Associated Companies and Corporation Tax Rate changes

Directors know that starting 1 April 2023, companies with taxable profits above £250,000 will pay corporation tax at the main rate (25%). Companies with taxable profits of £50,000 or less will still be charged at 19% and companies with profit levels between £50,000 and £250,000 will pay tax at 25%, reduced by marginal relief. 

However, many directors may be unaware that rules for determining associated companies are being reintroduced which as well may impact their businesses.

These rules state that companies with subsidiaries or associated with each other will share the marginal relief thresholds. This will drastically increase the tax bill for some of the companies. 

The reason for these rules’ reintroduction is that following the increase in the tax rate, some companies may consider splitting the company’s activities across multiple entities in an attempt to fall below these thresholds. The ‘associated’ rules ensure that is not possible. 

Calculations show that, should there be three associated companies, when calculating the marginal relief available, the lower profits limit for each will be as low as £16,667, with the upper profits limit being £83,333.

What is considered an associated company?

The tax rules state that ‘a company is to be treated as an associated company of another at a given time if at that time, or at any other time within one year previously, one of the two has control of the other or both are under the control of the same person or persons.’ Therefore, if company A controls company B then, generally speaking, they are associated. Similarly, if all or some of the same individuals also control other companies, those companies may be associated and, therefore, share thresholds.

The important word in this definition is ‘control’. Usually, ‘control’ rests with the person or persons owning the majority of a company’s shares with voting rights but this might not always be the case. If a person is entitled to acquire the greater part of the company’s income or assets either on winding up or otherwise, then that also comes under the definition of ‘control’. A company may also be associated with another despite not being under the common control of one person if there is what is termed in the regulations as ‘substantial commercial interdependence’ between them, e.g. if the two companies share premises or staff. 

If this type of connection exists, any shareholder must also count their relatives, business partners and certain trusts and estates when considering whether a company is associated with another.

The only time that the associated rules don’t apply is when a company has no business activities during the relevant accounting period, so here we are looking at dormant companies and companies incorporated to passively hold investments (actively buying and selling investments will mean coming within the rules).

The calculation for 2022/2023

An associated company with an accounting period straddling 1 April 2023 will divide its profits between the period up to and including 31 March 2023, and the period thereafter. Profits incurred during the first period will be taxed at 19%, with profits falling after (within the financial year 2023) taxed at the appropriate rate depending on the level of profits falling into that period with the upper and lower profits limits being proportionately reduced depending upon the number of associated companies.

For more information about these changes, please visit the official government website.