.

If you already prepare your accounts to 31 March each year, you won’t be affected by these new rules as you are already being taxed on the tax year basis.

If you operate with a different year end, you will be affected. You will have to choose to either:

„ Change your business year end or

„ Keep your existing business year end and time apportion profits from two accounting periods, to arrive at a tax year basis profit.

The following is an example of how the new system will work for a business that has a 30 April year end.

„ A business has a 12-month accounting period ending 30 April 2023.

„ In the 2023/24 transitional year it will recognise:

The profits arising in the 12-month period ended 30 April 2023 (the standard part).

The profits arising in the period from 1 May 2023 to 5 April 2024 (the transitional part).

This will be taken from the accounts for the year to 30 April 2024.

As you can see from the above, this will mean nearly two years of profits fall into the 2023/24 tax year. Reliefs are available in the form of overlap profits and spreading. However, the impact of this change on your tax position could be significant and we will be speaking to all affected clients over the coming months. The decision about whether to change your accounting date will also need to be given careful consideration.

If you think you will be affected by this change and would like more information on how this will impact you, please contact your usual

Albert Goodman

point of contact in the first instance.

Sharron Quick Business Services Senior Manager sharron.quick@albertgoodman.co.uk

CAPITAL ALLOWANCES - WHAT’S NEW?

In his spring budget, the Chancellor announced the following measures on Capital Allowances. From April 2023:

„ Companies incurring qualifying expenditure on new plant and machinery before 1 April 2026 will be able to claim either a 100% or 50% First Year Allowance (FYA). The 100% allowance is known as ‘full expensing’. This will not apply to sole traders or partnerships and replaces the 130% super-deduction from 1 April 2023 which also only applied to limited companies.

„ The temporary £1m Annual Investment Allowance (AIA) limit is made permanent (applies to companies, sole trades and partnerships).

„ 100% FYAs on electric vehicle charge-points are extended to 31 March 2025 for Corporation Tax purposes and 5 April 2025 for Income Tax purposes.

With the AIA limit now fixed at £1m, this will give all businesses 100% tax relief in the year of investment for qualifying plant and machinery up to this limit.

If expenditure in a single tax year exceeds £1m on qualifying expenditure a company will be able to take advantage of the full expensing rules.

Further details about each relief can be seen below. Careful consideration will need to be given to the new rules and how they will work for you and your business. There are also transitional rules relating to the withdrawal of the 130% super-deduction which further complicate matters.

FULL EXPENSING

From 1 April 2023:

„ Spring Finance Bill 2023 will introduce full expensing for three years.

„ Companies incurring qualifying expenditure on new plant and machinery on or after 1 April 2023 and before 1 April 2026 will be able to claim: 100% First Year Allowances (FYAs) for main rate expenditure (‘full expensing’).

50% FYAs for special rate expenditure, including long-life assets.

„ The allowances will not apply to second-hand assets and the general exclusions in s.46 CAA 2001 will apply,

meaning allowances will not be available on cars or most plant and machinery acquired for leasing.

„ Disposals of plant or machinery where full expensing or a 50% FYA have been claimed will be subject to immediate balancing charges. These will be:

100% of the disposal value in the case of full expensing.

50% of the disposal value in the case of the 50% FYA.

„ Balancing charges will be reduced proportionately if an allowance is claimed in respect of only part of the expenditure.

„ An anti-avoidance provision will apply to counteract arrangements which are contrived, abnormal or lacking a genuine commercial purpose.

130% SUPER-DEDUCTION

Where the company’s year end straddles 31 March 2023, the amount of super-deduction is pro-rated. For example, if the company had a year end of 30 September 2023, and incurred expenditure on a new machine before 31 March 2023, there would be 115% relief for that equipment. A new lorry purchased in May 2023 would only qualify for 100% full expensing.

ANNUAL INVESTMENT ALLOWANCE (AIA)

From 1 April 2023:

„ Spring Finance Bill 2023 will include measures to make permanent the temporary £1m AIA limit.

„ Existing transitional rules applying to chargeable periods straddling 1 April 2023 will be repealed.

FIRST-YEAR ALLOWANCE (FYA): ELECTRIC VEHICLE CHARGE POINTS

From 1/6 April 2023:

„ Spring Finance Bill 2023 will include measures to extend the 100% FYA for electric vehicle charge-points by two years to 31 March 2025 for Corporation Tax purposes and 5 April 2025 for Income Tax purposes.

Sharron Quick Business Services Senior Manager

IS OUTSOURCING PAYROLL A GOOD IDEA?

As a business owner or finance manager you are probably aware that payroll is a lot more in-depth than just paying your employees. It involves a variety of tasks that usually require several team members and often spans across more than one department.

Outsourcing payroll has many benefits; it can help employers save both time and money. Not having to spend long hours on administrative work affords employers the ability to focus on business growth initiatives, and improved accuracy can prevent costly penalties.

The payroll department has to ensure they have all of the correct and up-to-date information for all employees, and collecting the relevant information for new employees, setting up automatic payments, collating and tracking timesheet information for employees, and calculating the wages due to all employees, ensuring payslip information whether paper-based or digital is completed and dispersed, plus managing information such as pensions contributions, salary sacrifice schemes

THE ADVANTAGES OF OUTSOURCING INCLUDE:

„ Keep compliant with changing legislation - there are over 100 pieces of legislation affecting payroll in the UK at the current time, staying on top of these is a challenging and time-consuming, especially when juggling this amongst many other responsibilities in your role, but it’s essential in staying compliant.

„ Saving time and money – outsourcing may seem like another expense that you don’t have the budget for but, the true cost of internal processing is often much higher than outsourcing when you factor in the cost of time and the number of team members that will have to have some involvement with it.

„ Removing risk – often employers only have one person who runs your payroll for you and can’t afford to employ someone to support them. As a result, you have nobody in the organisation to help if your payroll person is ever off work unexpectedly. Employing a payroll provider ensures that this never happens – here at Albert Goodman we have a team of over 10 members of staff enabling us to provide payroll support to many hundreds of clients at once.

Albert Goodman’s team of payroll experts can ease the hassle of managing your companies payroll requirements in-house, guaranteeing a worry-free payroll for you and your staff.

We specialise in the many complexities of regulations, legislation, and government compliance. Processing payroll is the core of what we do and outsourcing to Albert Goodman can save you time, reduce your costs and guarantee you a stress-free service every pay period.

Helen Trowbridge Payroll Client Relationship Manager

FRS 102 PERIODIC REVIEW

The FRC released the Financial Reporting Exposure Draft 82, in December. The main drive is to better align UK accounting standards to International Financial Reporting Standards (IFRS).

The consultation period closed on 30 April 2023 so we are now waiting for the final version of the standard to be released ahead of the proposed effective date of 1 January 2025. So how might the proposed changes impact your business?

1. REVENUE RECOGNITION CHANGES FOR ANY SIZE OF BUSINESS

A new Revenue Recognition model is proposed based upon IFRS 15. A 5 step recognition process is likely to be introduced:

1. Identification of a contract

2. Identification of promises

3. Allocation of a transaction price

4. Matching of the transaction price to the promises

5. Recognition of revenue based on fulfilment of promises

This may result in businesses that have contracts falling into the following categories having their income recognised over an extended or shortened time frame, which could impact on your accounting profits:

1. Products and services sold within the same contract/transaction

2. Contract lengths not matching the period over which the service is provided

3. Service provided is unevenly weighted over the delivery period

A SIMPLE EXAMPLE WOULD BE:

Identify

Identify

Recognise revenue when or as the entity satisfies the promise

Day one: Phone £600

Over 2 years £360/24 = £15 per month

Determine the transaction price £40 x 24 months = £960

4

Allocate the transaction price to the promises

Phone fair value £600

(Balance) calls, texts, data £360

Under current UK GAAP the contract above would be recognised in revenue at £40 per month. The 5 point recognition process speeds this up.

Sale of a phone on a two-year contract for £40 per month without an upfront fee. The contract includes unlimited calls, texts and 2GB of data per month.

the contract - one phone contract signed

the promises Provision of a phone Provision of minutes, texts, data

On first time adoption, retrospective application will be required for any contracts which are not complete at the implementation date. The impact of the 5 step model should be considered on any new contracts which will span the 2025 year.

2. ON BALANCE SHEET LEASE RECOGNITION FOR NON-MICRO ENTITIES

A new method of presenting leases based on IFRS 16, is proposed for small, medium and large entities but not for micro entities. The proposal requires recognition on the balance sheet of a right of use asset and a corresponding lease liability. This will have little impact on the lessor but will be a major change to lessees.

For lessees a right of use asset will need to be calculated as the lease liability, plus payments made at or before commencement of the lease, direct costs, rectification costs and less any lease incentives. The asset is then held at cost less depreciation / impairment or at revaluation.

The corresponding lease liability is then recognised at the present value of the future lease payments, discounted using one of the following rates: the rate implicit in the lease, an incremental borrowing rate, an obtainable borrowing rate or the guilt rate.

FOR EXAMPLE:

• Liability = PV of lease payments not paid = £693,021

• Right of use asset = lease liability + payments in advance = £693,021+ £25,000 + £200,000 = £918,021

• Lease liability adjusted by interest charged and payments made

• ROU asset depreciated over lease term

The impact on the profit and loss would be:

On first time adoption entities are permitted to keep comparatives as they are. The lease liabilities can be added at the PV of remaining lease payments and the asset included at the same value. There is also the option for group entities who are included in consolidated IFRS financial statements to use the amounts currently recognised under IFRS 16.

When entering into new lease contracts, and when reviewing current lease contracts it would be worth considering the impact on the balance sheet, particularly net current assets, of the new lease model.

3. ENHANCED DISCLOSURES FOR SMALL ENTITIES

A number of previously encouraged disclosures are likely to become mandated resulting in more information being available at Companies House. The most significant of those are:

„ Going concern disclosure

„ Dividends

There are also additional disclosures required relating to revenue recognition, lease arrangements and off balance sheet items as a result of the changes above. On top of this share based payments disclosures will be required along with an enhancement to the deferred tax disclosures.

5 year lease. Annual rent payable in advance £200k. Indirect costs £25,000. Borrowing rate 6%

ENGAGING DIGITALLY WITH HM REVENUE & CUSTOMS (HMRC)

As a business owner, keeping up to date with the ever evolving Making Tax Digital (MTD) landscape isn’t always easy. There have been many changes to the format and timeline in arriving at the current iteration, where all VAT registered businesses must comply with MTD for filing of their VAT returns.

Self-assessment for individuals with business and/or property income over £50,000 is scheduled to come under MTD from 5 April 2026, with the income threshold reducing to £30,000 from 5 April 2027. MTD for self-assessment will likely entail the quarterly filing of summary trading returns via cloud accounting software, followed by an annual confirmation which largely resembles the current tax return process.

Regardless of the legislation, and the deadlines that come and go, there remain good reasons why engaging with us and HMRC digitally can be beneficial.

Under the wrapper of “modernising the UK’s tax administration framework” HMRC’s core focuses are: MTD, a single customer account, real-time information, timely (re) payments, and improved standards in tax advice.

Whilst Making Tax Digital is the stick HMRC have used to drive the digitalisation of business accounting records, the real carrots are accessed through the single customer account; known historically as the Government Gateway, and now HMRC Online Services. You also cannot register for MTD without having an Online Services account, so legislation will drive you there eventually.

An individual Online Services account will be split between your personal tax account and/or business tax account. A company or organisation will only have a business tax account.

From your personal tax account, you are able to handle your non-business taxes and benefits. You can:

„ manage your personal details

„ view your Income Tax estimate and find out more about your tax code

„ check how much Income Tax you paid last year

„ claim a tax refund

„ view your National Insurance record and State Pension forecast

„ manage your tax credits

„ view correspondence from HMRC and check the status of submitted forms

Your business tax account allows you to access all your business taxes in one place. This could include:

„ Corporation tax

„ PAYE for employers, including CIS

„ Self-Assessment for partnerships or trusts, or Making Tax Digital for Income Tax

„ VAT and VAT services, for example EC Sales List

Taking a deeper dive in to VAT, for example, you can view return

deadlines, view submitted returns, check what you owe and make a payment, view payment history, track repayments, set up direct debits and a repayment bank account. You can also view your VAT certificate and update items on this such as your principal place of business address, VAT return dates and even cancel your VAT registration.

We are not suggesting that these are items you should be doing on your own. For us, the most important feature of the Online Services account, is that it is used to authorise us as your tax agent with HMRC. It is almost impossible for us to act as your accountant under MTD without you engaging with your Online Services account.

The authorisation allows us to communicate with HMRC on your behalf and to see a summary of the information available to you. This facilitates us in having more informed conversations with you and resolving HMRC queries in a timelier manner. It is also required so that we can submit VAT returns as your tax agent.

To back up the positives with hard data from taxpayers, HMRC recently presented at AccountEx highlighting some of their internal issues and the shifting trends of taxpayer engagement:

„ 138m taxpayers interact with HMRC digitally via webchat, online services, or app, whilst

„ 54m taxpayers interact with HMRC via post or phone.

„ HMRC’s target is to answer 85% of all telephone calls,

„ in 2022 only 70% of telephone calls were answered, and „ 2/3 of all calls could have been dealt with online.

„ Customer satisfaction for those engaging digitally with HMRC was 84%,

„ customer satisfaction for those engaging via telephone was only 62%, and

„ the HMRC app has an average 4.8* review from 124k reviews.

If you would like assistance is creating your Online Services account, or tidying up old accounts and taxes, please do speak with your usual Albert Goodman point of contact. Alternatively, you can try HMRC’s webchat by searching: “HMRC online services helpdesk”.

Darren Jasper Head of Outsourcing & Cloud

MORTGAGE ADVICE: SHOULD YOU USE A MORTGAGE ADVISER?

Independent mortgage advisers have a wide knowledge of the mortgages available from different lenders. They can search the market on your behalf and recommend the best deal.

To find these deals on your own involves a lot of research and talking through your circumstances many times with different lenders.

An adviser might also be able to find a deal you can’t find on your own. They can also improve your chances of being accepted for a mortgage as they’ll know which lenders are best suited to your particular circumstances.

This is particularly important if you don’t have a large deposit, haven’t been with your employer for long or if you’re self-employed.

RISKS OF NOT GETTING ADVICE

When you get regulated mortgage advice rather than doing research on your own, your mortgage adviser will recommend an appropriate mortgage for your needs and circumstances.

If the mortgage later turns out to be unsuitable for any reason, you can make a complaint. If necessary, you can take your complaint to the Financial Ombudsman Service. This means you automatically have more rights when you take advice.

Not getting advice means you have to take full responsibility for your mortgage decision.

If you don’t get advice, you could end up:

„ with the wrong mortgage for your situation, which would be a costly mistake in the long run

„ applying for a mortgage that doesn’t fit the lender’s lending criteria.

WHEN TO SEE A MORTGAGE ADVISER

It’s important to see a mortgage adviser at the start of your mortgage journey whether it’s your first mortgage or you’re looking to re-mortgage. It will save you a lot of time and effort in the long run.

There are two main types of mortgage advisers.

Mortgage advisers connected directly to lenders usually only recommend mortgages from that specific lender.

Mortgage brokers, or independent financial advisers, who can look at a range of mortgages from different lenders. Some might even check the whole market offering you a wider range of products.

It makes sense to choose a broker or adviser providing a ‘whole of market’ service. This means they can choose from the largest number of lenders and mortgages available.

OTHER REASONS TO USE AN ADVISER

„ They’ll check your finances to make sure you are likely to meet the individual lender’s lending and affordability criteria.

„ They might have exclusive deals with lenders, not otherwise available.

„ They often help you complete the paperwork, so your application should be dealt with faster.

„ They’ll help you take all the costs and features of the mortgage into account, beyond the interest rate.

„ They should only recommend an appropriate mortgage for you and will tell you which ones you’re likely to get.

Mortgage advisers might charge you for their service, depending on the product you choose or the value of the mortgage. This charge could be a flat rate or hourly rate, or a percentage of the amount you borrow.

Others will be free to you but receive commission from the lender.

Some charge fees and receive commission, but you should be told how an adviser will be paid and all the costs involved in providing the advice.

The fee can be added to the mortgage, but you have to agree to this first and you will pay interest on the fee as well as the rest of the mortgage, until the whole mortgage is paid off.

When your adviser makes a recommendation, they must give you a mortgage illustration document(s).

MORTGAGE ILLUSTRATION DOCUMENT

The mortgage illustration document outlines a lot of the details about the mortgage you’re being offered. This includes:

„ the frequency and number of your repayments

„ any fees or charges you have to pay upfront to get the mortgage

„ the overall cost of the mortgage, including interest, over the full term

„ the rate of interest or Annual Percentage Rate of Charge (APRC), and the type of interest (fixed or variable)

„ what happens if interest rates rise and how this affects your repayments

„ if there are any special features of the mortgage, such as the ability to overpay or underpay

„ if you can make overpayments to the mortgage and any penalties for doing so

„ what happens if you don’t want the mortgage any more

„ the length of the reflection period (at least seven days, or more depending on the lender).

This helps you understand what you’re agreeing to and is an easy way to directly compare mortgage offers.

Albert Goodman Financial Planning offer whole of market, independent mortgage advice, speak to us today about your options.

“Your home may be repossessed if you do not keep up repayments on your mortgage.”

SUMMARY OF NEW INTEREST AND PENALTIES FOR LATE PAYMENT AND SUBMISSION OF VAT RETURNS

For VAT returns starting on or after 1 January 2023 the old default surcharge penalty system has been replaced. Under the new system more businesses are likely to incur a penalty or pay interest, particularly for late payments. However the new system should avoid circumstance where very large penalties were imposed for minor infringements, for example paying one day late.

A summary of the basics of the new system, with some tips on how to avoid or minimise penalties and interest is set out below.

LATE SUBMISSION PENALTIES

Late submission penalties work on a points-based system. For each return submitted late a penalty point is issued.

Once a penalty point threshold (see table below) is reached a £200 penalty is issued. Once the threshold is reached a £200 penalty will be issued for all subsequent late returns.

A very important change is that points and penalties will apply to nil returns or returns claiming a repayment.

The late submission penalty rules do not apply to first or final VAT returns or one off-returns that cover a period other than a month, quarter or year.

REMOVAL OF POINTS

If a business does not reach the penalty point threshold penalty points will expire after a certain period of time.

Where the deadline for payment was not the last day of the month a point will expire 24 months after the end of the month in which the late return was due. For example if a return was due on 7 April 2023 the late submission point will expire on 30 April 2025.

If the due date is the last day of the month the point will expire on the last day of the month 25 months after the due date. For a return due on 30 April 2023 the penalty point will expire on 31 May 2025.

Provided the threshold for a penalty is not reached penalty points will disappear on a rolling basis.

Once at the penalty point threshold is reached the only way penalty points can be removed is if:

„ All outstanding returns for the previous 24 months have been submitted, and

„ All returns are submitted on time for a specified period of compliance. The specified period of compliance varies depending on VAT return type. The start date for the period of compliance is calculated by adding one day to the return deadline and is the first day of the next month.

For a return due on 7 July the compliance period starts on 1 August and if the due date is 31 March the period of compliance starts on 1 May.

Penalty points will be reset to zero on the first day where conditions are met.

Points can also be appealed. There is a new online process for appealing penalty points. This can be accessed via the businesses VAT online account (or an agent’s Agent Services Account). This new process is relatively user friendly.

The table below summarises the penalty point threshold and period of compliance.

It is calculated at the Bank of England base rate plus 2.5%

A time to pay agreement will not stop interest being charged.

AGREEING A TIME TO PAY WITH HMRC

Some businesses can now set up a VAT payment plan online.

VAT-registered businesses that owe less than £20,000 of VAT can now set up a payment plan online. Plans can be set up online if a business:

„ has filed its latest VAT return;

„ owes £20,000 or less;

„ is within 28 days of the payment deadline;

„ does not have any other payment plans or debts with HMRC; and

„ plans to pay off its debt within the next six months.

LATE PAYMENT PENALTIES

The penalty imposed for late payment will depend on how late the payment is made.

Some businesses are not eligible to use the online service. This includes businesses that use the VAT cash accounting or annual accounting schemes. Businesses that make VAT payments on account also cannot set up a payment plan online.

Businesses not eligible to use the self-serve time to pay service should call the HMRC Payment Support Service on 0300 200 3835 to agree a payment plan.

WAYS TO AVOID OR MINIMIZE PENALTIES

Where possible submit VAT returns on time, even if payment cannot be made. This should avoid a late submission penalty.

If payment cannot be made by the due date agreeing time to pay with HMRC may reduce or prevent late payment penalties being imposed.

Contacting HMRC as soon as possible to try and agree a time to pay plan may avoid a late payment penalty.

Paying as much of the VAT due as soon as possible will minimise late payment penalties and interest.

If time to pay agreements are not complied with penalties will be imposed.

Again points can be appealed.

Late payment interest is charged from the day after the customer’s VAT payment is due until the day it is paid in full.

Richard Taylor VAT Manager richard.taylor@albertgoodman.co.uk

WHAT WILL MY CORPORATION TAX RATE BE?

Since 1 April 2015 this has been an easy question to answer. From this date, differential rates depending on the level of a company’s taxable profits disappeared for most companies. Life was simple and the rate was 19%.

It has been well publicised that the rate is increasing to 25% from 1 April 2023 but there are a number of added complications which will result in many companies paying a different rate, at least until 2024. These arise from:

„ Different rates for companies with taxable profits of less than £250K

„ Blended rates for companies that have something other than a March year end

„ Special rules for the splitting of tax bands for companies that are associated with other companies

The first two of these are straightforward mathematical exercises, but the third is more complicated and requires an element of judgement.

SMALL COMPANY AND MARGINAL RATES

Despite the announced rise in the rate of corporation tax, a standalone company with taxable profits below £50K will continue to pay tax at 19%.

For those with profits in excess of £250K, the full amount will be subject to tax at the new rate of 25%.

The complication arises for those companies with profits above £50K but below £250K. Marginal relief will apply to profits within this range to smooth the transition between the 19% and 25% rates. The tax due is calculated by applying a complex formula and despite the ‘smoothing’ it has the effect of increasing the tax due on profits within this range to 26.5%.

For a single company with a March 2024 year end and profits of £100K, assuming it receives no dividend income from non-group members, its tax charge for the year will be £22,750 (£50K at 19%, plus the balance of £50K at 26.5%).

The full 25% rate will also apply to all profits made by a “Close Investment Holding Company” and those not resident in the UK, irrespective of the level of profits earned. A company is deemed to be a Close Investment Holding Company unless it either carries on a trade on a commercial basis or invests in property for the purposes of letting to unconnected third parties. The most obvious example is a company whose only activity is the making of stock market investments.

BLENDED RATES FOR NON-MARCH YEAR ENDS

Corporation tax rates apply for fiscal years which run from 1 April to 31 March. If a company’s accounting year falls into two fiscal years then its profits are time apportioned between the two (there is no need to try and calculate the actual profit arising in each period).

HMRC have released an online tool to help companies calculate their expected tax liability, including any marginal relief that may be due.

Calculate Marginal Relief for Corporation Tax - Calculate Marginal Relief for Corporation Tax - GOV.UK

The rates applying for standalone companies with year ends between 30 April 2023 and 31 March 2024 are:

Care needs to be taken where an accounting period is less than 12 months. The limits and effective rates will need to be adjusted accordingly.

ASSOCIATED COMPANIES

The biggest complication is for companies that are associated with other companies. In these cases, it becomes necessary to split the limits based on the number of companies involved. If there are two active companies (including the company in question) divide each limit by two, if there are three divides by three, and so on.

In a simple example of two affected companies (a parent and a wholly owned subsidiary) with a March 2024 year end, the small (19%) limit applies up to profits of £25K (£50K/2), the main (25%) rate from profits of £125K (£250K/2) and the marginal (26.5%) rate in between.

The table below shows how the upper and lower limits change where there are up to five associated companies:

WHAT IS AN ASSOCIATED COMPANY?

It can be difficult to decide if two companies are associated. If one company has control of the other, or if both are under “common control” then they will be associated. The count includes worldwide companies but excludes dormant and “passive” entities. A company is associated if it meets the definition at any time in an accounting period.

For group companies this should be straightforward to determine. The difficulty comes when determining whether two companies are under common control.

Common control is determined by:

„ Share ownership;

„ Shareholder voting power;

„ Rights to distributable income: or

„ Entitlement to assets on a winding up (excluding trading balances).

So, if one person owns 100% of the share capital in each of two companies those companies will be associated whether they have any other relationship between them or not.

In some cases, it is necessary to aggregate the shares (or other rights) held by individuals and their associates. This should only be considered where there is “Substantial Commercial Interdependence” between the two companies which may be:

„ Financial e.g., loans

„ Economic e.g., same economic objective, one’s activities benefit the other’s, common customers

„ Organisational e.g., common management/employees/ premises/equipment

This is where judgement comes in. Unhelpfully, “Substantial” is not defined but will require an assessment of each set of circumstances with the onus on each company to determine its own position. Our view is that such an assessment will take into account the number of factors involved and for how long within an accounting period they are in place. In some cases, a number of smaller factors may aggregate to make companies associated whereas in others one substantial factor may be relevant.

If it is established that such interdependence exists the next step is to aggregate the interests of the associated persons and for this purpose, an associate includes:

„ Spouses

„ Civil partners

„ Business partners

„ Blood relatives (parent, child, sibling)

„ Trustees of a settlement created by the individual or a relative of theirs.

As an example, suppose that two spouses each own 100% of their respective companies. If the two companies share the same employees, customers, and business premises there is substantial commercial interdependence and the spouses’ interests will be aggregated. The two companies will therefore be associated. If the same two companies were entirely unconnected in their activities there would be no aggregation of interests and they would not be associated.

PLANNING OPPORTUNITIES

Companies may wish to plan and consider reducing profits below the marginal rate limit where this is likely to apply. For example, this could be achieved through employer pension contributions or by bringing forward the purchase of plant and machinery.

Where different companies have been set up over the years to house different divisions or trades, thought should be given as to whether this is still a commercial need. It may be possible for the activities of different entities be transferred into one, to reduce the number of companies in operation. Where this is not possible, consideration should be given to the matching of profits between the associated companies to ensure one does not end up taxable at the marginal rate.

If the company is a member of a group, a review should be given to the use of any group losses. These would normally be used in priority by those companies with profits falling between the lower and upper limits, to ensure the tax cost to the group is mitigated as far as possible.

Companies should start identifying the number of associated companies now. They can then plan for any impact this may have on the corporation tax that will be payable, with cash flow forecasts and budgets updated accordingly.

Paul Hake Partner