Associated companies rules for Corporation Tax

12th April 2024

From 1 April 2023, the ‘associated companies’ rules were reintroduced for Corporation Tax purposes. Individuals, trustees, partnerships and funds who control several companies which are not in a group structure should now be considering these rules and the impact they are likely to have on Corporation Tax rates and quarterly instalment payments for their companies’ current and future accounting periods.

Broadly, a company is an associated company of another when:

  • One of the two has control of the other; or
  • Both are under the control of the same person or persons, or in both cases their associates (S25 Corporation Tax Act (CTA) 2010).

Control is defined in S450–S451 CTA 2010 but broadly, a person has control of a company if they exercise, are able to exercise, or are entitled to acquire direct or indirect control over the company’s affairs.

A company will be an associated company of another company in an accounting period if it is an associated company for any part of the accounting period. All worldwide companies must be included when determining the number of associated companies.

Companies which have not carried on a trade or a business at any time in the accounting period, and passive holding companies (i.e., no activity except for receiving and distributing dividends), are ignored for these purposes.

Substantial commercial interdependence

When determining control, the rights held by an individual’s associates will need to be taken into account if there is ‘substantial commercial interdependence’ between the companies concerned.

An individual’s associates would include a spouse or civil partner, lineal descendants, ancestors and siblings.

Substantial commercial interdependence can include financial, economic and organisational connections  between the companies and each case would need to be considered on its own facts to establish whether there is substantial commercial interdependence between the companies concerned.

Example:

Company A is a standalone company controlled by individual X.

Company B is a standalone company controlled by X and their spouse, each holding 50% of the company’s shares.

Company A and company B will be associated companies but only if there is substantial commercial interdependence between the two companies. If this is the case, the rights held by X’s spouse in company B are attributed to X. As a result, the companies are treated as being under the control of the same person.

Effect on Corporation Tax rates

From 1 April 2023, the main rate of Corporation Tax increased to 25% which applies to profits over £250,000.

For companies with profits of £50,000 or less, the small profits rate at 19% applies.

Companies with profits between £50,000-£250,000 pay tax at the main rate which is reduced by marginal relief. You can calculate how much marginal relief your company may be entitled to using HMRC’s online tool.

In situations where a company has associated companies, these profit thresholds need to be divided by the number of associated companies to determine the applicable tax rate.

If a company’s accounting period straddles 1 April 2023, the period will be split into two notional accounting periods and profits will be pro-rated on a time basis. The profit thresholds are accordingly reduced where the accounting period is less than 12 months long.

Example:

Company C is a standalone company controlled by individual Y. Company C has a 12-month accounting period to 31 December 2023 with profits of £100,000.

Y also controls three other companies. Therefore, at 1 April 2023, the company has four associated companies. Between 1 April 2023 and 31 December 2023, Y disposes of their controlling shareholdings in two of the other companies. Even though the number of associated companies has reduced to two by the end of the accounting period, the thresholds are still divided by four to determine the applicable tax rate.

The accounting period for company C will be split into two notional periods with the profits pro-rated on a time basis:

  • 1 January 2023–31 March 2023: £24,658 (90/365 x £100,000)
  • 1 April 2023–31 December 2023: £75,342 (275/365 x £100,000)

The thresholds are reduced accordingly to reflect a nine-month period:

  • Main rates profit threshold: £188,356 (275/365 x £250,000)
  • Small profits rate threshold: £37,671 (275/365 x £50,000)

The thresholds are then divided by the number of associated companies:

  • Main rates profit threshold: £47,089 (£188,356/4)
  • Small profits rate threshold: £9,418 (£37,671/4)

Company C will pay tax on the profits allocated to the period from 1 January 2023–31 March 2023 at a rate of 19%. As company C’s profits for the period from 1 April 2023–31 December 2023 exceed £47,089, the company will pay tax for that period at a rate of 25%.

Effect on quarterly instalment payments

‘Large’ and ‘very large’ companies are required to pay their tax earlier than the normal due date and in quarterly instalment payments (QIPs). A company is classed as ‘large’ when profits exceed £1.5m. When a company breaches the £1.5m threshold in an accounting period, and was not classed as large or very large in the previous accounting period, it does not need to start paying QIPs immediately as there is a one-year grace period, provided profits remain below £10m. A company is classed as ‘very large’ when profits exceed £20m. There are different instalment dates for large and very large companies.

If profits breach the £10m or £20m thresholds, QIPs are payable immediately for that period. Where a company’s accounting period is shorter than 12 months, the thresholds are reduced proportionately. However, for accounting periods beginning on or after 1 April 2023, these thresholds are divided by the number of associated companies at the start of the accounting period. For accounting periods beginning prior to 1 April 2023, these thresholds were divided by the number of related 51% group companies at the start of the accounting period.

This change means that companies held under common control, which were previously disregarded when calculating the thresholds, will now need to be included meaning more companies are likely to fall into the QIPs regime.

A company is not required to pay its tax by quarterly instalments if the total liability for the accounting period is less than £10,000.

Example:

Company D is a standalone company controlled by individual Z. Company D has a 12-month accounting period to 31 March 2024 with taxable total profits of £750,000 and was not large or very large in the previous accounting period. At 1 April 2023, Z also controls two other companies, therefore company D has three associated companies.

The thresholds are divided by the number of associated companies:

  • Large (£1.5m): £500,000 (£1.5m/3)
  • Large (£10m): £3,333,333 (£10m/3)
  • Very large (£20m):- £6,666,667 (£20m/3)

Company D is now a ‘large’ company as profits exceed £500,000 but the company will be entitled to a one-year grace period as it was not large or very large in the previous accounting period. If Company D’s profits remain above £500,000 for the accounting period to 31 March 2025, the company will be required to pay its tax liability in quarterly instalments.

To discuss the impact of associated company rules and Corporation Tax on your business, please contact Mark Baycroft, Business Tax Partner, or a member of our Business Tax team.

 

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