Return of the mack: associated companies are back from April 2023

July 18, 2023|In KRW Q&A|By Keith Witchell

MACK: Misunderstood Associated Company Kalculation…..well it almost worked!  With two rates of Corporation Tax back from April 2023, so too are the dreaded associated company rules.

Most readers will be well aware that the Corporation Tax rate increased from 19% to 25% from April 2023 for company profits over £250,000 per annum.  As a business owner myself, I’m not going to lie….I’m still crying about this 6% increase in tax rate!

However, small companies with a profit of up to £50,000 qualify for the small companies rate of 19% on their profits, meaning that companies with lower levels of profit could be unaffected by the main rate change.  So at least there’s some reprieve for smaller companies.

But what about companies with profits of £50,000 to £250,000?  Profits in that band are subject to an effective Corporation Tax rate of 26.5%!  This is 7.5% higher than the tax on that level of profit last year!  Ouch!

To illustrate this, if your company has a taxable profit of £100,000 it will pay 19% Corporation Tax on the first £50,000, then 26.5% Corporation Tax on the next £50,000, totalling £22,750.  The overall tax rate on a £100,000 profit therefore equates to 22.75%.  Which is 3.75% higher than last year…

So why do associated companies affect this?  Well the above example assumes a stand alone company, but where there is a group of companies, or more than one company under the common control of the same shareholder (or group of shareholders) then the Corporation Tax bands are split by the number of associated companies.

This means that for groups of companies you need to split the bands between the number of companies in the group.  For example, if you have a main trading company, a holding company, and also a separate property investment company which are all part of the same group then (in most cases) the various thresholds are split into 3.  This means that each of the 3 companies pay 19% Corporation Tax on the first £16,667 of profit (i.e., £50,000/3), then 26.5% Corporation Tax on the next £66,666 (i.e., £200,000/3), and finally 25% Corporation Tax on all profits over and above £83,333 (i.e., £250,000/3).

The issue here is that the holding company might not be making £16,667 of taxable profit, if all of its income is derived from dividends from the two subsidiary companies (since dividends between companies are tax-free), which means it would be wasting its share of the group’s £50,000 small companies rate band.  Plus the trading company might not have been making £250,000 of profit, but now faces the full 25% rate on all profits once over £83,333.

There are planning steps that can be taken to minimise the impact of the rules within groups, but the return of the associated company rules unfortunately brings back a layer of complication that we’ve managed to escape for the last 8 years.  Sigh.

So are all companies in a group associated companies?  There is a get out for any dormant group companies, and also for a holding company whose dividends out to shareholders are equal to its dividends in from subsidiary companies (we rarely see this in practice), but otherwise yes, they are all associated companies.

What if I have a few companies, but they are not grouped?  If you have more than one company with the same controlling shareholder/shareholders then they are also associated companies.  So you might have two completely different businesses in different industries operated through limited companies, but if you own the majority of the shares in both companies then they will be associated companies under these rules.

Can it get any worse?  Yes it can.  Any company controlled by your spouse (or civil partner) will also be an associated company, even if they are run completely separately.  Furthermore, any company owned by your parents, grandparents, children or siblings may also be caught by these rules!  Oh and if you operate a partnership or LLP, then your fellow partners/members are also classed as your associates so any other companies they control will also be associated companies!

Please say you’re done?  Nope.  Still more.  If another company is substantially commercially or financially interdependent on your company (for example sharing the same premises or staff) then that will be an associated company too!

Phew!  So, in a nutshell, you might well have associated companies and not even know it, and if you do then their existence could potentially mean more Corporation Tax for your company to pay, unless your company profits are already over £250,000 per annum (in which case there’s no impact).

The good news is that we are here to help, both in helping you to identify how many associated companies you have, and also in finding ways to minimise the impact of this as far as possible to the rate of Corporation Tax you have to pay.  We will always go the extra mile to help our clients with reducing tax bills; its part of our DNA.

If you want further clarity on this topic, and how you might be affected, then please contact your Client Manager.

Key Facts

  • 25% Corporation Tax applies to company profits over £250k pa from April 2023
  • 19% Corporation Tax still applies to first £50k pa of profit, then 26.5% from £50k to £250k pa
  • If there are associated companies, these bands are split by the number of associated companies
  • This affects groups of companies and those with more than one company under common control
  • Companies controlled by spouses, parents, grandparents, children and siblings are associated too

For further advice on this matter, please contact me.

Keith Witchell