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 atCTM60210is 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 circ*mstances, 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’sguidance in the Company Taxation Manual at CTM03900 helpful in navigating your way through the web of various relationships.
