FINANCE
The return of the small companies ’ regime
Martin Gurney , Tax Partner for Haines Watts Swindon explains the proposed changes to the Corporation Tax system announced in the Budget .
Martin has been in practice for over 20 years , and as Tax Partner at Haines Watts Swindon , oversees taxation planning and compliance matters .
Our corporation tax system had become relatively straight-forward – all companies , regardless of size , pay the same rate of corporation tax .
But no more ! Following the announcement in the Budget , from 2023 we are returning to a tiered system of corporation tax rates , with the profitability of each ‘ connected ’ company directly impacting upon the rate of corporation tax of the other connected companies .
Companies with profits of £ 50,000 will pay tax at 19 %. Companies with profits in excess of £ 250,000 will pay tax at 25 %, and there will be a sliding scale of rates in between .
With connected companies , the bandings are divisible by the number of connected companies . Why is that an issue ? Firstly , companies will need to keep track of ( and advisers will need to be aware of ) all ‘ connected ’ companies . This increases the administrative burden for both .
Secondly , there is significantly more sensitivity around the profitability of each entity , transactions between connected companies , and therefore where those profits are taxed and at what rate .
What does this look like ? In between the £ 50,000 and £ 250,000 profit thresholds there will be a sliding scale of rates of tax . What that means in practice is that profits falling in to the £ 50,000 – £ 250,000 range are actually taxed at a rate in excess of 25 %. So the marginal cost of falling into that tax bracket can be disproportionately high .
“ connected companies that transact with each other will need to re-examine their trading terms ”
What does this mean in practice ? Essentially , connected companies that transact with each other will need to reexamine their trading terms and charging structures which , in turn , requires more planning .
Advisers will need to carefully monitor structures of connected companies for
changes in numbers and to ensure that tax rates are optimised . Again , more planning .
The money to pay for the Coronavirus support has to come from somewhere . However , I suspect that even those not so long in the tooth as myself will recall with dread the small companies regime and the issues that it created . Fortunately it is still a couple of years off , which is a long time in politics and in tax . Every cloud ….!
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THE BUSINESS EXCHANGE 2021 11