Wednesday, June 22 2022

Fiona Holloway, Associate Partner at Claritas Tax, says it’s no secret that millions of us are feeling the pinch right now. With skyrocketing rates of inflation, rising costs and interest rates, and sky-high energy bills, not to mention the tax increases and benefit freezes that research1 predicts that more than 1.2 million people will benefit from higher tax rates, we can certainly count on good trading conditions to pull us out of a now widely predicted recession.

Or can we? While household budgets are tight and some sectors (not to mention all those energy companies with record profits) are doing very well, for many businesses there are a number of fiscal challenges to overcome if we are to exit of this economic plunge crisis.

First, the rate of corporation tax rate on profits over £250,000 will increase from 19% to 25% from 1 April 2023. This means fewer after-tax funds for business investment, although the government says the UK remains a great place to do business.

the small profit rate of 19% will remain for profits up to £50,000, with graduated relief applying to profits up to £250,000. However, inflation will quickly erode the benefits of this rate, making the situation worse for most businesses. Where possible, companies could consider deferring the use of losses until 2023, which would save an additional 6% in tax, while delaying the collection of the benefit of these losses.

New Addition of 1.25% of health and social services to NI Contributions, whose effect on individuals was slightly blunted with the announcement last month that the NI contribution threshold will be increased in line with tax relief, should still have a significant impact on corporate results. This increase also applies to NI employers, bringing the main rate up to 15.05%, although these costs are eligible for a corporation tax deduction. Add to that the 6.6% increase in national minimum wage for £9.50 per hour from April 1, 2022, and some companies will see their payroll increase significantly. With inflation currently at 7%, it is likely that there will be at least a similar rise for low-wage workers next year.

But even if companies are starting to make higher profits, not everything is simple, after all, income tax is not the only place where the thresholds have been frozen. Corporation tax payment dates also depend on profits and companies and groups that make taxable profits less than £1.5m pay their tax nine months and one day after the end of the accounting year. Those whose profits exceed this threshold must pay their taxes earlier.

If profits rise in line with inflation, companies will end up paying taxes sooner. This will have an impact on cash flow and financing needs. Further planning will be required to ensure that corporation tax payments are made on the due dates and that cash will be available to fund them.

Similarly, the threshold for UK businesses to comply with all transfert price the requirements are 50 million euros in turnover and one balance sheet total of 43 million euros.

Companies that have been outside the transfer pricing regime may find themselves required to put in place transfer pricing documentation. It will be worthwhile for these companies to start considering the documentation requirements before hitting the thresholds. Waiting for HMRC to send a request for documentation probably won’t produce the best results!

While calls for a windfall energy tax have fallen on deaf ears so far, given the critical importance of SMEs to the economy, we can – to be hoped that the chancellor will offer aid and incentives to businesses in his next budget, to help ease this pinch and allow the economy to grow again.

1 analysis by the House of Commons Library commissioned by the Liberal Democrats

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