As we progress into the final month of the 2023/24 tax year, we’re prompted to reflect on some of the key tax changes that we have adapted to in the past year. One key change from 1st April 2023 was the new associated company rules. Navigating such a significant change to the tax treatment of your company is bound to be complex.
Gearing up for the new tax year, we’ve answered some of the most frequently asked questions about the tax treatment of associated companies.
1. What classifies one company as associated with another?
For corporation tax purposes, if a company is under the control or has control over another company at any point in the chargeable accounting period, then it is classified as associated with that company. This is also the case if both companies are controlled by the same person or group of people. Under this, a company will also be counted as an associated company no matter where it is resident for tax purposes, as well as if it is an associated company for only part of an accounting period.
2. What is the Corporation Tax treatment of an associated company?
For associated companies, the new corporation tax rate thresholds will be divided by the number of associated companies, to determine how much corporation tax each company will be subject to.
The main rate (25%) threshold is currently £250,000, the small profits rate (19%) threshold is currently companies with profits £50,000 or less, and companies with profits between these two thresholds are taxed at a marginal rate.
As an example, if your company is associated with four other companies, then there is a total of five associated companies, and it would be subject to a main rate threshold of £50,000 instead of £250,000. This means that each company will be subject to 25% corporation tax when its profits exceed £50,000. Similarly, their small profits threshold would be £10,000 instead of £50,000.
3. What if one of the associated companies doesn’t carry out any trade during an accounting period?
It is important to note that if an associated company has not carried out any trade or business at any time during the accounting period, then it is disregarded. Using the example above, this would mean that each of the associated companies would be subject to a main rate threshold of £62,500, and a small profits threshold of £12,500.
4. In what context are group companies not treated as associated companies?
If you are part of a group of companies, then some may not be treated as associated companies e.g. if they are:
- dormant.
- passive holding companies (their only activity is receiving/distributing dividends).
- owned by associates of that person or persons, providing that the relationship is not one of ‘substantial commercial interdependence’.
Note: This will impact how you calculate the relevant Corporation Tax thresholds.
5. What is the related 51% group company rule and is it still relevant?
The related 51% group company rule was where one company was the 51% related group company of another, e.g.if:
- A is a 51% subsidiary of B
- B is a 51% subsidiary of A, or
- A and B are 51% subsidiaries of the same company.
These rules have now been replaced by the associated company rules, meaning that more group companies are subject to the main rate of corporation tax.
How can we help?
If you have any questions about how the associated company rules affect your company, please don’t hesitate to get in touch with a member of our tax team on tax@haroldsharp.co.uk or call 0161 905 1616.