As an example, how will the computations proceed for a company with a 12-month accounting period ending 31/07/23 and net taxable trading profits of £135,000? The company is not part of a group but has one “associated” company that is under common control?
Corporation tax applies to the profits of an accounting period based on the rates and bands in force for each of the financial years that the period covers (a financial year runs from 1 April to the following 31 March). Where an accounting period straddles two financial years in which different corporation tax rates or bands apply it is split into separate notional accounting periods (para 34(2) Sch. 1 FA 2021). The corporation tax bands are time-apportioned between the periods for the purpose of applying the old and new tax rates. Although the new legislation itself does not directly stipulate a basis of apportionment for profits, HMRC’s view is that trading profits would also be time- apportioned (see CTM03955 and CTM01405).
Using the information given in your example, the calculations would therefore proceed as follows:
a) Financial year-ended 31/3/2023:
Period 1) 1/8/22 to 31/3/23
(£135,000 x 243/365 days=) chargeable profits £89,877: corporation tax due at 19% = £17,076
b) Financial year-ended 31/3/2024:
Period 2) 1/4/23 to 31/7/23
(£135,000 x 122/365=) chargeable profits £45,123
The reduced corporation tax small and main rate thresholds applicable are calculated as follows:
Small companies’ rate threshold (£50,000/2 x 122/366) £8,333
Main rate threshold £250,000/2 x 122/366 = £41,666.
As the profits for the apportioned accounting period exceed the main rate threshold, they are fully taxed at 25%. The Corporation tax payable is therefore (25% x £45,123) £11,280.
Note, that for the second notional accounting period the new “associated company rules” apply (*): the small and full companies rate thresholds of £50,000 and £250,000 are divided-by two (for the company itself plus one associated company) and then also pro-rated as the notional accounting period is for less-than 12 months.
Had the profits fallen below £8,333, they would be charged at the small companies rate of 19%; if they had been between £8,333 and £45,123 they would be charged at 25% but with marginal relief, giving a net overall rate of tax on total profits of between 19% and 25% (depending on the precise profit level and the amount of marginal relief available) (*).
(*) please see my earlier article available here-
https://www.cronertaxwise.com/community/21022023-associated-company-rules-from-010423/
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