Marginal relief - responding to an HMRC nudge letter

Marginal relief

When the main rate of corporation tax (CT) increased in April 2023 marginal relief (MR) was introduced to soften the blow. While companies with annual profits of £50,000 or less pay CT at the small profit rate of 19%, if profits are greater, even by £1, all profit is taxed at the 25% main rate. To prevent an inequitable tax bill MR tapers the impact of the main rate of CT where profits are between £50,000 and £250,000.

Anti-avoidance

Businesses are prevented from obtaining multiple MRs where they operate through more than one company and the companies are associated. Companies that are associated must share a single MR. The rules that determine when two or more companies are associated are especially tricky. Broadly, companies within the same corporate group, are controlled by the same individuals or commercially dependent on each other are associated (see Further information ).

Some types of company that appear to be associated with others can be ignored when working out MR, e.g. passive companies (see Further information ).

HMRC’s MR campaign

According to HMRC many companies have been overclaiming MR, in most cases probably because they have not fully understood the associated company rules. As a result, HMRC started a campaign to claw back excess MR claimed. Its attack starts with one of two different letters. What happens next depends on which type of letter you receive.

HMRC letters

While the text in each letter is similar, the content of each differs slightly. One indicates that HMRC might start a compliance check or take punitive action if you don’t respond while the other is less aggressive. The action you should take is the same for both letters, i.e. you should check the CT returns for the company’s accounting period that includes 1 April 2023 and subsequent periods. The letters also list the companies which HMRC thinks are associated.

If the MR for the company the letter is sent to is wrong then any MR claimed for the other companies that HMRC lists is probably also wrong, so also check the CT returns for them.

Remember that HMRC is far from infallible. We’ve seen a letter where its list of allegedly associated companies includes at least one that’s passive and so shouldn’t figure in the MR calculation.

Responding to HMRC

Despite the threats of possible action if you don’t reply to HMRC’s letter within 30 days, you’re under no obligation to do so. However, we strongly advise that you do. If you need more than 30 days for this contact HMRC as soon as possible and ask for an extension.

If after checking you still believe that your calculation of MR is correct, ask HMRC to explain its reasoning. That way you can dispel any misapprehensions it has and prevent the matter from escalating or being raised in a later year.