Promises, promises – craving some certainty in tax
I have spent a fair amount of time over the past month considering the implications of the April 2023 corporation tax rise, and in particular the likely impact of the return of the associated company rules on our clients.
In simple terms, the main rate of corporation tax is set to rise to 25%, with the current 19% rate retained for the first £50,000 of taxable profit made by each company. However, all active companies under common control have to share equally that £50,000 band, so groups of companies need to think carefully about structure going forward.
The majority of our clients have holding companies, which hold the assets of significant value and the shares in the trading company as a commercial risk avoidance measure (particularly important at the moment). It is therefore of vital importance to us to know precisely how HMRC intends to define an active company for this purpose.
Time for a bit of history. We have been here before, and like the current legislation, the law on what was an active company was hugely restrictive, making it very difficult to keep a holding company outside the associated company definition.
However, there was also HMRC guidance which in practice greatly widened the statutory definition of an inactive company, so that in general terms provided a holding company was not itself carrying on a business it was possible to avoid it being an associated company of its trading subsidiary.
I consulted HMRC on this issue, and they quite rightly quoted the strict statutory definition and confirmed that the ‘old’ guidance was due to be updated for the new legislation and so basically said “watch this space” – so much for planning ahead.
This is a prime example of one of the numerous curses of the modern UK tax system, which I will call “taxing by statute and un-taxing by HMRC guidance and practice”, which I would contend is no way to operate a tax system.
Speaking of no way to operate a tax system, further doubt has now been cast on the matter by the victory of Liz Truss in the Conservative leadership election, as one of her bewilderingly large range of fiscal promises was to scrap the proposed increase altogether.
Apart from the fact that one assumes that Kwasi Kwarteng as Chancellor might like some input into that decision (the last Prime Minister who acted as his own Chancellor was William Pitt the Younger over 200 years ago, and he worked himself to death), what exactly is the status of this statement by our new Prime Minister?
Is it, to use a quaint phrase from the history of contract law, a ‘mere puff’ – i.e. a statement that is not intended to be taken literally or seriously? I don’t think that one will run when we are talking about a process to appoint our most important politician, so I think this has to be taken more seriously than that.
So where does that leave our planning, other than in a state of limbo, pending an emergency Budget or “fiscal event” to quote our new Prime Minister’s most famous euphemism to date? It is less than 7 months until the change is due to come into effect, and we know neither whether it actually will or what the precise terms of one of its most important features will be in practice.
Might I suggest that there are enough pressures and uncertainties for businesses at the moment without the government gratuitously imposing more? We need to know urgently and definitively what is going to happen to corporation tax in April 2023.
What we want to know from you, is whether your accountant is equally aware of the arising issue, and as proactive as our tream aim to be. We are confident that no matter the confusion, we work to make sure our clients benefit as much as possible from the tax system, and avoid mistakes or unnecessary charges. Get in touch if you want to feel confident your accoutnant is doing the same for you.
