What You Need To Know About Associates For Corporation Tax

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21 July 2023 Tax

For many limited companies, corporation tax is a complex field in itself, but this can become even more confusing when associated companies are involved.

I wanted to follow up on my blog on corporation tax planning, ‘One For All – The 5th April 2023 Is Fast Approaching’, with a piece on associated companies. This is crucial, as the number of associated companies under the control of the same person(s) could have a significant impact on the corporation tax rate payable. Keep on reading to learn more.

What is an associated company for corporation tax?

A company is an ‘associated company for corporation tax’ of another, if one of the two has control of the other, or both are under the control of the same person or persons. Where two or more companies are ‘associated’ with each other, the amount of corporation tax payable will vary.

A good example of this would be where a husband and wife both own 50% of two companies, one being a trading company and the other holding residential property.

What happens if there are associated companies?

This all comes back to the rate of tax the company is likely to pay. The rates of tax a company will pay from the 1st April 2023 with no associated companies will be as follows:

Taxable profits up to £50,000 – taxed at 19%.
Taxable profits between £50,001 and £249,999 – taxed at 25% with a marginal rate tax relief adjustment, which brings the effective tax rate to between 19.01% and 24.99%.
Taxable profits of £250,000 or over all taxed at 25%.

For associates, the above rates are divided by the number of associated companies. So, for example if there are four associated companies in a tax year the new rates will be as follows:

Taxable profits up to £12,500 – taxed at 19%.
Taxable profits between £12,501 and £62,499 – taxed at 25% with a marginal rate tax relief adjustment, which brings the effective tax rate to between 19.01% and 24.99%.
Taxable profits of £62,500 or over all taxed at 25%.

If all companies are profitable the chances are the above will have a little impact on the corporation tax payable. However, in certain circumstances having a number of associated companies could now be tax inefficient.

Why Is Commercial Interdependence Important?

From the 1st April 2023, the rules that determine whether the rights of an associate of the shareholder need to be attributed to that shareholder only apply when there is a substantial commercial interdependence between the two companies concerned.

Associates for this purpose would include:

Relatives (i.e. their spouse or civil partner, parent or remoter forebear, children or remoter issue, and brothers and sisters);
Business partner(s);
Any company controlled by them;
Any company controlled by them, together with associates.

Applying the above, a good example would be that before the commercial interdependence rules were applied, a husband and wife who each owned 100% of their own companies would be connected as you would add their respective shareholdings together. As they both control their respective companies, the two would be associated. With these rules, as long as there is no commercial interdependence, they would no longer be associated.
When you assess whether there is substantial commercial interdependence between two companies, just one of the following three types of linkages is required for a company to meet this condition.

Financial interdependence

HMRC state that two companies are financially interdependent if (in particular):

One gives financial support (directly or indirectly) to the other, or
Each has a financial interest in the affairs of the same business.

Visit the Company Taxation Manual covering financial interdependence, to read some common examples of how this is applied.

Economically interdependent

HMRC state that two companies are economically interdependent if (in particular):

The companies seek to realise the same economic objective or
The activities of one benefit the other or
The companies have common customers.

For more information and some useful examples of economic interdependence, read this section of the Company Taxation Manual from HMRC.

Organisational interdependence

Finally, two companies are organisationally interdependent if (in particular) the businesses of the companies have or use:

Common management
Common employees
Common premises
Common equipment

You can find simplified examples of organisational interdependence in this section of the Company Taxation Manual.

Find Out More About Associated Companies For Corporation Tax Today

At first glance you could be forgiven for thinking that the associated company rules should be simple and easy to navigate. Unfortunately, as seems to be the pattern with HMRC, things are only becoming more complicated. It is therefore important that if you are looking at a new venture or lending money to an associate, make sure you consider the associated company rules first.

If you’d like to learn more about associated companies for corporation tax, require advice on any other tax-related matters, or you’d like to learn more about our professional accounting packages, please contact our team today and we’d be happy to help.

Call us on 01392360008 or email dan@sidaways.co.uk.

Daniel Routcliffe FCA CTA

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Dan Routcliffe

Email: dan@sidaways.co.uk

Tel: 01392 360008

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