With corporation tax changes coming into effect from 01 April 2023, it’s time to focus on the associated company rules that could affect your business’s tax rate. Here’s what you need to know:
Why are associated companies important?
The corporation tax rate a company pays in an accounting period depends on its profits as follows:
– Small profits rate of 19% for profits below £50,000
– Main rate of 25% for profits above £250,000
– Main rate of 25% less marginal relief for profits between £50,000 and £250,000
These limits will be lower if a company has fewer than 12 months in an accounting period or has associated companies.
What is an associated company?
Two companies are associated if:
– One has control of the other, or
– The same person or persons have control of both of them.
Control here means the ability to control a company’s affairs through share capital, voting power or other rights to income and assets. Associations need to be calculated even if the companies are not resident in the same country and if they were only associated for part of the accounting period. However, we can ignore dormant companies and passive holding companies where dividends pass through directly to shareholders.
A dormant company is basically one that is not doing anything. In Jowett v O’Neill v Brennan Construction Ltd, a company simply holding funds in a bank deposit account and receiving interest income, was not an active company and counted as dormant for associated company purposes. Prior to this decision, the Revenue believed that a company was only dormant if it had no income. From this decision, the company is dormant provided it has no activity.
Broadly, a passive holding company is a company that only receives dividends from its subsidiaries and pays these to its shareholders, and the company receives no other income or expenses.
Control complications
To determine if two companies are associated, we need to identify the “minimum controlling combinations” for each company, which is the group of people who have control, but would not have control if we excluded any one person. If two companies have the same minimum controlling combination, they are associated.
For example if Mr A, and Ms B hold combined shares in Company A of 65%, and combined shares in Company B of 55% then the companies are Associated.
A family affair?
If there is “substantial commercial interdependence” between two companies, we also need to take into account the rights and powers of each shareholder’s “associates” when determining whether the companies are under common control. Associates include relatives, partners, and some trustees and settlors. If a husband and wife have 100% control of their own companies, those companies will not be associated unless there is substantial commercial interdependence between them.
Substantial commercial interdependence
Three types of commercial interdependence exist: financial, economic and organizational. If one company financially supports the other, or if the companies have the same economic objective, common customers or activities that benefit each other, they are commercially interdependent. Companies are also interdependent if they have common management, employees, premises or equipment. Just one of these factors is enough for substantial commercial interdependence to exist.
It’s important to remember that it is the interdependence of the companies, not the shareholders, that is important. Therefore, lending money from a shareholder’s personal funds to a company would not create financial interdependence unless the loan was made from the shareholder’s company instead.
What now?
In summary, understanding the associated companies rules is crucial to ensure that your business is not inadvertently pushed into a higher tax rate. By identifying whether your company has associated companies and calculating the minimum controlling combinations, you can avoid unnecessary tax charges and ensure that your business meets HMRC’s regulatory stipulations.