When you’re closing the 2022 year end financials, tax for 2023 may not be at the top of your list. But the time of year means changes are not far off. Here are some pointers to consider.
For most companies with a December year end, the 2021 tax return process may only just have been completed, meaning that in January they can focus on the 2022 year. This housekeeping includes checking that accounting entries reflect the final tax position, as more detailed work will have been done on the returns during the year – such as moving numbers from provisional to actual.
Has last year’s Corporation Tax provision been trued up for the actual liability submitted in the return to HMRC? Do the balance sheet liabilities tie in with the current position? This question is particularly important for very large companies or those in the ‘payments on account’ (POA) regime. Have outstanding enquiries or issues been resolved with HMRC? And are these now accurately reflected in the ledgers?
Deferred tax
The other area where figures often change is in the provision and carrying value of deferred tax. So it’s important that these numbers are updated to reflect the actual figures in the tax computations. Those companies carrying deferred tax assets will benefit from the Corporation Tax rate going up to 25% from 1 April 2023. But those in a net deferred tax liability position will not be so lucky.
Group matters
Year end housekeeping can be even more challenging in a group context, especially if you are surrendering group relief. If so, it’s vital to check that group relief policies have been consistently followed. And has the agreed consideration for consortium relief been accurately reflected?
This can be even more difficult to manage in an international environment, especially where some decisions are made at head office level or if you are reporting under different local accounting practices. A special challenge this year has been the foreign exchange fluctuations and the impact this has had on consolidated balances.
The Corporation Tax rise
For UK companies, however, there are other forces to be reckoned with. Firstly, the rate of Corporation Tax will increase from 19% to 25% in April 2023. Tax logic would suggest recognising more income before the rate increase, paying tax on it at only 19%. Meanwhile it would be preferable to defer expenditure or capital investments until April 2023, benefiting from the increased 6% relief.
But of course the recognition of an income or expense is driven by generally accepted accounting standards and by the company’s, or group’s, accounting policies. The same will apply to those areas where estimations and calculations are used to determine an accounting value.
R&D and small companies
The opposite is true for small companies claiming R&D. The Chancellor’s change to R&D tax relief for SMEs reduces the additional deduction from 130% of qualifying expenditure to only 86%. At the same time, it reduces the payable credit rate that SMEs can claim for surrenderable losses from 14.5% to 10%. So, if you’re a small company incurring R&D, it’s best to accelerate your expenditure before April 2023 and make sure you get your claims in early.
On the other hand, those companies that carry out qualify R&D, and claim RDEC, will benefit from the increase in rate from 13% to 20%. So, for some, April 2023 can’t come quickly enough.
Capital Gains (CGT): best practice
On the CGT side, companies should identify those assets pregnant with gains and consider whether to bed and breakfast or crystallise those gains now at 19%, rather than when the rate increases to 25%.
From a group perspective, it’s also worth assessing how many companies are really needed in the group. That’s because the attractiveness of the small profits rate for companies of 19% is compromised when marginal rate bands are reduced by the number of associated companies in a group.
Considering all the changes afoot, this may be just the right time to restructure, consolidate operations and reduce expenditure.
If you would like more guidance on any of the issues raised in this article, please contact Chris Riley.
