As we reach the 2022/23 year-end tomorrow, several changes to tax have already come into place from 1st April, including an increase to corporation tax rates. Our last Tax Tuesday instalment discussed these changes to the main rate, small profits rate, and marginal relief for those with profits in between £50,000 and £250,000. However, alongside this, there has been an adjustment to the associated company rules in relation to corporation tax.
In this week’s Tax Tuesday, we aim to break down these changes, to help you gain a better understanding of what corporation tax your company will be subject to.
Corporation tax recap
On 1st April 2023, the main rate of corporation tax (companies with profits over £250,000) increased to 25%. The previous 19% rate has since become a small profits rate for companies with profits of £50,000 or less. Companies with profits between £50,001 and £250,000, will now be subject to the main rate but with a marginal relief applied.
What are the new Associated Company rules?
HMRC provided clarification that under the new corporation tax regime from 1st April 2023, Associated Company rules have replaced the related 51% group company rules. Under this, a company is now classified as associated with another if, at any other time in the chargeable accounting period, one company has control of another, or both companies are under the control of the same person or group of personas. 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.
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. For 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.
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.
This is also the case for companies that have only been an associated company for part of the accounting period and have not carried on any trade or business at any time during that part of the accounting period.
Building on this, some group companies are not required to be treated as associated companies, for example if they are:
- dormant companies
- passive holding companies (where their only activity is receiving and distributing dividends)
- companies owned by associates of that person or persons, so long as the relationship is not one of ‘substantial commercial interdependence’.
What was the 51% group company rule?
Earlier, we mentioned how the Associated Company rules have replaced the related 51% group company rules. To clarify, an example of this is where “A” is a 51% related group company of “B”, 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.
The new associated company rule means that more companies will be subject to the reduced thresholds for corporation tax.
How can we help?
If you have any questions relating to the new associated company rules, please do not hesitate to get in touch with our tax team on tax@haroldsharp.co.uk or call 0161 905 1616.