Changes to the corporation tax regime and associated companies

As you may be aware, changes in the corporation tax regime have been enacted by government and came into effect from 1 April 2023. As a result of these changes, the main rate of corporation tax has been increased to 25% on all profits earned by companies whose taxable profits exceeding £250,000.

Accounting periods straddling this date will be split into two notional accounting periods and profits apportioned on a time basis. Profits apportioned to the period to 31 March 2023 will be taxed at the previous fixed rate of 19%, and profits apportioned to the period after 1 April 2023 will be based on the new rates.

Marginal Rates:
The small profit rate of tax of 19% continues to apply for companies with profits below £50,000. Whilst companies whose taxable profits fall between £50,000 to £250,000 will also be subject to corporation tax at 25%, they will be entitled to a marginal relief, resulting in an overall tax rate of between 19-25%.

However, when looking at those companies that fall within these brackets, assuming that the initial £50,000 of profits is taxed at 19%, earnings between £50,000 and £250,000 are taxed at an effective rate of 26.5%.

Associated Companies:
The associate company rules came into effect from 1 April 2023 and replaces the previous ‘related 51% group company’ rules.

The profit thresholds above will need to be divided by the number of associated companies’ to determine the rate of tax payable.

A company is associated with another if, at any time in the chargeable accounting period:

           (a) one company has control of another, or

           (b) both companies are under the control of the same person or group of persons.

This change in definition now considers control by individuals and could, therefore, bring in companies which were previously ignored. For example, an individual directly holding 100% of the shares in five separate trading companies will see all five companies treated as associated from April 2023.

In addition, it is necessary to look at companies controlled by a person’s associates. An associate includes the individual’s spouse or civil partner, lineal descendants, ancestors and siblings.On the face of it, therefore, a company owned wholly by one spouse would be associated with a separate company owned wholly by the other spouse, unless it can be demonstrated that there is no substantial commercial interdependence between the two companies.

Substantial Commercial Interdependence:
Instances where there may be substantial commercial interdependence include:

• Financial interdependence: including where one company has made a loan to the other or both companies have a financial interest in the same business.
• Economic interdependence: such as both companies having common customers or the activities of one company benefitting the other.
• Organisational interdependence: which could include the two companies employing the same people, having the same management team, or sharing premises and or equipment.

Even companies only temporarily associated for part of the accounting period will be considered associated for the entirety of the accounting period, including overseas resident companies.

Exclusions to Associated Companies:
Dormant companies not carrying out any business during the accounting period, passive holding companies with no activity other than receiving dividends and distributing those dividends to its shareholders and companies owned by associates which do not have a relationship of substantial commercial interdependence are not treated as associated companies for corporation tax calculations.

Quarterly Instalments:
Companies with taxable profits of at least £1.5m are deemed large for corporation tax purposes and must normally pay corporation tax in quarterly instalments. Likewise, accelerated instalment payments apply to ‘very large’ companies where taxable profits exceed £20m.

These thresholds were previously divided by the number of related 51% group companies plus the company itself. However, from 1 April 2023 these profit thresholds will need to be divided by the number of associated companies to determine the size of the company for corporation tax purposes.

Taking our earlier example, the five companies would previously have been assessed on their individual thresholds of £1.5m and £20m respectively. However, from 1 April 2023 each company would be treated as large if its taxable profits exceed £300,000 and very large if they exceed £4m.The new associated companies definition could result in many more companies finding themselves within the quarterly instalments or accelerated instalment regimes.

Please note, a company will normally have a grace period for the first year it is deemed to be large unless its taxable profits for that year exceed £10m divided by the number of associated companies. However, there is no ‘year of grace’ provisions for companies moving into the ‘very large’ payment regime.

The new associated company rules for instalment payments only need to be considered for accounting periods beginning on or after 1 April 2023, with the old related 51% group company rules continuing to apply for accounting periods straddling 1 April 2023.

Actions to Take:
It is important to understand the number of associated companies as soon as possible so that you are able estimate tax liabilities and determine whether any of your companies fall within the quarterly instalments or accelerated instalments regime.

Consideration could also be given to rationalising the number of entities within the group to reduce the number of associated companies. This could be achieved by consolidating active companies and/or dissolving any companies with small/negligible trades.

Should you have any queries relating to this or require any support to determine your associated companies and how best to mitigate these changes going forward then please contact us.