Corporation tax rate changes and associated companies

Following the Corporation Tax rate increase on 1 April 2023, the rate of tax a company now pays now depends on its level of profit and whether the company has any “associated companies”. It is therefore important to understand how the status of an associate company is determined.

For a business with no associated companies, the position is as follows:

• The first £50,000 of profit are taxed at 19% (small profits rate)
• the next £200,000 of profit are taxed at a marginal rate of 26.5%
• any taxable profits over £250,000 are taxed at 25% (main rate)

What is the impact of the marginal rate?

Companies that have taxable profits within the marginal rate (profits between £50,000 and £250,000, will face a gradual increase in the effective rate of Corporation Tax they pay.

The effective rate of Corporation Tax for a standalone company at various profit levels will be:

If a company has associated companies, unfortunately, the threshold for the various Corporation Tax rates will be reduced and the above rates will apply from a lower profit level.

What is an associated company?

In broad terms, a company is an associated company of another company if one company has control over the other, or both are under the control of the same person(s).

If a company has associated companies, the thresholds for determining the applicable tax rate are divided by the total number of associated companies, for example if a company is deemed to be associated with another company, the thresholds are divided by two.

It is important to note that non-UK resident companies are included in the calculation of the number of associated companies, but dormant and some ‘passive’ investment companies are excluded.

As a result of the reduction to the rate thresholds, associated companies could see a significant increase in the amount of Corporation Tax due.

A further consequence of the associated company rules is that the taxable profit thresholds which determine the dates on which a company is due to pay its corporation tax may change. Large companies with taxable profits exceeding £1.5m, and very large companies with taxable profits exceeding £20m, will see these thresholds divided by the number of associated companies meaning the profit level at which a company needs to pay its Corporation Tax by quarterly instalments can be greatly reduced.

The rules to determine the number of associated companies are complex and come down to control. 

Understanding and applying the definition of control

As mentioned above, companies are associated where one company is controlled by another company, or companies are under the control of the same person(s).

A “person” for these purposes includes a company, an individual or individuals, trustees of a trust or partners in a partnership. Understanding this definition is key to determining whether companies are associated. 

Where a group of persons are needed to control a company, two companies must be under the control of the same minimum group of persons in order for them to be treated as being associated. However if the minimum group of persons that can control each company is different, the companies are not associated, despite the companies having the same shareholders. 

In some instances the definition of person can be extended to include a persons “associates”. Broadly, a persons "associates" includes their parents, siblings, business partners and children. A person’s associates are included only where there is substantial commercial interdependence between two companies. 

There is substantial commercial interdependence between companies where there is:

• Financial interdependence - two companies are financially interdependent if one gives financial support (directly or indirectly) to the other, or each has (directly or indirectly) a financial interest in the affairs of the other
• Economic interdependence - 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
• Organisational interdependence - This could apply where two companies employ the same people, have the same management team, or share premises/equipment.

When a company has associated companies, the thresholds for corporation tax rates (both main and small profits) are divided by the total number of associated companies.

For example, a company with taxable profits of £76k has three associated companies so the revised threshold from which the main rate of 25% becomes applicable is £250k (the main rate) /4 = £62,500. Although taxable profits are significantly lower than the standard main rate threshold, the number of associated companies will result in this company applying the main rate of corporation tax of 25% to profits of £76k.