DATE: Fri 15 Apr 2016
BY: Stephen Aldridge
Large companies and international groups may need to revise their forecasts in light of three changes to UK Corporation Tax announced the budget.
Whilst we all no doubt welcome the reduction in Corporation Tax rates announced in the Budget; 19% for financial years beginning April 2017, reducing to 17% in April 2020; other changes mean that some companies face negative impacts on their tax payments and cash flow.
In particular this may affect companies with:
+ Profits over £20m
+ Profits over £5m and accumulated historical losses
+ International group generating most profits overseas, with UK debt
If this sounds like your company, have you worked out how it affects you?
If your profits are over £20m, the date for quarterly payment on account is being pulled forward by 4 months in 2019 (this change has in fact been pushed back from the planned date of 2017, but did you update for the change when it was announced?). This appears to mean that at the changeover, you will make two quarterly payments in two months – one being the first new payment at month three of the 2020 tax year, followed one month later by the fourth payment for your 2019 tax year, ie approx. 9% of annual taxable profits in one quarter, instead of 4.75%.
Offsetting historical losses against future profits over £5m will now be restricted to 50% of taxable profits over the £5m threshold. This could hit any companies who have had a major turnaround from loss to profit, like Tesco, or special purpose companies which have made large investments (creating short term losses) which should lead to profits over £5m in future years. This will mean tax becomes payable much sooner that has been the case for such companies. Some infrastructure projects will be exempt, but other companies need to bear this in mind when planning large-scale investments through special purpose vehicles. Banks have it worse still – their loss relief is restricted to 25% of taxable profits.
Thirdly, UK based groups that finance overseas companies with debt may find that their interest is no longer fully tax deductible. The new restriction is that Interest expense is only deductible up to a cap of 30% of UK profits
Stephen is a Chartered Management Accountant and has over ten years of financial modelling experience both at KPMG and Deloitte. His early career included engineering, sales and corporate management roles. In 2004, Stephen joined Numeritas as a co-owner and a Managing Director.
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