Farmers advised to plan for corporation tax changes

Farmers who operate their businesses as limited companies should plan now to ensure they minimise their tax bills ahead of upcoming rule changes.

Changes to corporation tax are coming in 2023, as well as the end of the super-deduction and the increased £1m annual investment allowance (AIA), said Martyn Dobinson, partner at accountant Saffery Champness.

Corporation tax is paid on the taxable profits of limited companies. In just over 12 months, its current single rate of 19% will be replaced by a tiered system.

See also: VAT rules to know when offering land and buildings storage

This means those reporting taxable profits of up to £50,000 will continue to pay at the rate of 19%, but those with profits of more than £250,000 will see the rate increase to 25%.

Any whose taxable profits fall within the £50,000 to £250,000 bracket could be subject to “marginal relief” from the full 25% rate, with tapering available, Mr Dobinson explained.

Due to the way the marginal relief formula works, while the overall average tax rate will be lower, the element of profits that fall within the “marginal relief” band from April 2023 could end up being taxed at a higher marginal rate of 26.5%.

“Clearly, businesses will want to minimise their tax bill and pay at the lower rate of 19% where possible,” said Mr Dobinson. “Planning to do this will take some careful thought.”

It may seem possible to split off diversified activities into a separate company, with the individual companies all having lower taxable profits.

However, where there are “associated companies” – where one is under control of another or multiple companies are under common control at any time in an accounting period – the £50,000 and £250,000 thresholds are divided by the number of associated companies.

For example, if there are two associated companies, the thresholds are halved, which can counteract such restructuring, said Mr Dobinson.

“Other possible planning might be to bring forward profits so that they are taxed before 1 April 2023 or to defer expenses until after 1 April 2023 so that they obtain tax relief at a higher rate of corporation tax,” he said.

“Similarly, if a business makes corporation tax losses, carrying those forward to offset against future profits taxed at higher rates of tax may be preferable to carrying back to offset against profits subject to lower tax rates, albeit the tax relief and cashflow advantage will be delayed.”

Tax reliefs ending

The super-deduction and raised £1m AIA will also end on 31 March 2023.

Introduced in April 2021, the super-deduction provides a tax deduction of 130% for companies investing in new qualifying plant and machinery.

In addition, the AIA – which isn’t restricted to only companies – gives a 100% tax deduction on qualifying plant and machinery expenditure, and is set to return to £200,000.

The timing of qualifying capital expenditure should, therefore, also be carefully considered to maximise the tax relief afforded, said Mr Dobinson.

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Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

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