When are companies associated for corporation tax?

Historically, one company was associated with another for corporation tax purposes if they were in a ‘related 51% group’ however, this rule was replaced by the associated companies rule effective from 1 April 2023.

Under these new rules, along with the change in corporation tax rates for companies with profits exceeding £250,000, extra care must be taken when establishing associated companies.

Rates of corporation tax

From 1 April 2023, the main rate of corporation tax increased to 25% for companies with profits exceeding £250,000 however, companies with profits below £50,000 will continue to pay 19%. Companies with profits between £50,000 and £250,000 are entitled to marginal relief.

Where a company has one or more associated companies, these thresholds are divided equally across the companies meaning a company could enter the 25% tax bracket much sooner than expected.

The number of associated companies will also be used to determine whether a company is ‘large’ or ‘very large’ and whether quarterly instalment payments (QIPs) must be paid and when. Again, splitting the thresholds across the number of associates.

Associated companies

Since the introduction of the associated companies rules from 1 April 2023, a company is broadly associated with another if one company has control of another, or both companies are under the control of the same person or persons. Non-UK resident companies are also included but we can exclude dormant and passive companies.

So, what does this mean practically?

In the simplest example, Company A owns 51% of the shares in Company B. These two companies are associated for corporation tax under the old rules and the new rules.

In another scenario, Mr Jones owns 51% of the shares in Company A and 51% of the shares in Company B. Under the old rules, these companies would not be associated however, since 1 April 2023 they are now associated and would enter the 25% tax bracket if either company has profits exceeding £125,000.

There are of course more complex scenarios that can occur including shareholdings held by family members and varied voting rights. 

Other points to consider include:

Financially interdependent - Two companies are ‘financially interdependent’ if one gives financial support (directly or indirectly) to the other, or each has a financial interest in the affairs of the same business.

Economically interdependent - Two companies are ‘economically interdependent’ if the companies seek to realise the same economic objective, the activities of one benefit the other, or the companies have common customers.

Organisationally interdependent - Two companies are ‘organisationally interdependent’ if (in particular) the businesses of the companies have or use common management, common employees, common premises, or common equipment.

It is therefore crucial to discuss any companies, in which you hold shares or have an interest in that may potentially be associated, with your adviser to determine the correct number of associated companies for your business.

The next step

For more information, please contact Martin Frain on, or your usual UHY adviser.

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