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Companies – Be careful who you are associated with.

For some fundamental areas of corporation tax, companies must consider not only their own profits but also which other companies they are associated with.  This can impact the rate at which they pay corporation tax and significantly bring forward the due dates for paying it.

Corporation tax rate

From 1 April 2023, the corporation tax rate for standalone companies with profits over £250,000 increased to 25%.  Standalone companies with profits up to £50,000 are still taxed at 19% and there is a marginal rate relief for companies with profits in between these limits.  For non-standalone companies these limits need to be divided by the number of associated companies.  A company is associated with another if, at any time in the chargeable accounting period, one company has control of another or both companies are under the control of the same person or persons.  This includes control by individuals and so companies must look beyond their corporate group to work out how many companies to they are associated with.  Shares held by family members also have to be considered and the rules are complex.  The scope stretches overseas, as worldwide associated companies must be identified.  Small UK companies owned by a worldwide group or by highly entrepreneurial individuals can find themselves liable to the higher of corporation tax.

For accounting periods straddling 1 April 2023, profits arising up to that date are taxed at 19%.  The number of companies that are associated at any time from 1 April 2023 until the end of the accounting period is used to determine the tax rate to be applied to the later months.

Instalment payments regimes

There are different corporation tax payment dates for ‘large’ and ‘very large’ companies, with both regimes requiring instalments within the accounting period, based on estimated final taxable profits.  These regimes catch taxable profits of £1.5m and £20m respectively and the limits have always been reduced when companies are members of a 51% group.  However, for accounting periods beginning on or after 1 April 2023 the associated company rules apply here too.  Companies must identify worldwide ‘active’ companies under common control and divide the thresholds by the number of associates, using the number of associated companies at the end of the previous accounting period to judge whether instalment payments must be made.  This can significantly increase the number of companies that have to be counted, resulting in many more companies needing to pay corporation tax by instalments.

Keeping things tidy

When assessing the number of associated companies, dormant companies can be ignored, as can passive holding companies that only receive and distribute dividends.  Therefore there could be significant benefit from tidying up the balance sheets of, or dissolving, inactive companies.

Any non-standalone companies who have started to make profits, changed ownership or whose owners have acquired or set up new companies should seek to establish who they are associated with as soon as possible.   Eliminating minimally active companies or otherwise ensuring they can be ignored by these rules is a valuable housekeeping exercise.

If you have any questions, please do not hesitate to get in touch.

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