Background

The government announced an increase to the main rate of Corporation Tax to 25% for accounting periods ending after 1 April 2023.  The small profits rate is reintroduced to ensure that companies with small profits pay Corporation Tax at a lower rate.

In determining the rate of corporation tax for a company, its augmented profits, and the number of associated companies need to be considered. The associated company rules replace the current ‘related 51% group company’ rules.

New Corporation Tax rates

However the rules of what determines an associated company has been widened, making it more difficult to pay tax at a rate below 25%.

Why does it matter

If a company is associated to another company, the above limits are divided.

You can see from the following illustration how a previously standalone company with profits of £50,000 may expect to pay tax at 19%.

However as an example, if their spouse and perhaps two children and a business partner also control independent companies using shared premises, this would now give rise to four associates, and the tax rate would be 25%.

Instalment payments

For companies with larger taxable profits, the new associated companies rules could mean they become large or very large companies. This will affect their Corporation Tax payment date requiring Corporation Tax being paid quarterly in advance rather than nine months and one day after the accounting period ends. Interest can build up quickly if this is not considered in a timely manner.

What are the new rules

The previous definition was when one company has >50% ownership of another company.

This still applies, however the new rules are further reaching with control being the main criteria.

Previously, if an individual owned 100% of the share capital of two unconnected companies, they would NOT be associated for tax. This is no longer the case.

Definition of control

• Percentage of share ownership.
• Voting power.
• Entitlement to assets on winding up.
• Rights to income.

Also consider any other matters whereby one person can ensure that the affairs of another company are operated in accordance with their wishes.  This could cover certain rights in a shareholders agreement or loan agreement which go beyond that person’s rights based on shares alone.

It is possible for more than one person to be in control under different tests, and all have to be considered.

Control is not restricted to a single person. It could be the same group of people have control over multiple companies which were previously not considered connected for Corporation Tax, but now would be connected under the new rules.

Steps to check

1. Direct rights

Check the number of companies controlled by an individual or a group of individuals.

In determining if two or more companies are under the control of the same individual or group of individuals, HMRC’s practice focuses on the ‘minimum controlling combination’ of persons. This concept entails that the minimum controlling combination of persons who control one company must be the same as the minimum combination controlling the other company.

2. Indirect rights

This includes considering the company ownerships of:

• spouses (and civil partners),
• blood relatives,
• business partners, corporate partners in partnerships are now considered associated due to their shared ‘underlying’ partnership business.
• trustees (an individual beneficiary will be associated with a trustee or settlor of a trust).

Check if any of the companies have a substantial commercial interdependence. Only one of the list below needs to apply for the companies to be associated.

3. Financial

This indicates the level to which one company provides financial backing (directly or indirectly) to another. Notably, even if a loan is given by a family member, it might classify a company as ‘associated’ under the ‘loan creditor’ rules.

4. Economic

Companies are considered ‘economically interdependent’ if they share the same economic objective, if the activities of one benefit the other, or if they have mutual customers.

5. Organisational

This is established when companies share common management or employees, utilise the same premises, or have shared equipment.

If none apply then the count of associated companies is solely based on the findings from step one above to be considered associated for the Corporation Tax purpose.

Exclusion to the small company regime

Close investment holding companies are generally not eligible for the standard small profits rate or marginal relief, and are taxed at 25%.

A close company includes any company which is under the control of five or fewer shareholders or a company with any number of shareholders, if any shareholders are also directors. HMRC’s guidance outlines that all close companies are CIHCs, unless they exist for the purposes of:

• Carrying on a trade or trades commercially, or;
• Investing in land, estates or interests in land for commercial letting to unconnected parties, or;
• Certain other group administrative coordination/investment activities, where, broadly, the activities of the other companies fall within the above.

Contact us

If you would like to discuss the changes to associated company rules, and how they may impact your business, please contact with Simone Lyons, Pritesh Patel or your usual contact within the tax team.