From 1 April 2023, most ecommerce companies will pay 25 percent corporation tax instead of 19 percent. Small ecommerce companies with taxable profits under £50,000 will remain at 19% until their taxable profits exceed £250,000. The full 25% rate applies only if profits exceed £250,000, and there is a tapered rate between the two.
Limited companies that do not have 31 March year ends will have their profits prorated between pre- and post-1 April 2023.
One thing ecommerce business owners ask us a lot is if they create more companies to split the profits and reduce the tax rate. The effectiveness of this strategy is, however, negated by associated company rules (dormant companies and passive holding companies excluded).
How do associated companies impact tax rates?
Companies are generally associated with each other if they have either been controlled by the same person or group of people within the previous 12 months or both have been controlled by the same group of people or individuals. In addition to 51% control, a person’s associates (e.g. spouses, civil partners, and business partners) also have rights and powers.
The relationship between one or more businesses belong to the same person (or persons), but they won’t be deemed to be associated if they don’t have substantial commercial interdependence.
When associated companies are included in a company there is a reduction in the upper and lower profit limits. In essence, lower (£50,000) and upper profit limits (£250,000) are divided by the number of associate companies.
How do you define substantial commercial interdependence?
An organisation’s financial, economic, or organisational interdependence is taken into account. It is possible to have financial interdependence as the result of financial support or financial interest in each other’s activities. It is possible for two companies to become economically interdependent if they are striving to reach the same economic goal, if their activities benefit each other, or if they share a customer base. Organisational interdependence can be demonstrated through common management, employees, facilities, or equipment. It can be challenging to prove a lack of substantial commercial interdependence.
How to calculate the applicable tax rate
Tax is calculated at 25% less marginal relief where profits are between £50,000 and £250,000 (adjusted for associates). Marginal relief is calculated as follows:
A Marginal relief fraction is calculated by multiplying the upper limit by (augmented profits – taxable profits) by (taxable profits dividend subtracted from augmented profits)
In addition to taxable profits, the company also receives exempt distributions from non-group companies (e.g. dividends), so augmented profits will often be the same as taxable profits. Assuming this were the case, then the company’s taxable profits would be £190,000, then the calculation would be 1/3200 x (250,000 -190,000 = £900. To calculate tax at 25%, the £900 marginal relief is deducted. The actual tax due for £190,000 at 25% is £47,500, so the actual tax due is £46,600, representing a 24.526% tax rate.
The upper profit limit for the company in the example above would be £125,000 if it had an associated company. The lower limit for a company with 2 associates would be £16,667 / 3 = £16,667, and the upper limit would be £83,333 if the company had 3 associates. The marginal relief for profits of £50,000 is 3/200 x (83,333 – 50,000) = £500, and the tax due would be £12,500 x 25% = £12,500 less £500 = £12,000, or 24% rate.
This can be daunting for many ecommerce business owners. The best thing to do is talk to an accountant to know what this means for you
If you want to find out how we can help you understand how these changes impact your ecommerce business, go to our contact page and book a free consultation .