The rate of corporation tax is scheduled to be a single rate of 20% from 1 April 2015, so the distinction between the ‘full rate’ and the ‘small companies’ rate’ will no longer exist.
Why the change?
Until 1 April this year, there are two rates of corporation tax – 21% on profits over £1.5 million, and 20% on profits under £300,000. The rate on profits between £300,000 and £1.5 million is 21%, but it is reduced by ‘marginal small companies’ relief’ which produces a rate of 21.25% on the profits between £300,000 and £1.5 million.
The distinction between the two rates is less important than it used to be when the difference between the full rate and the small companies’ rate was much greater – 30% and 19%, for example, in the early years of this millennium.
The £300,000 and £1.5 million thresholds were reduced if a company had any ‘associated’ companies, so with one associated company the lower threshold became £150,000, and with two associates, £100,000.
An associated company was one that was within the same ‘control’, and this could include companies controlled by close relatives or business partners, though over the years this was restricted to cases where there was ‘substantial commercial interdependence’ between the companies concerned.
The rules for associated companies and their effect on the rate of corporation tax led to some artificial tax planning; steps would be taken to ensure separate companies were not caught by the definition of ‘control’, or in the case of a group of companies, management charges would, for example, be used to ensure that each company used its £300,000 band as fully as possible. In a simple case of a parent company with profits of £100,000 and a subsidiary with profits of £200,000, there would be a management charge by the parent of £50,000 to reduce the subsidiary’s profit to £150,000, thus ensuring that all the group profits were taxed at the small companies’ rate.
With effect from 1 April 2015, all this will be swept away, because with one rate of corporation tax for all profits, there is no need to count ‘associated companies’ in order to see where the threshold for the small companies’ rate falls (there is an exception for certain North Sea oil companies, which is too rarefied and tedious to deal with here).
Quarterly tax payments
At present, two companies controlled by the same individual would be ‘associated’ even though not in a corporate group of companies. This will be completely abolished. For companies in the same group, however, there will be a new definition of ‘51% group companies’ which is fairly self-explanatory.
The reason for this is that one aspect of the £300,000/£1.5 million thresholds remains. A ‘large company’ is required to pay its corporation tax in quarterly instalments on account, instead of paying it nine months after its year end like other companies. From 1 April a large company will be defined as one whose profits are greater than £1.5 million (or a fraction of that amount based on how many companies there are in the group). It will still be necessary, therefore, to determine how many ‘51% group companies’ are involved, to see what fraction of £1.5 million represents their threshold for the purposes of instalment payments of tax.
Practical Tip:
As a standalone company can never be included with companies in a group, the day of the management charge may not be over. If you have a group company near the threshold for paying by instalments, you could set up a separate company outside the group and transfer some of the profits to it using a commercially justifiable management charge.
