From 1 April 2023, the rate of corporation tax that a company is subject to depends on the level of its taxable profits. The rate of tax is based on a comparison of the company’s taxable profits against the corporation tax thresholds of £50,000 (the lower limit) and £250,000 (the upper limit).
In summary:
- Where taxable profits are £50,000 or less, a rate of 19% applies.
- Where taxable profits are between £50,001 and £250,000, an effective rate of 26.5% applies.
- Where taxable profits are more than £250,000, a rate of 25% applies.
The above profit limits are, however, reduced equally by the number of companies that are ‘associated’ with your company.
As an expert in tax regulations, we’ve asked Connor Smith, Senior Tax Manager to share his insights on how these changes can affect associated companies.
Take it away Connor
As businesses grow and evolve, it is crucial for business owners and stakeholders to stay updated on the latest regulations that govern their operations. Below I’ve walked through what associated companies actually are, and explained the impact that these rules may have on your business.
What are associated companies?
Lets start at the beginning. Broadly, companies are associated with one another if the same person, or group of companies / individuals, has control over the company.
Control means more than 50% of:
- The voting power within the company.
- The company’s issued ordinary share capital.
- Distributable profits.
- Greater part of the assets on a notional winding up. Commonly, the greater part of the assets on a notional winding up will apply whereby a company has loaned money to another company and therefore, if the loanee company was wound up, the loaner would be entitled to the greater part of the assets due to the loan provided.
In addition, companies may be associated if there is ‘substantial commercial interdependence’ between companies. This, for example, could be common management, employees, premises, equipment, customers, economic objective or financial support / interest.
Other rules impacting associated companies
To determine the number of associated companies, the following rules generally apply:
- Companies are associated for a whole chargeable accounting period if they are associated at any point in time during the accounting period. Therefore, companies that join or leave the group during the year are included, even if they are only in for 1 day.
- If companies are in a group and A Ltd owns 51% of B Ltd and B Ltd owns 51% of C Ltd, A Ltd is treated as having 3 associated companies even though it only indirectly controls 26% of C Ltd.
- Dormant companies are excluded. A dormant company is essentially a company with no activity which is broadly the receipt and payment of dividends.
- Overseas companies are deemed to be associated.
If, however, a husband and wife each have 100% control of their own companies, those companies will not be associated unless there is substantial commercial interdependence between them.
As you can see, the associated companies rules are not straight forward and therefore advice should be sought as to whether companies are associated.
Potential impact of associated companies
Where shareholders own a number of companies within a group, or where companies are under common ownership, it can result in a higher rate of Corporation Tax due on profits than that of previous years. It is therefore important for you to discuss the impact of the above with your Client Services Director.
