Don’t ignore letters from HMRC!
HMRC is running a one-to-many letter campaign targeting companies that may have miscalculated corporation tax marginal relief in their company tax returns.
Even if you think your calculation is correct, don’t ignore it. Any business that receives a letter needs to respond, and those that don’t are likely to face an HMRC compliance check and subsequent penalties. You have 30 days from the date on the actual physical letter to respond to HMRC. And the ball is in your court.
The issue particularly affects businesses with ‘associated companies’.
That covers any company that has a shareholder or shareholders who have common control with another company, or are under a ‘group’ umbrella. It doesn’t matter if these companies operate entirely independently of each other. They may be a dormant company, but, HMRC will have flagged a name of someone who appears on the list of directors and/or shareholders of more than one company.
In the letter, HMRC states: ‘We have information that shows your company has associated companies, but hasn’t declared them when claiming marginal relief.
‘Having associated companies reduces the taxable profit limits for claiming marginal relief. This means your company may owe more corporation tax.’
Marginal relief reduces the corporation tax liability of companies with taxable profits between lower and upper limits of £50,000 and £250,000.
This situation occurred after changes to corporation tax rates two years ago. From 1 April 2023 companies with taxable profits over £250,000 pay corporation tax at the main rate of 25%. Companies with taxable profits of £50,000 or less will be subject to corporation tax at the rate of 19% and those with profit levels between £50,000 and £250,000 will pay tax at 26.5%, reduced by marginal relief.
Under the associated company rules, these limits have to be reduced proportionately whenever a company has one or more ‘associated companies’ in an accounting period.
It’s important to examine the share structure of any companies with common shareholders – and it may well be that HMRC is wrong. But don’t just ignore that letter, the burden of proof is with you.
If you do the company Corporation Tax return yourself, you do need to be careful. As with the new rules, it’s no longer a single rate, but depends on the profits. If you have got it wrong, there will be interest and, maybe, a penalty.
In all cases, it is essential to discuss any issues with a qualified tax adviser or accountant to ensure that the correct information related to the marginal relief is submitted to HMRC.
