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Corporation Tax increase and implications on Associated Companies

The main rate of Corporation Tax is going to rise from 19% to 25% in April 2023 for companies with annual profits above £250,000. Companies with yearly profits between £50,000 and £250,000 will have a marginal ‘tapered rate’ relief applied, and companies with profits below £50,000 will continue to pay Corporation Tax at 19%. Business owners of multiple companies may consider splitting activities to keep profits below the threshold, however, be aware of added implications of Associated Companies Rules!

What are Associated Companies?

The Associated Companies rules were last relevant in 2014/15 when the UK had different tax rate thresholds and required a marginal relief. The Corporation Tax Act 2010 defines an associated company of another as:

  • One of the two have control of the other, or
  • Both are under the control of the same person or persons.

If two or more companies are deemed to be associated and have ‘substantial commercial interdependence’ then their profits will be added together to determine which rate of Corporation Tax they will pay. Substantial commercial interdependence can be defined as follows:

  • Financially interdependent – this is where one company lends to another, both have a financial interest in the same business or the borrowings between two companies are guaranteed.
  • Economically interdependent – both companies share the same economic objectives, share the same customers or the activities of one company benefit the other.
  • Organisationally independent – both companies share the same, management, staff, premises, or equipment.

Companies with the same people

When we look at a company to see if they are controlled by the same group of people, the rules which apply are complex. However, associates or associated people include:

  • Close family
  • Business partners
  • Settlement and Trust associates.

 

Common control

Common control looks at the minimum controlling contribution. For example:

  • Company ABC Ltd is owned Mr A 50% and Mr B 50%
  • Company DEF Ltd is owned Mr A 33.3%, Mr B 33.3% and Mr C 33.3%

By default of the minimum controlling ownership, both companies are associated as all parties combined control both companies.

 

Husband and wife ownership

Scenario 1

  • ABC Ltd and DEF Ltd are owned by husband and wife with 50% each
  • ABC Ltd has profits of £170,000
  • DEF Ltd has profits of £3,000

As these are both associated companies, the £50,000 – £250,000 threshold will be split in half across these companies meaning ABC Ltd will pay tax at 25% and DEF Ltd will pay tax at 19%.

Scenario 2

  • Husband owns ABC Ltd 100%
  • Wife owns DEF Ltd 100%

Here, we consider ‘Attribution of Rights’ – the husband owns his wife’s shares and vice versa only if there is substantial commercial interdependence between both companies where for example, they have the same customers or the same premises.

 

Seek advice about Associated Companies

Companies are associated if they are connected at any time during an accounting period, so the thresholds would be divided for the whole period. Our advice to clients would be to reduce all associations by 31st March 2023 to avoid being caught out by these rules.

Speak to your accountant to ensure you are adhering to the rules or whether your businesses are eligible to pay the lower rate of Corporation Tax after 1st April 2023.

If you would like bespoke advice about Associated Companies, please speak to a member of LWA’s Corporate Tax Team on 0161 905 1801 in Manchester / 01925 830 830 in Warrington, or via email to mail@lwaltd.com.