Associated Companies
Associated Companies Impact
If your company is associated with one or more other companies this could impact your business:
Corporation tax: the marginal rate tax band of £50,000 will need to be split between the number of associated companies and therefore higher rates of corporation taxes could be payable.
PAYE: you can only claim the employment allowance of £5,000 against employers National Insurance for one associated company.
VAT: you are not allowed to use the flat rate VAT scheme if you are an associated company.
To optimise your tax outcomes, it might be necessary to review your company structure and consider consolidating or dissolving certain companies to reduce the number of associated companies.
Corporation Tax Changes: Example 1
Corporation Tax Example 1 (No Associated Companies)
As of 1 April 2023, the corporation tax rate changed. Instead of paying 19% on your profits, you will now pay 19% on profits up to £50,000 if you don’t have any associated companies, a marginal rate of 26.5% on profits between £50,000 and £250,000 and 25% on anything over £250,000.
An example of how this works for a company making a profit of £120,000 is shown below:
£50,000 x 19% = £9,500
£120,000 - £50,000 = £70,000 x 26.5% (marginal rate) = £18,550
Total tax for the period is therefore £28,050 (£9,500 + £18,550) which is a hybrid rate of 23.4% (£28,050/£120,000).
Corporation Tax Changes: Example 2
Corporation Tax Example (One Associated Company)
In this example lets assume you have one associated company and so the thresholds are divided by two. Instead of paying 19% on profits up to £50,000, you now pay 19% on profits up to £25,000 (£50,000/2), a marginal rate of 26.5% on profits between £25,000 and £125,000 and 25% on anything over £125,000.
An example of how this works for a company making a profit of £120,000 is shown below:
£25,000 x 19% = £4,750
£120,000 - £25,000 = £95,000 x 26.5% (marginal rate) = £25,175
Total tax for the period is therefore £29,925 (£4,750 + £25,175) which is a hybrid rate of 24.9% (£29,925/£120,000).
Determining Rule
The basic rule for deciding if two companies are associated with each other is that either:
One of them has “control” of the other; or
Both are under the “control” of the same person or “persons”; or
One of them has “control” of one and “associates” of them have control of the other and the businesses have “substantial commercial interdependence”
Definitions
“Control” is determined by having the greater part (more than 50%) of the:
Share capital; or
Voting power; or
Rights to income distribution; or
Rights to assets on winding-up
“Persons” two companies are only under the control of the same persons if:
A group which controls one company is identical with a group which controls the other; and
For each company, that group is a “minimum controlling combination”
“Minimum controlling combination” this means a group of persons which has control of the company but which would not have control if any one of the persons were excluded from the group.
“Associates” are any relation to a person and includes (but is not limited to): spouse, civil partner, partner, parent, child, sibling. A full definition of associates can be found here.
“Substantial commercial interdependence”
Financial - two companies are financially interdependent if either:
One gives financial support to the other (directly or indirectly) e.g. loan; or
Each has a financial interest in the affairs of the same business
Economic - two companies are economically interdependent if one of the following applies:
They look to realise the same economic goal; or
The activities benefit the other company; or
They have common customers
Organisational - two companies are organisationally interdependent if they have or use common:
Management
Employees
Premises
Equipment
Other Considerations
Dormant companies and passive holding companies can be ignored for the purposes of determining the number of associated companies.
Non-UK companies must be included in the calculation, therefore for groups of companies, the calculation could get quite complicated.
You need to consider whether the companies were associated at any point during the year and not just at the end of the year.
Associated Companies Determination: Example 1
Company A: The shares are owned 75% by Alex and 25% by their spouse, Sam. The company’s only activity is the trade of providing engineering consultancy services solely carried out by Alex.
Company B: The shares are owned 80% by Sam and 20% by Alex. The company’s only trade is providing educational training, solely carried out by Sam.
Despite the mutual shareholdings in each other’s company, they both run their respective companies independently of each other. In the early years of Company B, there were occasional short-term loans of money from Company A and the lending of assets (e.g. company vehicles).
At first glance, you may consider the two companies are associated due to the spousal relationship, however this would only be applicable if there is substantial commercial interdependence between the companies. In the above example, as the inter-company transactions were a few years ago, they would have little significance in the current period and as there is no other financial, economic or organisational interdependence then they would not be associated in the current period.
Associated Companies Determination: Example 2
Company C: James holds 30%, Chris holds 40% and Claire holds 30%; none of them are associates
Company D: James holds 40%, Chris holds 30% and Claire holds 30%
Company C is controlled by any combination of James/Chris, Chris/Claire or James/Claire. They are minimum controlling combinations as they only have control with the addition of another person. Therefore, these two companies would be associated for tax purposes.