Certain types of company are not eligible to apply the small profits rate for corporation tax, regardless of their profit levels.
On 1 April 2023, the main Corporation Tax (CT) rate was increased from 19% to 25%. A small profits rate of 19% was introduced for companies with profits below £50,000 (the lower limit). Marginal relief was brought in for companies whose profits fall between the lower limit and £250,000 (the upper limit).
For some companies the lower and upper limits will be much lower, and certain companies will be entirely excluded from the small profits rate and marginal relief.
Accounting periods less than twelve months
If your company’s accounting period straddles 1 April 2023 it should be split it into two notional accounting periods – one ending on 31 March 2023 and one starting on 1 April 2023.
For example, for a 31 December 2023 year-end there will be two notional accounting periods:
- 1 January 2023 to 31 March 2023; and
- 1 April 2023 to 31 December 2023.
Only the profits of the second notional accounting period will fall within the new rates. The first notional accounting period will be taxed at 19% under the old rules. The second notional accounting period will be taxed under the new rules. As this is not a 12-month period the upper and lower limits will need to be time-apportioned. In the example above, the lower limit would be £37,671 (275/365 x £50,000) and the upper limit £188,356 (275/365 x £250,000).
Associated companies
The upper and lower limits must be divided by the number of ‘associated’ companies. For example, a company with one associated company will have a lower limit of £25,000 (£50,000 / 2) and an upper limit of £125,000.
Broadly, two companies will be associated if:
- one has control of the other; or
- both are under the control of the same person or persons.
Excluded entirely
Non-resident companies without a permanent establishment within the UK and close investment holding companies are not eligible to use the small profits rate or apply marginal relief and must use the main CT rate regardless of their profit levels. There are a few exceptions to this which can be found by searching GOV.UK.
If you have already filed your CT return using the small profits rate or marginal relief incorrectly, you need to submit an amended company tax return to report the correct rate of tax. We can help you with this.