Corporation tax is being reformed and companies with profits of more than £50,000 will pay corporation tax at a higher rate than they do now. While the changes do not come into effect for a year, applying from the financial year 2023 which starts on 1 April 2023, their impact will be felt sooner where accounting periods span 1 April 2023. Consequently, they will be relevant to accounting periods of 12 months starting after 1 April 2022.

Nature of the changes

From 1 April 2023, the rate of corporation tax that you pay will depend on the level of your profits and the number of associated companies that you have if any.

If your profits are below the lower limit, from 1 April 2023, you will pay corporation tax at the small profits rate. At 19%, this is the same as the current rate of corporation tax.

If your profits are above the lower limit, you will pay corporation tax at the main rate. This has been set at 25% for the financial year 2023.

If your profits fall between the lower limit and the upper limit, you will pay corporation tax at the main rate, but you will receive marginal relief which will reduce the amount that you pay. Marginal relief is calculated in accordance with the following formula:

F x (U-A) x N/A

Where:

• F is the marginal relief fraction (set at 3/200 for the financial year 2023);
• U is the upper limit;
• A is the amount of augmented profits (profits plus dividends from non-group companies); and
• N is the amount of total taxable profits.

Where a company benefits from marginal relief, the effective rate of corporation tax will be between 19% and 25%. A company with profits nearer the lower limit will receive more marginal relief than a company with profits nearer the upper limit and pay tax at a lower rate.

The lower limit is £50,000 and the upper limit is £250,000 for a company with no associated companies. Where a company has one or more associated companies, the limits are divided by the number of associated companies plus 1, so that, for example, the lower limit for a company with one associated company will be £25,000 and the upper limit will be £125,000.

The limits are time apportioned where the accounting period (or pro rata period) is less than 12 months.

Plan ahead

Where the accounting period spans 1 April 2023 the profits for the period are apportioned and those relating to the period prior to 1 April 2023 will be taxed at the financial year 2022 corporation tax rate of 19%, while those relating to the period from 1 April 2023 to the end of the accounting period are taxed at the relevant rate for the financial year 2023 depending on the company’s profits.

Where the company will from April 2023 pay corporation tax at a rate above 19%, now is the time to plan ahead and, where possible, accelerate profits so that they fall in the current accounting period rather than one spanning 1 April 2023. On the other side of the coin, delaying costs so that they fall in a period spanning 1 April 2023 rather than the current period will also reduce the tax that is payable at a rate above 19%.

Example

ABC limit prepares accounts to 30 September each year. It has annual profits of £300,000.

Its profits for the year to 30 September 2022 will be taxed at 19%.

However, its profits for the year to 30 September 2023 will be time apportioned and six months’ worth will be taxed at 19% and the remaining six months’ worth at 25% — an effective rate of 22%. The company accelerates a profitable contract so that it is completed before 30 September 2023 so that the profit is taxed at 19%.

If you operate your business through a personal or family company and extract profits in the form of dividends, it is prudent to review your dividend policy to determine whether it would be beneficial to pay a further dividend before the end of the 2021/22 tax year on 5 April 2022. It should be remembered, however, that dividends can only be paid if you have sufficient retained profits, and where shares of the particular class in respect of which a dividend is being declared are held by more than one shareholder, in proportion to shareholdings.

Paying a dividend before the end of the tax year may be worthwhile if:

• shareholders have unused dividend allowances; or
• to beat the dividend tax rate increases that come into effect from 6 April 2022.

Utilise dividend allowances

All individuals, regardless of the rate at which they pay tax, have a dividend allowance. This is set at £2,000 for 2021/22. The dividend allowance operates as a zero rate band and dividends (which are taxed as the top slice of income) are tax-free to the extent that are covered by the dividend allowance. However, the dividend allowance does use up part of the tax band in which it falls.

If any shareholders have not fully used their dividend allowance for 2021/22, paying a dividend to take their dividends for the tax year up to £2,000 will be beneficial allowing profits to be extracted from the company without any further liability to tax. If an alphabet share structure is used, dividends can be tailored to match the unused amount of the dividend allowance; if there is only one class of share, dividends must be paid in proportion to share holdings.

Example

Fletcher Ltd is a family company in which Bertie Fletcher and his wife Jane are directors. Bertie holds 100 A Class shares and Jane holds 100 B Class shares. The couple each take a salary, which for 2021/22 is equal to the personal allowance of £12,570. In addition, the company has declared dividends of £37,700 for both A Class and B Class shareholders.

The couple have two sons, Chris and David. Chris holds 100 C Class shares and David holds 100 D Class shares. Chris has £1,500 of his 2021/22 dividend allowance available, while David’s dividend allowance remains available in full.

To utilise the dividend allowances to extract profits free of tax, the company pays a dividend of £15 per share to C Class shareholders and a dividend of £20 per share to D Class shareholders on 30 March 2022. Chris receives a dividend of £1,500, which are covered by his available dividend allowance, and David received a dividend of £2,000, which is covered by his dividend allowance. No dividends are declared for Class and Class B shares.

Beat the dividend rate rise

As part of a package of measures to fund health and social care, the rates at which dividends are taxed are to rise by 1.25% from 6 April 2022. This will mean that for 2022/23, dividends will be taxed at 8.75% to the extent that they fall in the basic rate band (currently taxed at 7.5%), at 33.75% to the extent that they fall in the higher rate band (currently 32.5%) and at 39.35% to the extent that they fall within the additional rate band (currently 38.1%). The dividend allowance will remain at £2,000 for 2022/23.

If retained profits permit, it may be advisable to pay dividends before 6 April 2022 if doing so means that they are taxed at a lower rate than if paid after that date. However, if paying a further dividend before 5 April 2022 means that it will fall in a higher tax band than if paid after that date, it will not be beneficial – it is preferable to pay tax at 8.75% than at 32.5%.

Example

Ali is the director of his personal company A Ltd. In 2021/22 he is paid himself a salary of £9,568. He also received a dividend each year of £20,000 on 30 April. He has retained profits of £50,000. If instead of paying the dividend of £20,000 that is due to be paid on 30 April 2022, £18,000 of that dividend is paid on 30 March 2022, the tax payable will be £1,350 (£18,000 @ 7.5%) rather than £1,575 (£18,000 @ 8.75%) if the dividend is paid on 30 April 2022. The remaining £2,000 of the dividend can be paid on 30 April 2022 as planned as it will be sheltered by the dividend allowance for 2022/23.

Paying £18,000 of the dividend before 6 April 2022 to beat the tax rise will save Ali £225 in tax.

Transactions between a director and his or her personal or family company are common and a director’s loan account is simply an account for recording the transactions that occur between the two.

However, there are tax consequences for the company if the director owes money to the company and the loan remains outstanding nine months and one day after the end of the accounting period in which it was made. This is the date that the corporation tax for the period is due. Where this is the case, the company must pay tax (Section 455 tax) of 32.5% of the overdrawn balance.

Avoiding a Section 455 tax charge

A Section 455 charge can be avoided if the outstanding loan balance is cleared before the corporation tax due date. However, anti-avoidance rules apply, and care should be taken not to fall foul of these rules. The rules seek to ensure that any repayments are genuine repayments, rather than transactions designed to avoid the Section 455 charge.

Rule 1: The 30-day rule

The 30-day rule comes into play where, within a period of 30 days of a repayment of more than £5,000, the participator borrows again from the company.

Section 455 tax is payable on the lesser of the amount of the loan repaid and the amount re-borrowed. This rule renders the repayment ineffective to the extent that the funds are re-borrowed within 30 days.

It doesn’t matter which comes first, the loan repayment or the further borrowing, the 30-day period applies equally. This prevents a participator from taking out a new loan and using it to repay all or part of the original one.

Rule 2: The intentions and arrangements rule

The intentions and arrangements rule gives the taxman a second bite of the cherry where the 30-day rule does not apply because the period between the repayment and the new loan is more than 30 days. This rule applies a motive test and can catch repayments and further borrowing more than 30 days apart where the intention is to avoid tax.

The intention and arrangements rule comes into play where the balance of the loan outstanding immediately before the repayment is at least £15,000 and, at the time a loan repayment is made, there are arrangements, or an intention, to subsequently borrow £5,000 or more.

This rule applies even where the new borrowing is outside 30 days. The rule bites if the repayment is made with the intention of redrawing at least £5,000 of the payment, irrespective of when this is done. This means waiting 31 days before re-borrowing the funds will not necessarily work.

Again, the rule does not apply to funds extracted by way of a dividend, salary or bonus, as these are within the charge to income tax.

Genuine repayment

Clearing an outstanding loan balance to avoid a Section 455 charge will only be tax-effective if this is done either by means of dividend, bonus or salary payment, which attracts tax charges in their own right, or by using funds from outside the company to make a genuine repayment.

To help meet the costs of health and adult social care, a new levy, the Health and Social Care Levy, is introduced from 6 April 2023. Payment of the levy, which is set at the rate of 1.25% of qualifying earnings, is linked to the payment of National Insurance contributions.

Prior to the introduction of the levy and in order to start raising ring-fenced funds for health and adult social care from 6 April 2022 onwards, the rates of ‘qualifying’ National Insurance contributions are to increase by 1.25% for 2022/23 only. Qualifying National Insurance contributions are Class 1, Class 1A, Class 1B and Class 4. Thus, employees, employers and the self-employed will be hit by the rises for 2022/23, and by the levy from 6 April 2023.

The National Insurance rates are due to revert to their 2021/22 levels from 6 April 2023 when the Health and Social Care Levy comes into effect.

Impact on employees

For 2022/23, employees will pay primary National Insurance contributions at the main rate of 13.25% on earnings between the primary threshold (set at £190 per week for 2022/23) and the upper earnings limit (set at £967 per week for 2022/23), and at the additional rate of 3.25% on earnings in excess of the upper earnings limit.

For 2021/22, the main rate is 12% (payable on earnings between £184 per week and £967 per week) and the additional rate is 2% (payable on earnings in excess of £967 per week).

The following case studies demonstrate the impact of the rate rises, which will depend to the extent to which they are offset by the increase in the primary threshold.

Case study 1

Karen is paid £185 per week. For 2021/22, she pays primary contributions of 12p per week. However, for 2022/23, she will not pay any contributions (but will be treated for state pension purposes as having made notional contributions) as her earnings are below the primary threshold of £190 per week.

She is unaffected by the rate rises, and benefits from the increase in the primary threshold.

Case study 2

Clive is paid a salary of £24,000, paid monthly at the rate of £2,000 per month. His pay remains the same in 2022/23 as in 2021/22.

The monthly primary threshold is £833 for 2022/23 and the monthly upper earnings limit is £4,189. For 2021/22, the monthly primary threshold is £797 and the monthly upper earnings limit is £4,189.

For 2021/22, Clive pays primary National Insurance contributions of £144.36 (12% (£2,000 – £797)).

For 2022/23, Clive pays primary National Insurance contributions of £154.63 ((13.25% (£2,000 – £833).

The combined impact of the rate rise and the increase in the primary threshold will mean that Clive will pay an additional £10.27 each month in National Insurance contributions.

Case study 3

Rebecca is a company director with a salary of £150,000 a year.

The annual primary threshold is £9,880 for 2022/23 and £9,568 for 2021/22. The annual upper earnings limit is £50,270 for both years.

For 2021/22, Rebecca pays primary Class 1 National Insurance of £6,878.84 ((12% (£50,270 – £9,568)) + 2% (£150,000 – £50,270))).

For 2022/23, Rebecca pays primary Class 1 National Insurance of £8,592.91 ((13.25% (£50,270 – £9,880)) + (3.25% (£150,000 – £50,270))).

As a result of the rate increases, Rebecca will pay £1,713.07 more in National Insurance contributions in 2022/23 than in 2021/22.

To help taxpayers and advisers affected by the surge in Covid-19 cases as a result of the Omicron variant, HMRC have announced that penalty waivers will apply for a limited time where the 2021/22 tax return is filed late or where tax due on 31 January 2022 is paid late.

Late filing penalty

The 2020/21 tax return was due to be filed online by midnight on 31 January 2022. Where this deadline is missed, normally HMRC would charge a late filing penalty of £100 automatically. The exception to this rule is where the notice to file a 2020/21 tax return was issued after 31 October 2021, in which case a later filing deadline of three months from the date of the notice to file applies. Where a late filing penalty is issued, the taxpayer can appeal the penalty if they have a ‘reasonable excuse’ for missing the deadline.

However, in recognition of impact of Covid-19 on the ability of taxpayers and their agents to meet the 31 January 2022 deadline, HMRC have announced that they will not charge a late filing penalty as long as the 2021/22 tax return is filed by midnight on 28 February 2022. This will give taxpayers an extra month in which to file their return. The move is perhaps not entirely altruistic on HMRC’s part as it is likely to save them from dealing with a large number of penalty appeals where the late filing is attributable to the reasonable excuse of Covid-19.

Late payment penalty

A tax payment deadline also fell on 31 January 2022. This is the date by which any tax and National Insurance still due for 2020/21 must be paid, along with the first payment on account for the 2021/22 tax year.

Normally, a late payment penalty of 5% of the outstanding tax would be charged where tax due by 31 January 2022 remained unpaid by 31 March 2022. However, HMRC have announced that they will not charge a late payment penalty as long as the taxpayer has paid their tax in full or agreed a Time to Pay arrangement with HMRC by midnight on 1 April 2022.

If you know already that you will struggle to pay your tax bill in full by 1 April 2022, you should act now to set up a Time to Pay arrangement, which will allow you to pay what you owe in instalments.

Interest Interest payments have not been waived. Where tax is not paid by 31 January 2022, interest will run from 1 February 2022 until the date of payment.

Tax policy is used to influence behaviour as well as to collect revenue. One example where this is the case is the company car tax rules which tax high emission cars heavily and reward drivers for choosing electric and low emission models.

Why emissions matter for tax?

Where an employee has a company car that is available for his or her private use, they are taxed on the benefit that this provide. The taxable amount is a percentage – the appropriate percentage – of the list price of the car and optional accessories. The charge is adjusted to reflect capital contributions made by the employee (capped at £5,000), certain periods when the car was unavailable and any payments for private use.

The appropriate percentage depends, in the main, on the CO2 emissions of the vehicle, with a lower charge applying to cars with lower emissions. For 2020/21 and 2021/22, it also depends on whether the car was registered before 6 April 2020 or on or after this date (the way in which emissions were measured changed for cars first registered on or after 6 April 2020). However, the rates are aligned from 6 April 2022.

Where the car’s emissions fall in 1—50g/km band, the electric range of the car also has a bearing on the emissions, with a lower percentage applying to cars with a greater electric range. The electric range is the distance that can be covered on a single charge.

A supplement of 4% applies to diesel cars which do not meet the RDE2 emissions standard. However, the percentage is capped at 37%.

Looking ahead – 2022/23 and beyond

For 2022/23 the appropriate percentages range from 2% for cars with zero emissions and those with CO2 emissions in the 1—50g/km band with an electric range of more than 130 miles to 37% for cars with CO2 emissions of 160g/km or more. For diesel cars not meeting the RDE standard, the maximum percentage of 37% applies to cars with emissions of 145g/km and above.

While it is no longer possible to enjoy a tax-free electric car (as was the case in 2020/21), the charge remains very low at 2% of the list price. This means that, for example, the taxable amount for an electric company car costing £30,000 is only £600, which will cost a basic rate taxpayer £120 in tax for the year and a higher rate taxpayer £240 in tax for the year. Even with a more expensive car costing £50,000, the taxable amount of £1,000 means that a higher rate taxpayer will only pay tax of £400 for the year. If a fully electric car is not viable, the same result is achieved with a hybrid with an electric range of 130 miles (and emission in the 1—50g/km band).

The appropriate percentages applying for 2022/23 remain unchanged for 2023/24 and 2024/25, meaning that electric and low efficient cars remain a tax efficient benefit for the next few years at least.

There is a lot of preparation involved in setting up a business, and costs will be incurred, which may be substantial. Before it is able to start trading, a business may incur expenditure on items such as:

• acquiring premises;
• recruiting staff;
• buying stock;
• setting up website;
• IT costs;
• advertising and marketing; and
• travel and subsistence.

These costs relate to a business, albeit one which has yet to start.

Relief for expenses

Once a business is up and running, relief is given for revenue expenses which are incurred wholly and exclusively for the purposes of the business.

Where the expenses are incurred in setting the business up, relief is available under the pre-trading expenses rules. These allow relief for expenses that were incurred in the seven years prior to the commencement of the trade to the extent that the expenses are revenue expenses which are incurred wholly and exclusively for the purposes of the trade. In this way, the pre-trading expenses rules allow relief for expenses which would have been deductible had the expenditure been incurred once the business was up and running. Pre-trading expenses are treated as if they were incurred on the day on the first day of trading, and are deducted in computing the profits for the first period of account.

Example

Lucy opens a shop selling cards and gifts on 1 October 2021. Prior to opening the shop, she incurred expenses as follows in 2021:

• rent — £2,000;
• staff costs — £4,000;
• stock — £20,000;
• travel expenses — £850;
• advertising — £3,000
• shop fittings — £12,000
• laptop — £500.

Under the pre-trading rules, the rent, staff costs, travel expenses and advertising costs are treated as if they were incurred on 1 October 2021. They are deducted in calculating her profits for her first accounting period.

Stock

No deduction is given for the cost of stock under the pre-trading expenses rules. Stock purchased prior to commencement will form opening stock, and relief against profits will be given for stock sold in the first accounting period.

Capital expenditure A similar rule to the pre-trading expenses rules applies for capital allowance purposes. Items purchased prior to the commencement of trade where the expenditure is qualifying expenditure for capital allowance purposes are eligible for capital allowances – the qualifying expenditure is treated as if it were incurred on the first day of trading.

The VAT is a simplified scheme that can save work. Instead of working out the VAT that you need to pay over to HMRC by deducting input VAT from output VAT, you pay a fixed percentage of your VAT-inclusive turnover. The percentage depends on the nature of your business.

Who can join?

To be eligible to join the VAT flat rate scheme you must be a VAT-registered business and expect your VAT taxable turnover to be £150,000 or less. This is the total of everything that you sell that is not exempt from VAT, exclusive of VAT. You cannot re-join the scheme if you have left it in the last 12 months.

Once in the scheme, you must leave if your turnover in the last 12 months was more than £230,000 including VAT, or you expect your turnover in the next 30 days alone to be more than £230,000 (including VAT).

Working out your VAT

The flat rate percentage depends on the nature of your business. The percentages applying to different business sectors can be found on the Gov.uk website. The percentages allow for input VAT recovery and are less than the rate of VAT charged.

You receive a discount of 1% from your flat-rate percentage for the first year that you are in the scheme.

The VAT that your need to pay to HMRC for a quarter is simply the fixed rate percentage as applied to your VAT-inclusive turnover.

Example

Molly runs a beauty business. Her annual turnover (excluding VAT) is £90,000. In a particular VAT quarter, her VAT inclusive turnover is £32,400. The flat rate percentage for her sector – hairdressing and other beauty treatments – is 13%. Consequently, she must pay HMRC VAT of £4,212 for the quarter. She does not need to keep records of her input VAT or work out the difference between VAT charged and VAT suffered in the quarter.

Limited cost businesses

Special rules apply to business that do not buy many goods – known as limited cost businesses. These are business where goods are less than either 2% of turnover or £1,000 a year.

Limited cost businesses must use a higher rate of 16.5% to work out the VAT that they pay over to HMRC, regardless of the sector in which they operate.

Is the scheme worthwhile?

The scheme will save work, but this may come at a cost if the amount that you would pay using the normal rules is less than the amount determined using the fixed rate percentage. There is no substitute to doing the sums.

The flat rate percentage for limited cost businesses of 16.5% of VAT-inclusive turnover is equivalent to 19.8% of net turnover, leaving little margin for input VAT recovery as 99% of the VAT charged at 20% must be paid over to HMRC. This may be problematic for a business that spends little on goods but incurs VAT on services and items such as fuel and promotional items, which are excluded from the calculation. Again, to assess whether the scheme is worthwhile, there is no substitute for doing the sums.

If your company is no longer trading and does not have any other income, you can tell HMRC that it is dormant. This will relieve you of the need to file a company tax return or pay corporation tax. However, while your company still exists, even if it is no longer trading, you will still need to file annual accounts and a confirmation statement with Companies House.

Dormant for corporation tax

A company will normally be classed as dormant for corporation tax if:

• it has stopped trading and it does not have any other income;
• it is a new limited company which has not yet started to trade;
• it is an unincorporated association or club that owes less than £100; or
• it is a flat management company.

A company will not be dormant if it is buying, selling, renting property, advertising, employing anyone or receiving interest.

Tell HMRC

If you think that your company is dormant for corporation tax, you can use HMRC’s online service on the Gov.uk to inform HMRC of this. To use the service you will need:

• the company name;
• its 10-digit Unique Taxpayer Reference (UTR); and
• the date it stopped trading.

HMRC decide your company is dormant

You may get a letter from HMRC telling you that they have decided to treat your company as dormant.

Implications for corporation tax

Once you have told HMRC that your company is dormant (or they have decided to treat it as dormant) you will not need to pay corporation tax or file a company tax returns unless you receive a notice to file. Once you have filed a return showing the company to be dormant, you should not receive a further notice to file.

Companies House

Registering your company as dormant with HMRC does not relieve you of your Companies House obligations. Your obligations depend on whether the company is ‘dormant’ for Companies House. This is the case if you did not have any significant transactions in the year. Any filing fees paid to Companies House, penalties for late filed accounts or money paid for shares when the company was incorporated do not count as significant financial transactions. If your company is dormant for Companies House and also ‘small’, you can file dormant company accounts. You will need to file a confirmation statement too.

All individuals are entitled to an annual exempt amount for capital gains tax purposes. Net gains (chargeable gains less allowable losses) for the tax year are free of capital gain tax to the extent that they are covered by the annual exempt amount. For 2021/22, the annual exempt amount is set at £12,300.

Use it or lose it

As with the personal allowance for income tax purposes, the capital gains tax annual exempt amount is lost if it is not fully used in the tax year – it is not possible to carry forward any unused part of the 2021/22 annual exempt amount to 2022/23.

As the end of the tax year approaches, now is the time to review gains and losses in the tax year, and planned disposals, to assess whether it is beneficial to make further disposals in 2021/22.

Losses

Losses realised in a tax year must be set against any gains for the same tax year to arrive at net chargeable gains, before applying the annual exempt amount. You cannot preserve the losses by using the exempt amount against the chargeable gains. However, there is no need to use losses brought forward from earlier tax years before utilising the annual exempt amount.

For example, if in a tax year you realise a gain of £14,000 and a loss of £6,000, the net gains for the year are £8,000. These are sheltered entirely by the annual exempt amount of £12,300. It is not possible to set the annual exempt amount against the chargeable gain to reduce it to £1,700, then use only £1,700 of the loss, carrying the remaining £4,300 forward.

Married couples and civil partners

Married couples and civil partners can take advantage of the rule that allows them to transfer assets between them at a value that gives rise to neither a gain nor a loss (i.e. the transferor’s base cost). This effectively allows them to shift some or all of a gain from one spouse or civil partner to the other. This is useful to ensure both partner’s annual exempt amounts are utilised.

Year-end planning

Case study 1

Mark is planning to sell some shares in Spring 2022 and expects to realise a gain of £10,000. He has not made any disposals so far in 2021/22.

If he sell his shares prior to 6 April 2022, the disposal will fall in the 2021/22 tax year. As his annual exempt amount has not been used, this is available to shelter the gain. Making the disposal prior to 6 April 2022 leaves his annual exempt amount for 2022/23 available to set against any disposal in the 2022/23 tax year.

Case study 2

Duncan and Anthony are civil partners. Antony sold a painting in May 2021 realising a gain of £15,000. This utilised his annual exempt amount in full. He plans to sell another painting and expects to realise a gain of £10,000.

If Anthony sells the painting in 2021/22, he will pay capital gains tax on the gain. However, if he transfers the painting to Duncan prior to sale and Duncan sells the painting, the gain will be Duncan’s rather than Anthony’s and will be sheltered by his annual exempt amount, saving the couple capital gains tax.