CTM03955 - Small profits rate: financial year 2023 onwards: accounting period straddling financial year - differing relevant amounts or limits

Where an accounting period straddles the beginning of a financial year for which the lower or upper limits for marginal relief differ from those of the preceding financial year, the two parts of the accounting period are treated as if they were separate accounting periods. The profits are apportioned between those parts on a strict time basis (CTA10/S1172). The profits for each part are then compared with the appropriate fractions of the lower or upper limits for the financial year in which each part falls.

If the profits in either part fall between the appropriate fractions of the lower and upper limits the taxable total profits (CTM03915) are apportioned on a time basis and marginal relief is computed as if each part is a separate accounting period. Authority for apportionment is given by the Finance Act for the year in which the amounts change.

The parts are also to be treated separately in restricting the limits to take account of associated companies (CTM03940 onwards). The limits for one part are not to be reduced on account of a company that is associated only during the other part.

If the fraction or rate changes, but the limits remain unchanged, apportionment of the amount deducted as marginal relief (CTM03925) is required so that the different fractions or rates can be applied. This apportionment does not mean that the two parts are to be considered separately in restricting the limits to take account of associated companies.

For accounting periods straddling 1 April 2023, the parts falling before and after 1 April 2023 are treated as separate accounting periods. The total profits are apportioned between those periods on a time basis with the small profits rate provisions applying to the period from 1 April 2023.

Example

Company with AP straddling the commencement date - 1/1/2023 to 31/12/2023

The company has profits of £175,000 and 2 associated companies throughout the entire accounting period.

The accounting period straddling 1 April 2023 is divided into 2 notional periods and the profits are apportioned to each on a strict time basis.

1st notional period:

1/1/2023 to 31/3/2023 = 90 days Profits of the period = (90/365) x £175,000 = £43,151

2nd notional period:

1/4/2023 to 31/12/2023 = 275 days Profits of the period = (275/365) x £175,000 = £131,849

The profits of the first notional period are chargeable at the main rate of 19%

£43,151 x 19% = £8,198.69

The profits of the second notional period must then be compared with the adjusted thresholds for the application of the small profits rate, marginal relief or the CT main rate of 25%.

The thresholds are adjusted for the short notional AP and the number of associated companies . (Note that Financial Year 2023 is a leap year and, as the thresholds apply on a Financial Year-by-Financial Year basis, they are apportioned by reference to the number of days in the Financial Year. The profits are always apportioned by length of the accounting period.)

Lower limit £50,000 x (275/366) = £37,568

Upper limit £250,000 x (275/366) = £187,841

There are 3 associated companies in total, so the above adjusted amounts are divided by 3 giving:

Lower limit £37,568/3 = £12,522

Upper limit £187,841/3 = £62,614

The apportioned profits of £131,849 exceed both these limits so they are chargeable at the main rate of 25%.

£131,849 x 25% = £32,962.25

Total CT liability

£32,962.25 plus £8,198.69 = £41,160.94