The June 2010 Emergency Budget delivered some welcome news to companies and others affected by corporation tax. The news took the form of rate cuts, both to the main rate of corporation tax and to the small companies rate. Here we look ahead to the forthcoming changes and consider the planning opportunities that may be available for companies.
As far as larger companies are concerned, the main rate of corporation tax will fall from 28% to 27% for the financial year 2011, which starts on 1 April 2011. Further cuts will follow in each of the next three successive years, reducing the main rate to 26% from 1 April 2012, 25% from 1 April 2013 and 24% from 1 April 2014. The main rate of corporation tax currently applies to companies with profits in excess of £1,500,000.
Small companies (profits up to £300,000) will gain from a reduction in the small profits rate from 21% to 20% from 1 April 2011. Those with profits between £300,000 and £1,500,000 benefit from the reduction in both rates.
planning opportunities
The reduction in the rate of corporation tax offers a number of planning opportunities. Where appropriate, delaying profits to a later accounting period will allow them to benefit from a lower rate, as well as delaying the date by which the tax must be paid. Likewise, bringing forward expenditure will give relief for those expenses at higher rates of tax.
If the company has unrelieved losses, relieving them earlier rather than later will provide relief at a higher rate. Generally, a trading loss for a 12 month period can be carried back and set against the profits of the preceding 12 months. However, as a temporary measure, losses incurred in accounting periods ending after 23 November 2008 and before 24 November 2010 (inclusive), can be carried back for up to three years rather than 12 months (up to a maximum of £50,000). In a climate of falling corporation tax rates, carrying losses back will give a higher rate of relief for the losses rather than carrying them forward.
The rate reductions, together with the increases in the rates of Class 1 and Class 4 National Insurance Contributions (NICs) scheduled for April 2011, swing the pendulum back in favour of incorporating a business and extracting profits by way of a dividend. However, this may not suit all businesses so please talk to us for advice tailored to your particular circumstances. Dividends must be paid out of retained profits and do not benefit from a corporation tax deduction. However, they do not attract NICs. Thus a reduction in corporation tax rates, combined with increasing NICs, favours profit extraction in this way.
other corporation tax changes
In addition to the forthcoming rate changes, HM Revenue and Customs (HMRC) is changing the way in which corporation tax returns must be filed. From 1 April 2011, company tax returns and accounts for accounting periods ending after 31 March 2010 must be filed online using the inline Extensible Business Reporting Language (iXBRL) format, the new standard designed for business financial reporting. Updated guidance on iXBRL tagging is available on the HMRC website.
We can help you plan to minimise your tax liability and provide advice on all aspects of running a business. Please contact us for assistance.
