Earlier this month, the Bank of England implemented the 14th consecutive increase to the UK’s base interest rate. This change will not only impact your personal finances but certain tax liabilities associated with your business. Our tax experts examine the potential implications of higher interest rates on tax for businesses.

The Bank of England (BoE) has been gradually increasing its base interest rate in recent months to counteract inflation and avoid a recession. As of 3rd August 2023, the interest rate stands at 5.25%, the highest base rate in 15 years. 

Changes to interest rate have a significant impact on the overall economic landscape in the UK, which in turn influence the ways businesses operate and plan their finances. Most importantly, there is a variety of tax implications that business owners should be aware of.

New Corporate Tax rates

Higher interest rates could lead to a reduction in profits for your business due to increased borrowing costs, lower demand or a combination of both. This could cause increased financial strain on your business, however there is a potential silver lining. A decrease in profits would lower your taxable income and, in doing so, the amount of corporation tax you have to pay. This decrease could help mitigate the effects of the increase to corporation tax earlier this year, which saw the rate rise to 25%. 

Revised HMRC late payment and repayment interest rates

HMRC has responded to the interest rate increase by making adjustments to the rates they apply to payments and repayments.  

If you are eligible for a tax refund, the interest paid on overpaid tax has been increased to 4.25%, which could be extremely beneficial for your business.  

HMRC has also upped the interest payable on late tax payments to 7.75%. To steer clear of late payment interest charges, it is vital to pay your company’s taxes on time and make sure your calculations of the money you owe are accurate. 

Find out more about HMRC’s revised late payment and repayment rates. 

Excess cash holdings

Given the potential rise in borrowing costs, you might be tempted to hold more cash reserves as a buffer against economic instability. However, holding excess cash could impact your trading status. The Inheritance Tax (IHT) position for your shareholders could be affected by excess cash holdings and HMRC may decide to deny or restrict IHT tax relief on shareholdings where excess cash or investments are retained in your business. 

Reviewing interest transactions

A careful review of any interest charged or paid on directors’ loan accounts or to connected companies within your business is essential in light of the rising interest rates. Accurate recording, proper reporting and appropriate pricing are key – oversights or discrepancies in these transactions could result in significant tax penalties from HMRC. 

Optimise your tax strategy with expert tax planning advice from PKF Smith Cooper

As business owners battle with higher interest rates and increased interest charges on late payments to HMRC, effective preparation of your taxes is paramount.  

Our experienced tax accountants can help you to navigate these changes effectively and limit the tax implications on your business. 

For more information on what rising interest rates could mean for your business, contact our expert tax team today.