Which corporate tax rates will change in 2025?

21 Jan 2025

Published in: Member News

Birmingham based MHA Tax Partner, Beverly Scott, delves into the world of corporate taxation, looking in detail at corporation tax, quarterly instalment payments, capital allowances and R&D.

Birmingham based MHA Tax Partner, Beverly Scott, delves into the world of corporate taxation, looking in detail at corporation tax, quarterly instalment payments, capital allowances and R&D.

Corporation Tax

Stability and continuity were the key messages coming from the Chancellor in the Autumn Budget, with the introduction of the much-anticipated Corporate Tax Roadmap. The roadmap sets out the government’s commitments for the coming parliament, including capping the top rate of Corporation Tax at 25%, and making full expensing a permanent feature of the capital allowances regime. In addition, the government affirmed its intention to retain R&D and Patent Box reliefs as well as the Substantial Shareholding’s Exemption, features of the tax regime which make the UK an attractive location for multinationals to headquarter. Whilst welcome, the roadmap did not provide any significant incentives to boost the corporate sector. Nonetheless, in conjunction with the forthcoming Industrial Strategy and a review aimed at simplifying the transfer pricing regime scheduled for early in 2025, it is hoped that the roadmap will give an assurance of stability, encouraging investment and business confidence. Tax rates – 25% mainstream company rate On 1 April 2023, the main rate of corporation tax increased from 19% to 25%. For businesses with accounting periods which straddle 1 April, profits are time apportioned. Businesses with profits of less than £50,000 continue to be taxed at 19%, and for businesses, with profits of between £50,000 and £250,000 a tapered rate applies. These thresholds are reduced for companies in a corporate group or with other associated companies. Companies with a March 2024 year end onwards face exposure to a full 25% tax rate, subject to the above thresholds. Companies will want to consider cash flow and to expect a higher tax liability even if profits have only remained level.

Quarterly Instalment Payments (QIPS) - change from “related 51% group companies” to “associated companies”

Companies are required to make payments in quarterly instalments where taxable profits are above £1.5 million (or £10 million if this is the first period in which it is defined as large). There is also a more accelerated quarterly payment regime for “very large” companies with taxable profits over £20 million. These thresholds are reduced according to the number of related companies it has. Prior to 1 April 2023, this was calculated according to the number of ‘51% group companies’. For the first accounting period starting after 1 April 2023 this has been widened to all ‘associated companies’ which would include companies that weren’t in a group together but under common control. It is recommend that companies undertake an annual review to ensure they are aware of any changes to the structure or ownership which may change the associated companies count.

Losses

Losses are always a key planning point for companies which make them, as there is often a decision to be made about how to utilise losses. In certain circumstances, losses can be carried back, normally for 12 months. If a company is in a group with other companies that are tax-paying, a sideways loss relief claim can be made via group relief. When corporation tax rates are static, decisions are more likely to revolve around cash flow, as there are no particular tax benefit differences between the various options. The increase in the main rate of corporation tax to 25% opens up differences in the amount of tax payable depending on the decisions made. For periods before April 2023, loss carrybacks and group relief claims will result in 19% tax savings, whereas carrying a loss forward post-April 2023 will result in a 25% tax saving (or potentially higher if marginal rates apply) from those losses. This will remain relevant and a consideration until periods ending March 2025 onwards and so still warrants note. The tax benefits from carrying forward losses will have to be weighed up alongside the cash flow impact to determine the best course of action. Forecasts of future profits / losses should also be considered. Where companies have previously surrendered losses for tax credits, through the R&D scheme perhaps, or loss carryback claims have been made, an amendment can be made within two years of the period end to reverse the claim. Companies should consider this in light of the corporation tax rate increase, to enable those losses to save tax at 25% rather than 19%. In such situations, however, any repayment previously received would need to be repaid, and interest on underpayment of tax will need to be factored in.

Income and Expenditure

Normal year-end tax planning advice typically involves deferring income where possible to take full advantage of all available allowances and deductions. In light of the increase in tax rates, consideration was given also to the reverse, where cash flow is not an issue, to accelerate income and profits to take advantage of the lower rate. As we move on to future years taxed at a full 25% (or potentially higher if marginal rates apply for periods ending March 2024 onwards) one should revert to deferring income and accelerating expenditure where appropriate. The following points explain this in more detail:

Income

Income is brought into the charge to tax in accordance with generally accepted accounting principles (GAAP). The general principle is that income arises as and when the work is done or goods are supplied, and not when a business is paid. It may be possible to accelerate income into an earlier accounting period or defer into a later one, however, accounting policies must be applied on a consistent basis and be in accordance with GAAP.

Expenditure

There are several ways a company can affect which accounting period expenses arise in, for instance, expenditure on planned repairs can be timed to fall into either an earlier or later period. Provisions can be made in the accounts for future costs to accelerate a tax deduction, or a company could review existing provisions to see whether they could be reduced or reversed. Generally, if a provision is in line with GAAP then it is allowable for tax purposes unless there are specific rules prohibiting deduction for the particular expenditure being provided for.

Read the full article over on MHA's website here.

Submitted by Alice from MHA
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