Reverting to the Two-Tier System

By Deborah Nadav, Citroen Wells Chartered Accountants

Since 01 April 2015, the UK has had one flat rate of corporation tax, currently 19%. This is set to change effective 01 April 2023, with the Finance Act 2021 reintroducing the small profits rate. The main rate of corporation tax will increase to 25% for companies with profits over GBP 250,000 and a small profits rate of 19% will apply to most companies with profits up to GBP 50,000. Companies earning profits of between GBP 50,000 and GBP 250,000 will apply marginal relief.

So how does marginal relief work?

Marginal relief gives a discount on the main rate of tax using the marginal relief fraction (3/200). A company with profits over GBP 50,000 should first calculate its tax liability using the main rate and then calculate the marginal relief discount. This will give an effective tax rate somewhere between 19% and 25%.

What about associated companies?

An added complexity is the reintroduction of associated company rules. Broadly, two companies are associated if one has control of the other or if they are both under the control of the same person or group of persons (even if for only part of the year). Non-UK companies are included but dormant companies are not.

Where there are associated companies, the limits for the main and small rates for each company are divided by the number of associated companies. For example, a company with three other associates would have a main rate limit of GBP 62,500 rather than GBP 250,000. The number of associated companies also affects the profit limits above which large companies have to pay corporation tax by instalments.

What about capital purchases?

The annual investment allowance gives a full corporation tax deduction for qualifying asset purchases, currently capped at GBP 1 million. Businesses may be tempted to defer large capital expenditure to 2023, to save tax at higher rates. However, the cap is set to revert to GBP 200,000 from 01 January 2022. Furthermore, from 01 April 2021 to 31 March 2023, a 130% super-deduction capital allowance is available. The timing of purchases may therefore be crucial to securing the best tax treatment.

Deborah Nadav

GGI member firm
Citroen Wells Chartered Accountants
Auditing & Accounting, Tax, Advisory, Corporate Finance, Fiduciary & Estate Planning
London, United Kingdom
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Citroen Wells' partners include specialists with years of practical knowledge assisting our international clients. We offer a range of accounting, tax, financial and business services with an emphasis on high quality.

Deborah Nadav is a general practice manager who deals with a varied portfolio of clients. She specialises in personal and corporate taxation, charity accounts and owner managed businesses. She is CTA and ACA qualified and has a legal background, with experience in Chambers and SRA audits.

Published: International Taxation Newsletter, No. 15, Autumn 2021 l Photo: moofushi - stock.adobe.com