The 20% corporation tax rate: planning for 2015
George Osborne announced in the Budget that from 1 April 2015 the main rate of corporation tax will be reduced to 20%, thereby marrying both the large and small company rates and eliminating marginal relief.
This further reduction, down from 28% when the coalition came to power, provides the UK with the lowest CT rate of any of the G7 member states and the joint lowest rate in the G20.
HMRC said the measure supports the government’s objective of a more competitive, simplified CT system to “provide the right conditions for business investment and growth”.
As previously announced the main rate of CT reduces to 23% from 1 April 2013 and will be further reduced to 21% from 1 April 2014.
The new unified CT main rate also means there will be no marginal rates from 2015.
|Taxable profits: First £300,000||20%||20%||20%||20%|
Many businesses may try to tie funds up in reserves or defer tax arrangements so they can realise the profits in 2015 when the rate is 20%.
Carl Powell, a partner at Houghton Stone and consultant on the PracticeWEB Budget guide, commented: “Companies will be deferring income where possible and pushing it into a later tax year. At the same time they will be planning to bring forward expenditure while the marginal rates are higher.”
Claritax Books publisher and author Ray Chidell, a long-time advocate of the lower merged CT rate, played down suggestions that the impending CT rate reductions would encourage people to accelerate capital spending, though he does see it as an important part of the Chancellor's economic stimulus package.
“Any tax relief is worth more if you are paying a higher rate of tax, but I doubt the falling CT rate will have the effect of bringing forward capital expenditure,” said Chidell. “The increased annual investment allowance (AIA) is a much bigger incentive. Because companies draw up their accounts across different tax years, there are complexities in dealing with the AIA transitional rules. But assuming there is no further change in next week's Finance Bill, there will be a period when it will be relatively simple to claim the £250,000 relief before it comes back down to £25,000 in 21 months.”
Although the merged rate will do away with the hassles of working out marginal rate relief, Rebecca Benneyworth warned that groups with associated companies may still have to jump through similar arithmetic hoops to work out whether they are taxed as small or large companies.
Large companies have to make quarterly CT payments, whereas small companies pay nine months after the end of the year.
“They still have to do associated company computations in order to determine when they pay corporation tax. At the moment it looks like it won’t mean any simplification on that front,” Benneyworth said.