In 2023, the rules around associated companies changed, which could cause a significant impact to your business if missed.
To help understand the changes, DTE has outlined what the new tax rules are, how this may impact you and what action you may need to take.
What are associated companies?
Associated companies are those under ‘common control’. A company is associated with another if, at any time during the chargeable accounting period either of the following applies:
a. One company has control of another.
b. Both companies are under the control of the same person (or group of persons).
Associated Companies – Key changes
From 1 April 2023 there were two key changes affecting the tax position for companies. Firstly, the rates of corporation tax payable, and secondly, how the number of associated companies are calculated, which impacts the rate of tax paid, and whether tax is paid in quarterly instalments.
New corporation tax rates
Standalone companies:
• Profits exceeding £250,000 are subject to tax at the new main rate of 25%. Profits below £50,000 are taxed at 19%.
• Profits between £50,000 and £250,000 are taxed at the 25% rate but are entitled to ‘marginal relief’.
However, the £50,000 and £250,000 limits must be reduced by being divided by the number of associated companies.
Quarterly instalments of corporation tax
Prior to 31 March 2023, there was only a single rate of corporation tax (19%). Therefore, the question of the number of associated companies was only relevant to determine if a company was required to pay corporation tax in quarterly instalments.
There are two quarterly instalment regimes:
• ‘Large’ companies – Taxable profits between £1.5m and £20m (there is a grace period which means the regime only starts once these limits are met for a second consecutive accounting period). Large company instalments are paid quarterly starting at month seven.
• ‘Very large’ companies – Taxable profits over £20m, (no grace period). Instalments are paid quarterly starting at month three.
The thresholds above were divided by the number of associated companies.
The profit thresholds for quarterly instalments were simply divided by the number of any 51% related companies within a group.
However, from 1 April 2023 the associated companies’ rules are now different when defining both the rate of tax payable and whether quarterly instalments are due.
The new associated companies’ rules
Under the new rules, an individual’s ‘associates’ must be taken into account when considering the question of control. A person’s associates include their spouse/civil partner, business partner, other lineal relatives such as children and grandchildren, ancestors and siblings.
However, any companies controlled by an individual’s associates will only be counted as an associated company when there is also substantial commercial interdependence between those companies. This test considers the financial, economic, and organisation interdependence of the relevant business.
There are some companies that do not need to be treated as associated, including:
• Dormant companies.
• Passive holding companies (essentially those with no activity other than receiving and distributing dividends in the same accounting period).
• Companies controlled by associates of that person, or persons, providing the relationship between those companies is not one of substantial commercial interdependence.
Example 1
An individual directly holding 100% of the shares in four separate trading companies will see all four companies treated as associated from April 2023. In this example, each company will be subject to tax at the main rate of 25% when its profits exceed £62,500 (£250,000/4).
Example 2
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.
What action do you need to take?
• Review your ownership structures.
• Review companies controlled by associates and consider whether there is substantial commercial interdependence between those companies.
• Determine whether the number of associated companies will affect the timing of tax payments (accelerated, quarterly instalment payments).
If you would like to know more about associated companies, please contact DTE Business Advisers on 0161 767 1291.