Doctors Surgery

Associated Companies Rules could significantly affect GP and Dental Practices

Many owners of dental and GP practices are still unaware of the potential impact of the recent Associated Companies Rules on how much corporation tax they will have to pay, and potentially, when they will have to pay.

In April 2023, the new Associated Companies Rules came into effect.

Now that the new rules have been in effect for a few months, it has become clear that the rules could particularly impact the owners of GP or dental practices.

Many owners of these practices are still unaware of the impact of the recent changes on how much corporation tax they will have to pay, and in some instances, when they will have to pay their corporation tax, which could have significant cash flow implications for the practice.

Recap: What are the Associated Companies Rules?

  • From 1st April 2023, corporation tax increased to 25% for companies whose taxable profits exceed £250,000.
  • For companies with less than £50,000 taxable profits, a 19% corporation tax rate applies.
  • For taxable profits between £50,000 and £250,000, companies will pay a tapered rate between 20% and 24% (25% reduced by marginal relief).

Because of this tapered rate starting at a relatively low rate of £50,000, business owners may have tried to split their profits between 2 or more companies to pay less corporation tax.

Under Associated Companies Rules, this division of profits is no longer possible. And because the tapered rate starts at only £50,000, the associated rules will affect a significant number of smaller businesses.

Under Associated Companies rules, the upper and lower corporation tax limits will be divided between the total number of companies deemed associated. For example, if you have 4 associated companies, each company will pay 25% tax on profits above £62,500 (£250,000/4).

A company will – very broadly – be considered to be associated with another company if, at any other time within the prior 12 months:

1. Both companies are under the control of the same person or group of persons, or

2. One company has control of the other.

Most commonly, a person is treated as having ‘control’ of a company if they own more than 50% of the share capital.

However, in some circumstances, the ownership and rights of people can be combined if the shares are deemed to be held by ‘Associates’.

The definition of ‘Associate’ is very broad but includes business partners, husband, wife, civil partners, any parent or “remoter forebear” (such as a grandparent), any child or “remoter issue” (such as a grandchild), any brother or sister, and/or the trustees of any settlement of which you, or any relative of yours (living or dead), is, or was a settlor.

Finally, even if two companies could be deemed as ‘associated’ based on the rules outlined above, for the corporation tax rules to apply there must also be a relationship of “Substantial Commercial Interdependence.”

What do the Associated Companies Rules mean for GP and dental practices?

GP and dental practices are likely to be affected by the associated companies rules more than other sector by virtue of the fact that practices are often owned by a large number of partners/directors, often with their own limited companies running alongside.

Up to now, GP or dental practice owners do not appear to appreciate how the new associated companies rules could significantly affect how much corporation tax they will have to pay but also when they will have to pay their corporation tax.

Example:

You are a Partner in a GP practice. Your practice is an LLP with a total of 20 Partners. In the morning, you provide GP services in your GP practice.

However, in the afternoon, you carry out private consulting work through your own limited company.

Crucially, if all the other Partners in your GP Practice have their own limited companies through which they do their own private consulting work (there are 20 limited companies), then in the eyes of HMRC there are 20 associated companies.

The companies are linked for corporation tax purposes because of their association as business partners in the LLP.

What does this mean for GP and Dental Practice Owners?

1. HOW MUCH tax you pay: Higher Corporation Tax Bill

In our example, as there are 20 associated companies, the threshold for paying the highest rate of corporation tax (25%) will be significantly lower than £250,000 so your corporation tax bill will be higher.

2. WHEN you pay your tax: Quarterly Instalment Payments

This is a point that has been largely neglected up to now: the threshold for making ‘Quarterly Instalment Payments’ could be significantly reduced by the associated companies – so you may have to pay your corporation tax more frequently.

Quarterly Instalment Payments are typically made only by the largest companies.

The vast majority of companies are not within the quarterly payment regime and pay their corporation tax nine months and one day after the end of their accounting period.

However, under associated companies rules, the threshold for quarterly instalments payments is significantly reduced if there are several associated companies. And as the name suggests, you will have to pay corporation tax in four equal instalments, in months 7, 10, 13 and 16 following the start of the accounting period.

This could dramatically affect your cashflow, and there could also be fines for non-compliance.

What do GP or Dental Practice Owners need to do Now?

1. As a priority, find out if any of your business partners and/or family members have interests in other businesses.

2. If you’re a practice Owner or Director, identify the relationship between the companies in which you own shares now.

3. If possible, try to work out the likely profit levels of each business to make sure you don’t pay any more tax than necessary.

4. Determine how your threshold for corporation tax will be affected by any associated companies.

5. If you are affected by associated companies rules, determine whether you’ll have to make ‘Quarterly Instalment Payments’- if this is the case then you must consider the cashflow implications.

6. Can you rationalise the number of associated entities? Consider dissolving any companies with negligible/small trades.

Need help? Contact Leonherman

If you are a Partner in a GP or Dentist practice, and you’re unsure how you could be affected by the Associated Companies Rules, then get in touch with our accounting experts today. We’d be happy to help you.

Call us on 0161 249 5040 or email: partners@leonherman.co.uk

Important Disclaimer

This material is published for client information. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by Leonherman.

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