Newsletter Spring ’23 – Associated Companies for Tax Purposes

Corporation tax and changes to the associated company rules from 1 April 2023

 

WHO DOES THIS AFFECT?

 

Any company or unincorporated association that pays corporation tax.

 

WHAT ARE THE CHANGES?

 

In Summary:

 

  • From 1st April 2023 the corporation tax main rate will increase to 25% for profits over £250,000
  • The small profits rate will be 19% where taxable profits are £50,000 or less
  • The effective tax rate for profits of £50,001 and £250,000 will be 26.5%
  • The criteria to establish whethertwo or more companies are classed as associated are being broadened, which potentially changes the applicable tax rate for these companies

 

In Detail:

 

Changes to corporation tax rates

 

As you may have heard from the 1st April 2023 the corporation tax main rate applied to taxable profits over £250,000 will increase to 25%, with a small profits rate of 19% for companies with taxable profits of £50,000 or less. Companies with profit levels of between £50,001 and £250,000 will be taxed using an effective tax rate of 26.5%.

 

The effective tax rate of 26.5% is to ensure there is some transition between the 19% and 25% rates. This is illustrated below:

 

First £50,000 taxed at 19% gives a tax liability of £9,500

Next £200,000 taxed at 26.5% gives a tax liability of £53,000

The total tax charged on first £250,000 profits is £62,500 (which is a tax rate of 25%)

 

Changes to how associated companies are defined for tax purposes

 

The criteria used to determine whether companies are classed as associated has been changed from 1st April. A company will now be classed as associated with another company using several factors of which we have highlighted a few below.

 

  • One company has control of another company(s)

 

If for group accounting purposes a parent company owns one or more subsidiaries then these are classed as associated companies for tax purposes.

 

It is worth noting that dormant companies are excluded from the associated company rules.

 

A company will not be treated as an associate of another if it is a passive holding company (broadly where a company only receives dividends from its subsidiaries and pays these to its shareholders, and the company receives no other income or expenses

 

  • Both companies are under the control of the same person or group of persons

 

Where businesses are owned by associated persons, if the relationship between one or more companies is not one of substantial commercial interdependence, they will not be deemed as associated.

 

  • The companies are commercially interdependent

 

Some of the factors to consider when determining whether companies are interdependent are as follows, though the below is not an exhaustive list:

 

  • Financially – eg one company supports the other
  • Economically – eg the companies serve the same market, share common customers or benefit each other
  • Organisationally – eg common management, premises or equipment

 

So if companies are under common control, or the owners are lineal descendants but not commercial independent then

 

Example:

Mr F owns 100% of A Limited

Mrs F owns 100% of B Limited

 

If A and B limited have no commercial interdependence the companies will not be associated- if there is a commercial interdependence they will be associated.

 

  • The companies are associated for only part of an accounting period

 

Two or more companies can meet the new criteria for being classed as associated, even if:

 

  • the association only exists for part of an accounting period
  • they are associated companies for different parts of the accounting period

 

An associated company which has not carried on any trade or business  at any time during the accounting period is disregarded – if it is an associated company for part only of the accounting period, the rule applies to any time during that part.

 

Why does it matter for tax purposes if companies are associated?

 

Where companies are classed as associated the £50,000 and £250,000 thresholds are strictly apportioned, eg if two companies are associated, then each has a £25,000 Small Profit Rate threshold and a £125,000 high profit rate.

 

This means that a company with profits of £200,000 could be required to pay tax at the 25% rate if it is deemed to have more than one associated company.

 

WHAT DO YOU NEED TO DO NEXT?

 

We strongly recommend that as part of your tax planning strategy you urgently consider whether your company will now be:

 

  1. Eligible for a change to the corporation tax rate it pays, either because of its own taxable profits, or because under the new criteria it is now classed as an associated company which changes the taxable profit
  2. Required to start paying corporation tax in quarterly instalments because it is now classed as an associated company which takes the taxable profit over £1.5m(see below)

 

Payments by instalments

 

An important consideration of the above is whether your company/companies now must pay corporation tax by instalments. The taxable profit limit for payment by instalments is £1.5m but this is divided by the number of associated companies.

 

This could potentially mean one of your companies needs to start paying corporation tax by instalments even though they have profit under £1.5m, which could result in an unexpected cashflow hit.

 

If you would like to discuss any of the topics raised in this article please contact the office on 01482 888 820 or your usual designated partner contact.