SMEs will benefit from reduced tax complexity costs and potential tax planning opportunities thanks to the single UK corporation tax rate operative from 1 April.

That’s the opinion of chartered accountants firm Baker Tilly welcoming the new unified corporation tax rate of 20%.

Corporation tax was originally introduced in 1965 at a rate of 40%. Since then, there have been many changes in the rate levied and the legislative burden for companies has increased with successive Budgets. George Osborne announced during his 2013 Budget that from 1 April 2015 the rate of corporation tax will be unified at 20% for all companies except for those with ring-fence profits such as oil and gas companies.

This measure will not only reduce the rate of tax for many companies but will also remove the need for some complex marginal rate calculations to the relief of many financial directors.

The Government’s objective of a more competitive, simplified corporate tax system is to provide an improving business environment and the hope is that this will attract multi-national business and investment into the UK. The 20% rate will be the lowest rate ever in the UK and the lowest rate in the G7.

At its height, UK corporation tax was charged at 52%, so a rate of 20% will be welcomed by companies in reducing the tax burden and also cutting out some complexity.
It is to be hoped that the measure also attracts inbound business and investment by international companies.

The changes

• The small profits rate provisions will be abolished for non-ring fence profits from 1 April 2015.
• All other companies will be taxed at 20% on chargeable profits regardless of size.
• For large companies these changes represent a tax reduction of 1%, and 1.25% for companies being taxed at marginal rates.

Associated companies

• The existing associated companies’ rules will be replaced with new targeted rules. Whilst identifying associated companies will no longer be required to determine the rate of tax charged, it will still be required for the purposes of the patent box, capital allowance long life assets and most commonly, quarterly instalment payments (QIPs).
• From 1 April 2015 new simpler rules based on a ‘related 51% group companies’ test are being introduced.

Planning opportunities

• As corporation tax rates are falling, profitable companies may wish to consider transactions that either accelerate tax deductible expenditure into this final window where relief will effectively be given at 21% (higher if the marginal rate applies), or to defer taxable income until after 1 April 2015 when it will be charged at the new unified 20% rate.