A “one size fits all” corporation tax rate

I’ve been an accountant for almost 16 years now. In that time there has always been one rate of corporation tax for companies with larger profits and another (lower) rate of tax for those with smaller profits.

However, from 1 April 2015, the headline rate of corporation tax in the UK becomes 20% irrespective of whether your profits are £10,000 or £10m. The “small” rate has been at 20% for some years now, but over the last few years the “large” rate has been steadily falling year on year, with parity now being achieved – encouraging large companies to stay and/or invest in the UK. This move has to be seen as generally good for our typical SME client as well. I say generally good, because, as we all know, any tax reduction obviously has to be paid for elsewhere….

The progressive nature of our corporation tax system used to mean that companies with taxable profits above £300,000 would pay at least some tax at the large company rate. Indeed, since the small rate threshold is reduced further depending on the number of companies that you are “associated” with, the large company rate applied to many more companies than simply those with profits above £300,000. As the rate of tax across the board is now 20%, the good news is that no longer will the number of associated companies affect the rate of corporation tax that you pay. The concept of a large company for corporation tax purposes will still exist – for the purposes of determining whether a company falls within the corporation tax instalment payment regime, for example (and the complicated associated company rules will still impact on this), but associated companies will no longer mean that you may pay a higher rate of tax.

How long will it last? – that is a good question with the General Election just over a month away. Perhaps we’ll see an even lower small company rate in due course or perhaps they will simply meddle with other reliefs and allowances – either way our tax system has a nasty habit of throwing up further complexity just when you think things have been simplified and I’m sure that will be the case again here.

Finally, bear in mind that the change is effective from 1 April 2015, so for companies preparing annual accounts their effective rate will be a hybrid of the old and new rates until 31 March 2016, when the full benefit of the rate cut will be felt.

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