We don’t need a crystal ball to see the future for corporation tax in Scotland and the rest of the UK. Over in Westminster, the Chancellor spelled it all out for us in March 2021.

Currently, businesses enjoy a flat rate of 19% corporation tax and have done so for several years. But that is all going to change in April 2023.

What are the new corporation tax rates?

On 1 April 2023, the headline rate of corporation tax will jump quite considerably – to 25%. But before you panic, know that the flat rate is also changing to a tapered system and if you are a smaller business, you may not notice any difference at all.

As you might already know, corporation tax is based upon profits. The Chancellor wants to protect smaller businesses so if your profits are less than £50,000 you will remain on the existing rate of 19%.

Then, for those businesses which generate between £50,000 and £250,000 of annual profits, tapering will be introduced. This means that depending on your precise profits, you’ll pay somewhere between 19% and 25% corporation tax.

So it is only businesses with profits in excess of £250,000 that will be subject to the full 25% tax.

How can I manage the corporation tax increase?

If you will face a rise to your corporation tax rate, you may be wondering if there is anything you can do to reduce its effect.

The tax system usually has reliefs and allowances that can legitimately be used to reduce tax liability, and corporation tax is no different.

One long-standing option is to make pension contributions. These reduce your corporation tax liability while helping you (and other employees or directors) build a pot for retirement. 

There should be no personal tax liability at the time of making the contribution, although personal taxes may be due when drawing pension income depending on your circumstances.

A time-limited way of reducing corporation tax liability which is available this year (albeit before the higher rate is introduced), is to invest in new plant and machinery assets. Until 31 March 2023 these will benefit from a super-deduction of 130%. In layman’s terms this means that every pound you invest could cut your tax bill by 25p.

A third way you could potentially reduce your corporation tax bill now and into the future is to explore whether you qualify for R&D tax credits. This is a government incentive to reward corporate innovation. Like the super deduction, R&D tax credits can reduce your corporation tax bill by 25p for every qualifying pound you spend, and relief is also available if you are loss-making.

There are prescribed criteria you need to meet, but the scope is surprisingly broad and any sector can benefit. So it is always worth checking with a reputable adviser if you could qualify.

Are there any other changes for corporation tax on the horizon?

The other change we know about in relation to corporation tax involves Making Tax Digital (MTD), but details are still vague. So far, MTD for VAT has been rolled out for larger VAT-registered businesses, and more recently to all VAT-registered businesses from April 2022.

Next up is income tax self-assessment for landlords and business owners, with that launch scheduled for 2024. 

It is thought that MTD for corporation tax will come some time after that, but no date has been confirmed – HMRC has only said this will happen no earlier than 2026. 

You will be required to keep records digitally (which you may already do) as well as use special software to digitally file documents with HMRC.

If you have any questions about the changes to corporation tax, get in touch with us – we can talk you through the way in which the changes will likely affect you.