Mitigating the CT rate hike on company gains

Which CT rate?

The answer to the question above is important because it can make an appreciable difference to a company’s corporation tax (CT) bill.

Example. Acom Ltd’s current financial year ends on 30 September 2023. It sold investments in November 2022 making a gain of £200,000. If the gain could be attributed to profits in the period prior to 1 April 2023, CT at 19% would apply to the whole gain, but if it’s attributable to the accounting period as a whole the 25% would apply to part. That could mean a difference of up to £6,000 (£200,000 x 6/12) x (25% - 19%)).

Our view

The answer to the question in our view is that gains count as part of a company’s chargeable profits and must, in effect, be attributed evenly across the whole of the CT accounting period in which they occur. Therefore, part of the gain for an accounting period that straddles 1 April 2023 is subject to the higher post-1 April CT rates. To be sure we put the question to HMRC’s technical advisors who, to our surprise, replied that a gain which occurred prior to 1 April 2023 in an accounting period is taxable at the CT applicable in the tax year it was made, i.e. 19%.

To good to be true

While we would have liked HMRC’s view to have been correct, it seemed too good to be true. Before we could respond to HMRC we received another letter from it reversing its original answer and confirming our view.

Profits of a CT accounting period which fall into more than one tax year (for CT purposes a tax year runs from 1 April to 31 March) must be divided between each year by time apportioning the profits including gains. The CT rate(s) relevant for each tax year are then applied as illustrated in the example above (see The next step ).

By changing your company’s financial period it’s possible to work around the rules for apportioning profits to prevent the attribution of part of a pre-1 April 2023 gain to the post 1-April period, and so prevent the new higher CT rate from applying.

Example. The circumstances are the same as in the previous example, except that Acom shortens its financial period from one year to six months, so that it ends on 31 March 2023. The CT accounting period is therefore also shortened to the six months to 31 March. The gain of £200,000 is therefore attributable to the 2022 CT year and therefore the rate of tax applicable is 19%, thus saving £6,000 CT.

Conditions for changing dates

Acom can change its financial year if it hasn’t already submitted its accounts covering the 31 March, or made another change within the previous five years; and does so before the Companies House filing date for the revised period of accounts, i.e. 31 December 2023