Associated Companies

1st April 2023: Corporation Tax Rise and Associated Companies Rules

From 1st April 2023, due to the rise in corporation tax, and because marginal relief will start at the relatively low limit of £50,000, a significant number of small businesses could now be impacted by associated companies rules. Here we answer frequently asked questions about the rules and outline what you should do now.

What are the corporation tax changes taking effect on 1st April 2023?

From 1st April 2023, the Corporation Tax rate will increase to 25% for companies whose taxable profits exceed £250,000.

For companies with profits less than £50,000, the current 19% rate will still apply.

Companies with profit levels between £50,000 and £250,000 will pay tax at 25%, reduced by marginal relief. That is, they will pay a tapered rate between 20% and 24%.

Because of this tapered rate (marginal relief), some business owners may have tried to split their profits between 2 or more companies, in order to keep the profits of each company below £50,000 where the 19% corporation tax rate applies.

However, this splitting of profits will not be possible under the updated ‘Associated Companies Rules’.

What are the Associated Companies Rules?

Law Changes

From 1st April 2023, if you try to split your profits between 2 or more companies which are deemed to be associated, you will fall foul of the associated companies rules.

Under the rules, the upper and lower corporation tax limits will be divided between the total number of companies deemed associated, creating lower thresholds for the 19%, tapered tax rates and 25% tax rate.

For example, from April 2023, if an individual holds 100% of the shares in four separate trading companies, these four companies will be treated as associated. Each company will pay 25% tax on profits above £62,500 (£250,000 divided by 4) and will move out of the 19% corporation tax rate once their profits reach £12,500 (rather than £50,000).

Importantly, because marginal relief will start at the relatively low limit of £50,000, the associated companies rules will affect a significant number of small businesses.

Please note that the associated companies rules replace the existing 51% group company test, and the rules apply to companies worldwide irrespective of where they are resident for tax purposes.

Example: Associated vs Not Associated Corporation Tax Implications

The example below illustrates why determining if companies are associated, or not, could have a significant impact on a business’s tax bill.

If two or more companies are classed as associated, with substantial commercial interdependence, then their profits will be added together to determine which rate of corporation tax they will pay.

For example: There are two companies, and they each make a taxable profit of £80,000…

Associated: If the two companies are deemed to be associated, their total taxable profit would be £160,000. Their tax would be £40,000 (25% of £160,000) with a marginal relief of £1,350 giving a total combined tax bill of £38,650.

Not Associated: If the two companies are not associated, the taxable profit for each business would be £80,000. The tax bill would be £20,000, with a higher marginal relief of £2,550 – giving a total of £17,450 for each company.

What are Associated Companies?

Under Section 18E of the Corporation Tax Act 2010, a company will – broadly – be considered to be associated with another company if, at any other time within the prior 12 months:

  • Both companies are under the control of the same person or group of persons, or
  • One company has control of the other.

Who has ‘Control’ and who are ‘Associates’?

Associates

In order to determine if companies are ‘associated’, it’s important to establish who has control of each company.

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’.

Most often, associates will be people such as a husband and wife, civil partners, or business partners.

However, associates can also include:

  • Any parent or “remoter forebear” (such as a grandparent)
  • Any child or “remoter issue” (such as a grandchild)
  • Any brother or sister
  • The trustees of any settlement of which you, or any relative of yours (living or dead), is, or was a settlor

This is not an exhaustive list and the government have published these (complicated!) rules to help you determine if your company is controlled by the same group of people.

As a very simple example, if you own 30% of the shares in a company, and your spouse owns 30%, these shareholdings will be added together, and you will be judged as having control of the company with your combined 60% of the shareholding.

Do the companies have ‘Substantial Commercial Interdependence’?

Importantly, 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”.

This means that the businesses in question are:

  • Economically interdependent – both companies share economic objectives. They have customers in common and/or the activities of one firm benefit the other.
  • Organisationally interdependent – the companies share management, staff, equipment, or premises.
  • Financially interdependent – one company guarantees its borrowings, lends to another, or both have another financial interest in the same business.

What other exclusions apply?

There are also a few other exclusions which would stop companies from being deemed as ‘Associated’:

  • Dormant Company – If a has not “Carried on any trade or business” at any time during the accounting period concerned.
  • A Passive Holding Company – This means, broadly, that the company only receives dividends from its subsidiaries and pays these to its shareholders, and the company receives no other income or expenses.

What should business owners do now?

Do it now

If you are a business owner, it is vital that you explore the relationship between the companies in which you own shares now.

If possible, you should try to work out the likely profit levels of each business and decide if you need to take any action now to avoid paying any more tax than is necessary from April 2023.

As we’ve outlined above, the associated companies rules are quite complex. If you, your family members, or other business partners have interests in multiple businesses, you may need to consider how best to structure these businesses to comply with the associated company regulations.

Crucially, if you (or any potential associates) do have interests in multiple companies, are you (or they) able to rationalise the number of entities within the group before 31st March?

As profit limits are divided by the number of associated companies, now may be a good time to dissolve any companies with small/negligible trades or to consolidate active companies.

There are also a few strategies you can consider to mitigate against the impact of the rate increase, if you think you may be affected by the associated companies rules.

For example, you may choose to delay planned expenditure until after 1st April 2023, to keep your profits below the higher rates of tax.

If your company incurred losses, you may also consider carrying back the losses for a refund of prior tax paid at 19%, or carry the losses forward for the potential of saving 25% on future profits.

Any questions? Contact us without delay

If you think that you may be affected by the corporation tax rises and the associated companies rules, or if you would like further advice specific to your situation, we strongly advise you to take contact us to assess your situation before acting.

In particular, if you and/or your family or other associates have interests in multiple businesses, we would be happy to advise you on how best to structure your businesses to comply with the regulations.

For more information or to speak to one of our accounting experts, contact us today or call 0161 249 5040.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
READ NEXT...
To get a-head in business, subscribe