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Associated company rules: Get the details right | accountingweb
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Time to focus on the associated company rules

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With corporation tax set for a major shakeup this April, Emma Rawson looks at how the associated companies rules could tip businesses into a higher tax rate.

10th Mar 2023
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From 1 April 2023, we will no longer have the simplicity of a single corporation tax rate, but instead be back to the position last seen in 2015 of juggling two rates and marginal relief. 

This change also brings the associated company rules back into focus. Given the time that has passed, some readers may have never dealt with these before, while others may have forgotten some of their quirks. 

Why are associated companies important?

From 1 April, the corporation tax rate a company pays in any accounting period will depend on its profits as follows:

  • below £50,000 – small profits rate of 19% 
  • above £250,000 – main rate of 25% 
  • between £50,000 and £250,000 – main rate of 25% less marginal relief.

These limits are much lower than they were in 2014/15 (when they were £300,000 and £1,500,000 respectively), meaning many more companies will be brought into higher rates this time around.

The limits may be even lower for some companies, as they need to be:

  • reduced proportionately if an accounting period is less than 12 months, and 
  • divided by the total number of associated companies. 

For example, a company with three associated companies will have a lower limit of only £12,500 (£50,000 divided by four) and an upper limit of £62,500 (£250,000 divided by four).

What is an associated company?

The starting point is that two companies will be associated if:

  • one has control of the other, or
  • the same person, or persons, have control of both of them.

It does not matter where the companies in question are resident, or if they were only associated for part of the accounting period. You can however ignore dormant companies and “passive” holding companies where dividends pass straight through to the shareholders.

Control here has the same meaning as for close companies – the ability to control directly or indirectly a company’s affairs through share capital, voting power or any other rights to income and assets. HMRC’s guidance at CTM60210 is worth consulting for more on this.

Control complications

It should be fairly obvious if one company controls another, but things get a bit more complicated when we look at whether companies are controlled by the same person or persons.

For this test, we need to identify the “minimum controlling combinations” for each company, that is the groups of people who have control, but would not have if we excluded any one person. If two companies have an identical minimum controlling combination, they will be associated. 

For example, assume two companies have unconnected shareholders with the following levels of control:

Company 1

  • Mr Alpha – 35%
  • Mr Beta – 35%
  • Mrs Gamma – 30%

Company 2

  • Mr Alpha – 15%
  • Ms Delta – 45%
  • Mrs Gamma – 40%

Even though no one person controls both companies, Company 1 and Company 2 will be associated as they have a common minimum controlling combination in Mr Alpha and Mrs Gamma.

Things get more complicated if a company has fixed-rate preference shares or loan creditors who are not lending in the course of their business. In these circumstances, it is worth consulting HMRC’s guidance at CTM03900.

A family affair?

In the example above, the shareholders were all unconnected, meaning we only needed to look at their individual rights and powers to determine whether the companies were associated. 

However, where 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 looking at whether the companies are under common control. Associates for these purposes include relatives (spouses/civil partners, parents, grandparents, children, grandchildren, siblings and so on), partners, and some trustees and settlors. 

The rights of an individual’s associates only need to be considered if there is substantial commercial interdependence between the companies. For example, if a husband and wife each have 100% control of their own companies, those companies will not be associated unless there is substantial commercial interdependence between them.

Substantial commercial interdependence

There are three types of commercial interdependence:

  • Financial – one company financially supports the other, or each has a financial interest in the affairs of the same business. 
  • Economic – the companies have the same economic objective, common customers or the activities of one benefit the other. 
  • Organisational – the companies have common management, employees, premises or equipment.

Just one of the above is enough for substantial commercial interdependence to exist. For example, if a company lends to another that may be enough to constitute substantial commercial interdependence even if there is no other link between them.

In other cases, there may be a mixture of all three elements. For example, if a pub has split its drink sales and catering into different companies, those companies are likely to be economically interdependent (having the same customers and activities that benefit each other) as well as organisationally (having the same premises, staff and so on) and financially. In every instance, the different factors and their importance to the companies need to be weighed up. 

However, it is worth remembering that it is the interdependence of the companies, not the shareholders, that is important. For example, if Mr T lends money to his son’s company, that would not create financial interdependence, but could do so if the loan were made from Mr T’s company instead.

What now?

Anyone advising smaller companies, especially where there are families or multiple shareholders involved, needs to get comfortable with the associated companies rules. As can be seen, this is a tricky area. Careful planning of family-owned business structures in particular will be even more critical from April 2023. You might find HMRC’s guidance in the Company Taxation Manual at CTM03900 helpful in navigating your way through the web of various relationships.

Replies (5)

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By Software Seeker
11th Mar 2023 16:46

Thanks for the reminder of the rules. Have been wondering if a company with falling or rising profits should be thinking about changing its year-end in order to avoid the new higher CT rates. Have prepared some example calcs, juggled a few numbers and fiddled with year-ends and there doesn't seem to be much in it. Have any readers considered this in advance of 31 March?

Thanks (0)
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By petestar1969
13th Mar 2023 11:19

This is going to be fun.

I had a client that ran a wedding planning business and span off the bar services into a separate company. Its all stopped now as it got nobbled by the lockdowns, but would have been caught by the associated companies rule.

I'm sure there will be many people caught out by this.

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By Postingcomments
13th Mar 2023 11:29

The current trend for internet headlines seems to be to use the phrase "It's time to" or similar.

Is there a monthly mailing list where you are told the phrase of the month that all websites must do to death?

Thanks (1)
Ivor Windybottom
By Ivor Windybottom
13th Mar 2023 12:36

While marginal CT relief is important for some, it's only worth £3k at most.

It is perhaps more important to consider the impact of quarterly instalment payments, which often has a far greater business impact, as the £1.5m threshold will be divided by associated companies rather than 51% group companies, so may start to affect more businesses over time.

Thanks (1)
Replying to Ivor Windybottom:
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By Paul Crowley
21st Mar 2023 18:21

Agree
More time could be spent on saving £3000 than is worth spending
And the £3000 reduces the dividend tax by 33.75% for a HR tax payer, so really less than £2000

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