Impact of the banking surcharge rate change for periods straddling April 2023

However, these banks may still be liable for banking surcharge on profits apportioned to the period before 1 April 2023, when the surcharge allowance was smaller.

Banks should consider whether time apportionment of profits before and after that date is necessary, or whether an alternative allocation of some elements of profit is more appropriate.

The time is approaching for companies to start preparing 2023 year-end tax provisions, taking into account the banking surcharge and corporation tax changes which took effect on 1 April 2023:

TTP is taxable total profits for the accounting period. Broadly speaking this means income and chargeable gains as computed for corporation tax purposes, less any reliefs that can be deducted.

NBGR is non-banking group relief given in computing TTP.

NBGRCF is non-banking group relief for carried-forward losses.

NBPLR is non-banking or pre-2016 loss relief.

NBTILR is non-banking transferred-in loss relief.

RTOG is the sum of any relevant transferred-out gains.

NBTIG is the sum of any non-banking transferred-in gains.

RDEC is any R&D expenditure credit brought into account as a trading receipt.

Each element of the formula must be examined to see if apportionment is needed between the deemed accounting periods on either side of 1 April 2023.

Case law based on similar legislation (Marshall Hus v Bolton [1981] 55 TC 539) shows it may be possible to allocate some elements of the formula to deemed accounting periods, rather than apportion them. The two examples below illustrate the different outcomes that can arise if an element of surcharge profits is either apportioned or directly allocated.

Example 1 – apportionment of surcharge profits

Profit Bank plc has £150m tax adjusted profits in the year ended 31 December 2023 and utilises £50m of brought forward losses, taking TTP for 2023 down to £100m. The tax adjusted profits include £30m non-banking transferred in gains, while the brought forward losses include £20m incurred before 2016.

Starting with TTP, for banking surcharge purposes, the NBPLR is added back and the NBTIG is excluded. The resulting £90m surcharge profits, along with the surcharge allowances, are then time apportioned across the two deemed accounting periods.

Consequently, Profit Bank plc has surcharge profits surpassing the surcharge allowance for the deemed accounting period ended 31 March 2023. However, due to the increased surcharge allowance from 1 April 2023, it escapes banking surcharge in the deemed accounting period ended 31 December 2023. Overall, a relatively modest banking surcharge of £1,282,192 arises.

Example 2 – allocation of NBTIG

In Marshall Hus, the corporation tax accounting periods differed from the period of account. The court found that if a different mode of computation serves the purpose of the particular tax legislation better, then apportionment is not necessary. This meant that allocation of property disposals could be made to specific accounting periods.

Based on Marshall Hus, it may be appropriate in some circumstances to allocate components of surcharge profit to either the deemed accounting period before or after 1 April 2023. Much will depend on the particular facts, as cases have been decided in favour of both apportionment and allocation. In our example, if we assume that NBTIG can be properly allocated to the deemed accounting period ended 31 March 2023, then it would significantly reduce the banking surcharge liability.

By allocating the NBTIG to the deemed accounting period ended 31 March 2023, rather than apportioning across both deemed accounting periods, the overall banking surcharge reduces by £830,137 compared to Example 1. This is due to accessing both the decreased banking surcharge rate and the increased surcharge allowance in the latter period.

Conclusion

With changes in surcharge rates and allowances, the calculation of banking surcharge in 2023 requires care.  Where necessary, the components of surcharge profits are time apportioned to the deemed accounting periods that straddle 1 April 2023. However, banks should assess whether there are cases where specific allocation of items to a particular period may serve the legislation better.