Corporation Tax

Companies often have two different company accounting periods. This is because there are different rules for Companies House filings and for returns sent to HMRC.

The accounting periods can be the same but can also differ and a change may need to be made to ‘sync’ the accounting periods. As a general rule the Companies House rules are more flexible and under certain circumstances it is possible to make a change to the year end. The Companies House accounting period can sometimes run for more or less than 12 months.

A tax accounting period for Corporation Tax purpose cannot be longer than 12 months. This can mean that you will need to file two returns to HMRC to accommodate the maximum 12 month rule.

If your accounts cover less than 12 months, then your accounting period will normally end on the same day and will be shorter than 12 months. This can happen if the company stops trading or shortens its company’s year-end also known as its accounting reference date.

Usually, if you sell an asset for less than you paid for it you would make a capital loss. As a general rule, if the asset would have been liable to CGT had a gain taken place, then the loss should be an allowable deduction. 

The exact treatment of losses depends on whether they are:

• losses of the same year of assessment as the gains;
• losses of earlier years of assessment;
• losses of the tax year of death; or
• particular losses which may, exceptionally, be carried back from a later year of assessment.

These deduction of an allowable loss from chargeable gains does not require a claim and does not extend the time limit for enquiring into the original loss claim. Gains accruing in a tax year may be chargeable to CGT at different rates. Therefore, the tax effect of losses and the annual exempt amount set off against those gains can vary.

In most circumstances, allowable losses and the annual exempt amount can be deducted in the way that is most beneficial to the individual. This will usually be against gains that are charged at the highest rate. A claim for losses does not have to be made straight away and can be made up to 4 years after the end of the tax year that the relevant asset was disposed.

Where there remain unused losses that cannot be set against gains of the same year, these losses are carried forward to be set against future gains. It is only possible to utilise losses brought forward if net gains exceed the annual CGT exempt amount for the year.

There are special rules concerning the transfer of assets in groups of companies. In most cases, this means that where assets are moved around group companies, there are no immediate capital gains consequences. This effectively allows for a tax neutral, no gain – no loss transfer opportunity.

HMRC’s manuals states that:

This is achieved by fixing both the consideration received for the asset by the transferor and the consideration given for the asset by the transferee. The transferor has neither chargeable gain nor allowable loss. The transferee effectively takes over the transferor’s capital gains cost, augmented by indexation allowance as appropriate.

The no gain – no loss rule only applies where a member of a group of companies disposes of an asset to another member of the same group. There is a general requirement that there should be both a disposal by a group company and an acquisition by a group company.

The no gain/no loss rule does not apply where a group company makes a deemed disposal of an asset for consideration received from another group company, if the group company paying the consideration does not itself acquire an asset.

There are also other specific exceptions that must be considered before relying on the use of a no gain – no loss transfer.

A Corporation Tax Group Payment Arrangement (GPA) is a special arrangement that allows groups of companies to make joint payments of Corporation Tax. This type of arrangement can reduce the administration and costs associated with making a large number of individual payments. A GPA can also let members of the group mitigate any potential differential interest charge by allowing the group to allocate payments in a way that is most beneficial.

Only certain groups can qualify for GPA and a legal agreement needs to be made. Companies that can enter a GPA are a parent company and its 51% subsidiaries. The 51% subsidiaries of those subsidiaries, and so on, can also be included in the group. This definition is not necessarily the same as other definitions used for groups by HMRC and other government departments and agencies.

A GPA does not alter the fact that each company is liable for its own Corporation Tax, although a GPA also makes the nominated company liable to discharge the Corporation Tax liabilities of all the companies participating in that GPA.

An application for using a GPA should only be made once all the necessary conditions have been or will be met. The application should be sent to HMRC at least one month before the first payment is due for the accounting period to be covered by the GPA. That is 6 months and 13 days after the start of the Corporation Tax accounting period.

Corporation Tax relief may be available where your company or organisation makes a trading loss. A qualifying trading loss may be used to claim relief from Corporation Tax by offsetting the loss against profits in previous years.

This could be a useful option for companies that have incurred significant losses. Carrying back a trading loss allows companies to seek relief by carrying them back to an earlier profit-making period resulting in a reclaim of Corporation Tax.

Usually, such a claim could only be made once a Corporation Tax return has been prepared and submitted to HMRC. However, in exceptional cases HMRC will allow claims to be carried back based on anticipated losses before the end of a current accounting period. Companies making a submission to HMRC requesting the early carry back of losses would need to provide HMRC with full evidence to support such claims.

Losses may only be carried back against profits of a preceding accounting period if the company was carrying on the trade (in which the loss was incurred) at some time in that accounting period.

Any claim for trading losses forms part of the Company Tax Return. The trading profit or loss for Corporation Tax purposes is calculated by making the usual tax adjustments to the figure of profit or loss shown in the company’s or organisation’s financial accounts.

If a company ceases to carry on a trade, the preceding period is three years preceding the accounting period in which the loss is incurred. Accounting periods must be taken in order, the most recent first.

There are two rates of Corporation Tax effective from 1 April 2023. Taxable profits up £50,000 continue to be taxed at the 19% Small Business Profits Rate. Taxable profits in excess of £250,000 will be taxed at 25%, the main rate. Taxable profits between £50,000 and £250,000 will pay a rate that gradually increases from 19% to 25% by claiming marginal relief.

These thresholds (£50,000 and £250,000) will be reduced for the number of associated companies and for short accounting periods.

A company is an ‘associated company’ of another company if one of the two has control of the other, or both are under the control of the same person or persons. 

The £250,000 limit will be divided by the total number of associated companies. For example, if two companies are deemed to be associated, both companies would pay the main CT rate of 25%, from 1 April 2023 at half the usual threshold, namely at £125,000 rather than £250,000. 

HMRC’s manuals make it clear that a company may be an associated company no matter where it is resident for tax purposes.

As part of the Spring Budget measures, the Chancellor announced that the government will extend the temporary higher rates for Theatre Tax Relief (TTR), Orchestra Tax Relief (OTR) and Museums and Galleries Exhibitions Tax Relief (MGETR) for two further years from 1 April 2023.

These reliefs are part of a collection of creative industry tax reliefs (CITR) that allow qualifying companies to claim a larger deduction, or in some circumstances claim a payable tax credit when calculating their taxable profits.

The sunset clause for the MGETR was supposed to come into force on 31 March 2024. It was also confirmed that the relief will be extended for another two years to 31 March 2026.

The headline rates of relief for the TTR and the MGETR will remain at 45% (for non-touring productions) and 50% (for touring productions). OTR rates will remain at 50%. From 1 April 2025, the rates will be 30% and 35%, and on 1 April 2026 the headline rates of relief for TTR and MGETR will return to 20% and 25%. The headline rates of relief for OTR will return to 25%.

There will also be reforms to the film, TV and video games tax reliefs which will become expenditure credits instead of additional deductions from 1 April 2024. 

Barring any unforeseen changes being announced at next week’s Budget, the Corporation Tax main rate will increase to 25% from 1 April 2023 for companies with profits over £250,000. A Small Profits Rate (SPR) of 19% will also be introduced from the same date for companies with profits of up to £50,000, ensuring these companies pay Corporation Tax at the same rate as currently.

Where a company has profits between £50,000 and £250,000 a rate of Corporation Tax will apply that bridges the gap between the lower and upper limits. The lower and upper limits will be proportionately reduced for short accounting periods of less than 12-months and where there are associated companies.

The effect of marginal relief is that the effective rate of Corporation Tax gradually increases from 19% where profits exceed £50,000 to 25% where profits are more than £250,000.

The amount of Corporation Tax to pay will be found by multiplying profits by the main rate of 25% and deducting marginal relief. For the fiscal year 2023, the marginal relief fraction will be 3/200.

There are currently two schemes for claiming R&D tax relief – the Small or Medium-sized Enterprise (SME) Scheme and the R&D Expenditure Credit (RDEC) Scheme for large companies. The amount of R&D tax relief available depends on the total qualifying spend on R&D activities.

It was announced as part of the Autumn Statement 2022 measures that the Research and RDEC rate will increase to 20% (from 13%) with effect from 1 April 2023. From the same date, the SME additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. These changes will see the two schemes broadly aligned.

A new consultation has been launched to examine simplifying how R&D relief works. The 8-week consultation, which runs from 13 January 2023 to 13 March 2023, sets out proposals on how a single scheme could be designed and implemented. The new scheme would be designed to simplify the R&D system and provide more information about how much relief businesses will be able to claim from the outset. If implemented, the new scheme is expected to be in place from 1 April 2024.

The Corporation Tax main rate will increase to 25% from 1 April 2023 for companies with profits over £250,000. A Small Profits Rate (SPR) of 19% will also be introduced from the same date for companies with profits of up to £50,000 – ensuring these companies pay Corporation Tax at the same rate as currently.

Where a company has profits between £50,000 and £250,000 a marginal rate of Corporation Tax will apply that bridges the gap between the lower and upper rates. The lower and upper limits will be proportionately reduced for short accounting periods of less than 12 months and where there are associated companies.

The effect of marginal relief is that the effective rate of Corporation Tax gradually increases from 19% where profits exceed £50,000 to 25% where profits are more than £250,000.

The amount of Corporation Tax payable will be found by multiplying taxable profits and gains by the main rate of 25% and deducting marginal relief. For the fiscal year 2023, the marginal relief fraction will be 3/200. HMRC also offers an online calculator that can be used to check basic eligibility for marginal relief. The calculator can be found at www.tax.service.gov.uk/marginal-relief-calculator.

For certain businesses it may be prudent to reconsider associated company relationships before April 2023. This will help avoid partial loss of the lower 19% rate or marginal tapering relief.