Insight & Analysis

Taxing times ahead for corporates

Published: Oct 2022

The UK government’s corporation tax U-turn is a blow for larger corporates hoping for some respite from difficult trading conditions and a challenging funding environment.

No one should have been surprised when the (last but one) unelected British Prime Minister was forced to abandon a corporation tax cut she had staked her political credibility on. The official announcement merely stated that ‘the legislated increase in the corporation tax rate from April 2023 will go ahead’.

Those with long memories will recall that the main rate of corporation tax was more than twice as high in the mid-1970s and only dropped below 50% in the middle of the following decade. But the reversal of the plan to reduce the rate from 25% to 19% next April is nonetheless a serious setback for companies affected by the cost of living crisis.

The government was quick to point out that the small profits rate means companies with profits of £50,000 or less will continue to pay corporation tax at 19% and that marginal relief for profits of up to £250,000 would remain. However, from next year the gap between the small profits rate and the main rate will be at its highest level for a decade.

The government also pointed out that even at 25% the UK’s rate of corporation tax is lower than the other G7 countries and highlighted the reversal of the national insurance increase as a beneficial move for businesses.

But there is no getting away from the fact that removing the corporation tax cut will cost big business plenty at a time when economists are warning of a global recession on the horizon.

The government has suggested that leaving the main rate at 25% will raise in the region of £18bn a year, although the OBR forecast will provide a more detailed analysis. Gavin Midgley, senior teaching fellow in accounting at University of Surrey says there is a real danger that a lack of disposable income will continue to hamper growth, which means revenues raised from corporation tax would fall short of the government’s targets.

Alison Conley, Corporate and International Tax Partner at MHA MacIntyre Hudson suggests that if companies are looking to dispose of chargeable assets within the next few years, they should consider bringing forward the date of the disposals to before 1st April 2023 in order to benefit from the lower rate.

Companies whose accounting periods end soon after April 2023 will pay a pro-rated corporation tax rate on a just and reasonable basis.

Conley notes that the upper and lower limits for taxable profits are reduced depending on the number of ‘associated companies’, the taxable profit limits being divided equally among all the associated companies.

For accounting periods beginning on or after 1st April 2023, new associated company rules will be introduced which provide for a more complicated ‘mutual control’ test.

According to Tony Danker, CBI Director-General, planning for economic growth from 2023 will require a new long-term tax regime that will kick start business investment and ensure the UK is competitive and the government should balance any rise in corporation tax with investment allowances to help achieve both stability and investment.

The National Chair of the Federation of Small Businesses, Martin McTague, has called on the government to revisit the level at which the higher rate of corporation tax kicks in ‘once public finances allow’.

Chancellor Jeremy Hunt has previously advocated cutting corporation tax and his recent comments indicate he still believes that lowering corporation tax would raise more money for the exchequer in the long term.

However, any plans to do so in the future would be likely to be opposed by bodies such as the Institute for Fiscal Studies, which rejected Hunt’s 2019 claim that cutting the main rate to 12.5% would effectively pay for itself.

All our content is free, just register below

As we move to a new and improved digital platform all users need to create a new account. This is very simple and should only take a moment.

Already have an account? Sign In

Already a member? Sign In

This website uses cookies and asks for your personal data to enhance your browsing experience.