When taxable profits are less than £300k a UK company pays corporation tax at the “small profits rate” (SPR), which from 1 April 2011 is 20%. When profits are below £1.5m, £300k is taxed at the SPR, the balance at a marginal rate, now 27.5%. However these thresholds reduce when any other company or companies is “associated” any time in the company’s accounting period.
What’s not changing is that all companies either controlled by you or by the same persons who control the company are associated. However companies controlled by anyone else (e.g. a family member) now affect the SPR limit only when there is “substantial commercial interdependence” between your company and these other companies in terms of financial, economic or organisational factors. This has to be looked at case by case, involving subjective judgement, as the degree and period of time over which the inter-dependence existed is important. Only when interdependence exists at company-to-company level will companies controlled by others affect your company’s SPR thresholds.
The good news is that for most companies, fewer companies will be “associated” and the change will generally increase the SPR limits, increasing the amount of profits taxed at the SPR.
The new rule applies to accounting periods ending on or after 1 April 2011 – so it’s already in place. It’s possible to ask for a one year deferral of application of the new rule – we can advise if this election would be beneficial.
The recent budget announced greater reductions in the main rate of tax so diminishing the value of the SPR. The differential between the full rate and SPR was 11% in 2007; but will be down to 3% from 2014, when the main rate will be 23%, assuming the SPR is maintained at 20%.
If your company has suffered reduced benefits because of the small profits rate in the past this change may reduce its tax bill. Please get in touch if you would like us to look at your particular situation.