Tax Savings

Maximising tax savings – Watch out for corporation tax traps

October 25, 2023

The increase in corporation tax rates from April 2023 brings both traps and opportunities, PLUS potential changes to R&D tax credits brings a downside for SMEs.

Corporation Tax Rises Create Traps and Opportunities

In this article, we focus on the traps and opportunities arising from the increase in corporation tax rates from April 2023, together with potential changes to R&D tax credits that will have a significant downside for SMEs.

Understanding the impact of associated companies on corporation tax

As we have previously reported, from 1 April 2023, the rate of corporation tax that a company pays will now depend both on the level of taxable profits it generates as well as the number of “associated companies” it has.

If your company has no “associated companies,” then the corporation tax rates that apply will be 19% where profits are no more than £50,000 and 25% where profits exceed £250,000 a year, with a marginal rate where profits fall in between this figure. These limits will be divided by the number of associated companies you have.

Strategies to reduce taxable profits

Where your profits fall between these limits, there is marginal relief applied to transition between the 19% and 25% rates, which means that with a marginal tax rate of 26.5%, effective tax planning could substantially reduce your corporation tax bill.

There is scope to reduce the company’s taxable profits, e.g., by buying new equipment or paying additional pension contributions on behalf of the directors, which could save 26.5% corporation tax if your profits fall in the marginal relief band. We suggest a review of your profit position at least 2 months before your year-end to enable any planning opportunities to be implemented.

Identifying associated companies for tax purposes

It is worth noting that to identify “associated companies” when considering corporation tax, you need to consider those under common control. In determining whether a company is associated, the rights and powers of an individual’s close relatives may be taken into account where there is substantial commercial interdependence between the two companies.

Expert guidance for tax planning

The identification of associated companies together with planning to reduce your corporation tax bills is far from a straightforward matter, and the team at TAG is here to advise you.

Merging R&D tax relief schemes

The government has issued draft legislation for consultation proposing that, from 1 April 2024, the two existing schemes covering R&D relief – R&D expenditure credit (RDEC) and Credit Relief for SMEs, could be merged to form a unified scheme.

Unfortunately, it appears that the merged scheme will operate similarly to the existing RDEC scheme, rather than the SME scheme. The merged scheme will offer a taxable credit, based on a percentage of R&D expenditure that can be offset against the company’s tax liability with a proposed rate of 20% of R&D expenditure.

What will be the impact on SMEs?

SMEs have already seen tax relief reduced from 130% of R&D spend to 86% from 1 April 2023. It is envisaged that the current SME relief will effectively continue for loss-making R&D intensive companies.

The level of scrutiny of R&D relief claims, increased reporting requirements, and changes to the interpretation of the rules, together with the introduction of the merged scheme at lower tax credit rates, is likely to have a significant impact on SMEs that have benefitted significantly in the past from the scheme providing Credit Relief for SMEs.

If in doubt, seek professional advice!

SMEs should take professional advice on whether making claims in the future will be a worthwhile exercise, and again, the team at TAG is here to advise you.

The TAG tax team is always here to help

We believe that tax planning can result in significant savings for you and your business. 

Our friendly team is here to provide you with all the support you need in connection with determining any potential corporation tax traps or planning opportunities that may arise due to changes in corporation tax rates and to help you navigate the new R&D tax credits minefield.

If you would like to book a confidential appointment with one of the tax experts here at TAG Accountants, just call us at 01902 783172. Alternatively, to contact us via our website, just click HERE and we will be in touch.

We very much look forward to hearing from you.