Financial years and corporation tax rates
Corporation tax (CT) rates are set for “financial years”. A financial year (FY) runs from 1 April to 31 March and is identified by the calendar year in which it commences for example FY 2022 is the year from 1 April 2022 to 31 March 2023.
The rate of corporation tax to be applied depends on the level of Total Taxable Profits (TTP).
Rates of corporation tax
The UK currently has a single CT rate irrespective of profits (exception ring fenced trades) of 19%. This will continue until 31 March 2023 as follows:
FY2019 – FY2022 (1.4.19 – 31.3.23)
Main rate (MR) 19% – 25%
Threshold for instalment payments £1.5m
Threshold for accelerated instalment payments £20m
Marginal relief
Corporation tax is charged at the standard small profits rate (19%) on a company’s taxable total profits of an accounting period (which are not ring fence profits) if the company is UK resident in the accounting period, it is not a close investment-holding company (CIHC) in the period and its augmented profits of the accounting period do not exceed the lower limit.
If its augmented profits of the accounting period exceed the lower limit, the starting point is that profits are taxed at the main rate of CT. If the augmented profits do not exceed the upper limit, the CT charged on the company’s taxable total profits of the accounting period is reduced by an amount equal to F x (U – A) x N/A where:
• F is the standard marginal relief fraction.
• U is the upper limit.
• A is the amount of the augmented profits; and
• N is the amount of the taxable total profits.
Company losses
Introduction
This section focuses on the loss reliefs available for trading losses. New rules were introduced from 1 April 2017, which gave increased flexibility for the relief of carried forward losses. It is still important to understand the old rules as any carried forward losses arising before this date must be relieved under the rules applying at the time.
In addition, the impact of the pandemic on business has prompted the Chancellor to introduce a temporary two-year trading loss carry back extension.
Trading Losses Arising Prior to 1 April 2017
When computing the trading income position, where the result is a loss there are several ways in which relief can be obtained. These may be summarised as follows:
a. Set off against total profits of the same accounting period;
THEN (if required):
b. carried back against total profits in the immediately preceding 12- month period(s) (provided that the company was carrying on the trade); or
c. carried forward against income from the same trade in subsequent accounting periods; or
d. taken as group relief against ‘total taxable profits’ (after relief for gift aid donations) of other companies in the same group.
Claims under (a) must be made within two years of the end of the accounting period in which the loss is made.
Trading Losses Arising after 1 April 2017
The new rules give some flexibility in the use of carry forward losses, but also introduced a restriction. The current year and carry back rules have not been changed.
Carry forward of post-1 April 2017 trade loss against total profits
For losses incurred on or after 1 April 2017, companies will be able to use carried forward losses against profits from other income streams or from other companies within a group. In addition, the offset of carried forward losses is no longer automatic; a claim is made to offset all or part of the post-1 April 2017 trading loss.
Losses that arise prior to 1 April 2017 will remain subject to the existing restrictions over profit that they can be set against (e.g. a carried forward trading loss incurred pre-1 April 2017 can only be against profits arising from the same trade), but it is possible to disclaim the offset of a pre-1 April 2017 loss against profits incurred post 1-April 2017.
Foreign rental business losses
Foreign rental business losses of an overseas rental business may be carried forward against future foreign rental business profits of the same business.
This rule applies to overseas property businesses regardless of whether they arise before 1 April 2017 or not.
Terminal losses
On the cessation of trade, a loss incurred in the final twelve months of trading can be offset against profits of the three previous years. The set-off is effected against later years prior to earlier years. Any profits within the final 12 months must be covered by the loss first before any claim to carry back the balance.
Note that a loss can be carried back for three years preceding the beginning of the accounting period in which the loss was incurred, provided part of that accounting period falls within the 12 months prior to cessation. Relief is given for the earliest loss first.
Capital losses
Capital losses may be:
• offset against chargeable gains of the same accounting period; and
• the balance remaining carried forward against chargeable gains of future accounting periods.
Capital losses cannot be carried back (except for losses of investment companies on certain unquoted shares).
These rules apply to all capital losses regardless of whether they arise before 1 April 2017 or not.
Restriction of use of carried forward losses
When a loss is carried forward to an accounting period that occurs on or after 1 April 2017, the maximum loss offset is £5 million plus 50% of profits more than £5 million. Most companies will not be affected by the restriction, but it is important to remember that the £5 million deductions allowance must be claimed in the corporation tax return. The amount of deductions allowance available to the company must be specified, even if profits do not exceed that amount.
Temporary trading loss carry back for companies.
Under the existing rules in s37 CTA 2010, a company incurring a trading loss in an accounting period may make a claim for that loss to be set off against total profits of the same accounting period. It can also claim for the unused balance of such losses to be set off against all profits of the preceding 12-month period (provided that the company was carrying on the trade in the accounting period(s) which fall in that 12-month period). Where an accounting period straddles the preceding 12-month period, the profit is apportioned and losses can only be set off against profits falling within the 12-month period. For accounting periods ending between 1 April 2020 and 31 March 2022, this is extended to three years, with losses required to be set against profits of most recent years first before carrying back to earlier years.
Chargeable periods which straddle 1 April 2023
Where a chargeable period begins before 1/4/23 and ends on or after that date, the maximum AIA is the sum of the maximum allowances that would be found if the following were treated as separate chargeable periods:
• so much of the period as falls before 1 April 2023; and
• so much of the period as falls on or after that date.
With regard to expenditure incurred on or after 1 April 2023, the maximum AIA for the period is limited to the proportion of the £200,000 indicated by the amount of the chargeable period falling after that date.
Sale of plant
Where plant or machinery is sold during the year, the disposal proceeds are deducted from the balance on the pool. If the disposal value exceeds the original cost, then it is the original cost which is deducted.
This is because capital allowances aim to give tax relief to businesses for the net cost of the asset over its life in the business. The net cost to the business is the original cost less the proceeds received.
Disposal of assets where super-deduction made
Where there is a disposal of an asset on which a super deduction was claimed in respect of all/ part of the expenditure, the disposal proceeds will not be deducted against the relevant pool balance bfwd, but a balancing charge will be separately computed.
• If the disposal event occurs in a chargeable period that ends before 1 April 2023, recovery rate is 130%/ 50% depending on the respective pools. For SR Pool the other 50% of the proceeds is dealt with in the normal way by deduction from the pool balance.
• If the disposal event occurs of a main rate SD asset in a chargeable period that straddles 1 April 2023 the amount of the balancing charge is 1 + (0.3 x days in AP before 1 April 2023/ days in AP).
• If the disposal occurs in an AP beginning after 1 April 2023, then only a 100% balancing charge applies.