Corporation Tax and Associated Companies

Jan 4, 2024

CORPORATION TAX AND ASSOCIATED COMPANIES

 

From 1 April 2023 the Corporation Tax changed.

A standalone company making profits of £250,000 or above are now required to pay tax at a rate of 25%. Small businesses and other standalone companies with profits below £50,000 remain on the previous tax rate of 19%. If you’re in the middle of £50,000 to £250,000 profits, you may be eligible to claim Marginal Relief.

To understand how corporate tax works and when you have to pay, click to read our overview of the Corporation Tax rules.

 

WHAT DOES THIS MEAN FOR BUSINESSES WITH ASSOCIATED COMPANIES?

Where a company has associated companies, the profit threshold is divided by the number of associated companies.

Number of associated companies Lower threshold Upper threshold
0 £50,000 £250,000
1 £25,000 £125,000
2 £16,667 £83,333
3 £12,500 £62,500
4 £10,000 £50,000
5 £8,333 £41,667

 

The number of associated companies may also lead to a company being considered as large or very large, and will therefore pay Corporation Tax in instalments. This can impact the company’s financial plans for the accounting period.

Read more about payment instalments for large and very large companies > 

 

WHAT DEFINES AN ASSOCIATED COMPANY?

If at any time within the preceding 12 months, a company is associated with another company if one of the companies has control of the other, or if both companies are under the control of the same person or persons.

  • Person(s) can be a company, an individual(s), trustees of a trust, or partners in a partnership.

Broadly speaking, control in the definition above means a greater part in the voting power, a greater part in the share capital, distributable profits or receiving the greater part of the assets if winding up the company. You can view how HMRC defines ‘control’

It’s important to note that non-UK companies will also be considered as associated companies.

 

DETERMINING CONTROL OF A COMPANY

To determine control of a company, it’s necessary to look at the shares held by a person as well as their associates. This would include the person’s spouse or civil partner, lineal descendants (children, grandchildren), ancestors, and siblings.

A company owned wholly by one spouse would be associated with a separate company owned wholly by the other spouse, unless it can be demonstrated that there is not substantial commercial interdependence between the two companies.

Substantial Commercial interdependence examples:

  • Financial interdependence – including where one company has made a loan to the other or both companies have a financial interest in the same business.
  • Economic interdependence – such as both companies having common customers or the activities of one company benefitting the other.
  • Organisational interdependence – which could include the two companies employing the same people, having the same management team or sharing premises/equipment.

 

Shareholder Associates

A person’s associates include the following:

  • Relative (spouse/civil partner, parent or remoter forebear, children or remoter issue, and brothers and sisters)
  • Business partners
  • Trustees of a settlement created by them
  • Trustees of a settlement created by a relative, whether living or dead
  • Trustees or personal representatives of any settlement estate holding shares in which they have an interest

 

COMPANIES NOT TREATED AS ASSOCIATED COMPANIES

Companies which don’t need to be treated as associate companies include:

  • Dormant companies
  • Passive holding companies
  • Companies owned by associates of that person (or persons), providing the relationship between those companies is not one of ‘substantial commercial interdependence’

 

For more information on your Corporation Tax obligations and to avoid a penalty for an incorrect payment, contact our Tax team today.

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