Accounting effect of tax rate increase

The UK’s main rate of corporation tax will increase from 19% to 25% with effect from 1 April 2023. This may have some important implications that companies need to consider.

A small profits rate will be reintroduced for companies with annual chargeable profits of £50,000 or less, and this is to be set at the current standard rate of 19%, with a tapered band giving a marginal corporation tax rate of 26.5% for those with profits between £50,000 and £250,000.

The finance bill that became Finance Act 2021 received its final reading in the House of Commons on 24 May 2021. This date is the date of “substantive enactment” for the purposes of UK generally accepted accounting practice (UK GAAP) and international financial reporting standards (IFRS). It then received Royal Assent on 10 June 2021, the date of enactment for US generally accepted accounting principles (US GAAP) purposes.

The deferred tax accounting implications, of the rate change are therefore driven by the relevant accounting framework under which the UK business reports. To the extent that the underlying timing or temporary difference is expected to reverse on or after 1 April 2023 and the main rate of UK corporation tax is expected to apply ie the 25% rate should be reflected in deferred tax calculations by businesses subject to UK corporation tax:

-with a balance sheet date of 24 May 2021 or later, where they report under either UK GAAP or IFRS; and effects years ending 31 May 2021 onwards

-with a balance sheet date of 10 June 2021 or later, where they report under US GAAP. Effects years ending 30 June 2021 onwards

Finance Act 2021 also included some changes to the way in which associated companies are identified for the purposes of calculating the profit thresholds above which the quarterly instalment payments (QIPs) regimes applies. The new definition is broader, such that some companies may now be required to pay their tax earlier, if they are deemed to be a large company.

Businesses subject to corporation tax should review these changes, to understand the impact and what action is necessary.

For further information on tax rate increases, please contact Michaela Johns  on 023 8046 1256.