Kevin Read explains why the ‘associated companies’ rules will soon be important again.
The introduction of the 19% flat rate of corporation tax (CT) in 2017 put the topic of ‘associated companies’ on the backburner.
This will change from 1 April 2023, as the 19% CT rate will only apply where profits are up to £50,000. The rate will become 25% if profits are at least £250,000, with marginal relief applying below these limits. However, these thresholds are divided by the number of associated companies, so some companies may end up paying at the top rate when profits are below £250,000.
Other limits that will need to be divided by the number of associated companies from April 2023 are:
- CT payments – the £1.5 million and £20 million profit limits for testing whether and when a company has to make quarterly instalment payments.
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Long-life assets – the monetary limit (in CAA 2001, s 99) of up to £100,000 per annum, expenditure within which is excluded from being a long-life asset.
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Patent box – certain simplified claims have a ‘relevant maximum’ profit of £3 million.
Currently, these limits are divided by the number of 51% group companies.
When are companies ‘associated’?
A company (whether UK resident or not) is associated with another company at a particular time if, at that time in the chargeable accounting period:
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one company has control of the other, or
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both companies are under the control of the same person or group of persons.
‘Control’ (CTA 2010, s 451) exists where a person exercises, can exercise or can acquire direct or indirect control over a company’s affairs. This includes where the person owns or can acquire:
- more than 50% of the share capital or issued share capital, or
- the majority of the voting rights, or
- entitlement to the majority of distributable profits, or
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entitlement to more than 50% of assets available for distribution.
Two or more persons together may satisfy these conditions.
Example 1: Tax bills of the Browns’ companies are going up!
John and Susannah Brown jointly own 100% of Black Ltd and 70% of White Ltd. These companies are therefore associated.
Both companies make annual profits of £150,000 and are paying CT at 19%.
From 1 April 2023, they will both pay CT at 25%, as their profits each exceed £125,000 (i.e. £250,000 ÷ 2).
When can associated companies be ignored?
If there is no substantial commercial interdependence between the companies, the normal attribution of rights held by certain connected persons (CTA 2010, s 451), such as siblings, is ignored. When considering whether there is substantial commercial interdependence, regard should be had to the degree of financial, economic or organisational interdependence between the companies concerned. See HMRC’s Company Taxation manual at CTM03785, CTM03790 and CTM03795.
Dormant companies are ignored, as are ‘passive’ holding companies that do not carry on a trade and that hold at least one 51% subsidiary. Broadly, ‘passive’ means that it has no income or expenses, no chargeable gains and no assets (apart from shares in 51% subsidiaries) in the period. It also must redistribute at least the amount of dividend income in the period to at least one shareholder.
Example 2: The Mini Ltd group
Mini Ltd has three 100% subsidiaries, Aygo Ltd, Kia Ltd and Focus Ltd. Mini Ltd is a passive holding company and Focus Ltd is dormant.
From 1 April 2023, the marginal relief limits of Aygo Ltd and Kia Ltd will therefore be divided by two, not four, meaning that if either has profits above £125,000, it will pay CT at the full rate.
Practical tip
Small groups may wish to consider some restructuring to reduce the number of associated companies and avoid falling into higher corporation tax rates.
