As a citizen of a country, it is one's responsibility to pay taxes. One of the most widely discussed tax topics as the New Year began was the UK government's plan to raise the corporate tax rate from 19% to 25% on April 20, 2023.What changes will this new corporation tax rate cause? And what can you do about it?
Table of Contents
• Corporate Tax
• Why All This Changes in Corporate Tax?
• Tax Specializations
• Final Thoughts
But first, what exactly is corporate tax?
According to Britannica, corporate tax is a tax levied on a corporation's net profits. The definition may be simple, but its concept might be confusing for some due to the complexity of this new tax policy. So, let's try to make it easier to understand!
Businesses sell goods and services in exchange for money, and the sales they make less their business cost will be the profit. With the profits of the company or corporation, the government can take the established percentage as a corporate tax. Resident companies in the UK have to pay corporate tax on their worldwide profits. Non-resident companies, on the other hand, are subject to UK corporation tax on the trading profits attributable to UK permanent establishments. Limited companies—a form of corporate structure where the firm is legally separate from its shareholders and managers—associated with trading profits, investments, and asset selling such as land, properties, and shares for chargeable gains have to pay corporate taxes as well, while sole traders and partnerships have to file a tax return and deduct income tax return on their profit.
Why All This Changes in Corporate Tax?
Why did the UK government change the corporate tax rate for 2023? It is because of the status of the economy during the past years, caused mainly by the pandemic. The government sees this as an opportunity to pay the lost revenues and expenses during the COVID-19 pandemic. Besides, the UK's new corporate tax rate is just aligned with the corporate tax rate worldwide.
Here's the catch, though. Not everyone has to pay a 25% corporate tax. Beginning April 1, 2023, there will be no single corporation tax rate for non-ring-fenced profits, according to uk.gov. In addition to this, the government declared that the Corporation Tax main rate for non-ring-fenced profits would rise to 25% for profits over £250,000 in the Spring Budget of 2021. Fortunately, the corporate tax rate will remain at 19% for small businesses with profits of $50,000 or less.
What about those whose profits are between £50,000 and £250,000? In the article published by Wellers, the corporate tax for those in the marginal rate will be 26.5% by 2023/2024.
Ring-fenced companies, which profit from oil extraction and UK rights, have different corporate tax rates than other companies. The following shows the corporate tax policies for these types of companies:
• The corporate tax rate for small ring-fenced profits rate or those companies with profits under £50,000 is 19%.
• The corporate tax rate for main ring-fenced profits rate or those companies with profits over £250,000 is 30%.
• Marginal relief for ring fence companies with profits between £300,000 and £1.5 million will be available to claim for periods up to 31 March 2023 while marginal relief is available for companies with profits between £50,000 and £250,000 from April 1, 2023.
Ring-fenced companies are not the only ones whose corporation tax rate is different from others. Other regimes have special corporation tax due to the size of the business, transfer pricing, R&D credits, and some targeted anti-avoidance rules, which will result in additional compliance and reporting requirements. As given by the Worldwide Tax Summaries, the following are the special corporation tax regimes:
1. Oil and gas company regime (ring-fenced companies)
2. Life insurance company regime
3. Tonnage tax regime
4. Banking sector
5. Real estate investment trust (REIT) regime
6. Qualifying asset holding company (QAHC) regime
Each regime has a distinct tax specialization. For instance, life insurance companies are subject to a unique tax system that has various rates for corporate taxes as well as unique guidelines for estimating or calculating their profits. On the other hand, the Tonnage Tax uses the net tonnage of active ships as a substitute measurement to calculate business tax gains. The Tonnage Tax profit replaces the chargeable gains/losses on Tonnage Tax assets as well as the tax-adjusted profit/loss on a shipping firm and some related operations. Having said that, any additional profits are subject to the standard corporate tax system.
Similarly, businesses in the banking industry must pay an extra 8% tax on income beyond GBP 25 million.
While QAHCs are permitted a stamp duty or stamp duty reserve tax (SDRT) exemption on the repurchase by a QAHC of share and loan capital, as well as the ability to redeem, repay, or repurchase its share through the capital treatment of payments in the hands of investors, profits from the UK REIT's "residual business," or activities other than renting out properties, are subject to corporation tax in the usual manner.
Due to the decision to change the corporate tax rate of the UK, Diverted Profits Tax (DPT), a part of the United Kingdom's response to the shift in the tax environment, is said to rise to 31% starting on or after April 1, 2023.
With no mention of reversal or change, it looks like the new 25% corporate tax rate is going to go ahead, so people need to know how to register for corporation tax and responsibility. To register for corporation tax when starting up a limited company, you need to go through the HM Revenue and Customs section of GOV.UK. You can now fill up the needed information. Corporation tax must be paid before filing the company tax return, which means that the deadline for payment depends on your corporation tax accounting period. Failure to settle the bill by the deadline dates can lead to penalties.
Apart from this, you may be able to lower your corporation tax bill by making use of strategies like the "Annual Investment Allowance," "The Patent Box Tax Regime," R&D tax relief, allowable business expenses, employee share scheme, and many other ways which you may learn about here.
There will be several changes that this new corporate tax rate may bring, whether boosting federal revenues or causing negative impacts on certain businesses. However, those who are knowledgeable and can greatly adapt to these changes can withstand whatever the effects will be. Since the shift will most likely happen, then people must learn the things to do, such as registration, filing, and paying, and the strategies to use to reduce the corporate tax bill. Indeed, the tax environment is even more complicated than we've expected, but this complexity will surely continue as different corporations continue to evolve and as governments have distinct and certain priorities that can greatly influence how their tax policies will be shaped