Associated companies are critical for determining corporation tax, especially regarding thresholds for tax rates, allowances, and payments. The UK government uses this concept to prevent businesses from artificially splitting into smaller entities to benefit from tax advantages intended for small businesses.
Definition of Associated Companies
Two companies are considered associated if:
- One company has control over the other, or
- Both companies are under the control of the same person or group of persons.
Here, control generally refers to having more than 50% of the company’s share capital, voting power, or the right to distributions or assets in a winding-up. Control can also be indirect, where one company controls another via a third company or individual.
Importance of Associated Companies in Corporation Tax
The main reason for determining whether companies are associated is to calculate thresholds for corporation tax rates and allowances. If two companies are associated, they share limits on profits and margins for tax rates. This means that the limits for tax thresholds are divided among the associated companies rather than applied individually to each one. This prevents groups from splitting profits across multiple entities to reduce tax.
For example:
- Main Rate of Corporation Tax: From April 2023, the main rate of corporation tax is 25% for profits over £250,000. However, for companies with profits between £50,000 and £250,000, there is a marginal rate. If a company has associated companies, it will share this profit threshold with them, lowering the profit level at which the higher rate starts to apply.
Examples of Associated Companies
- Parent and Subsidiary Companies
- Example: Company A owns 100% of Company B.
- Since Company A controls Company B (direct ownership of more than 50%), they are considered associated companies for tax purposes.
- Companies Under Common Control by an Individual
- Example: Mrs. Smith owns 60% of both Company C and Company D.
- Since both companies are under the control of the same person, Mrs. Smith, they are associated companies.
- Companies Under Common Control by a Group of People
- Example: Mr. James and Ms. Anna together own 80% of both Company E and Company F (Mr. James owns 40%, and Ms. Anna owns 40% in each company).
- Because the same group (Mr. James and Ms. Anna) jointly controls both companies, Company E and Company F are associated.
Adjusting the Profit Threshold
To calculate the adjusted profit threshold for associated companies:
- Divide the £50,000 and £250,000 profit thresholds by the number of associated companies (including the main company).
For example:
- Scenario: If there are three associated companies, the profit thresholds for the lower and higher rates of corporation tax become £16,666 (50,000 ÷ 3) and £83,333 (250,000 ÷ 3), respectively.
Exceptions and Special Rules
There are some exceptions, such as:
- Dormant companies, may not count as associated for tax purposes if they don’t carry on a trade or business.
- Passive holding companies, will not be considered an associate of another company if it operates solely as a passive holding entity—meaning it primarily receives dividends from its subsidiaries, distributes these dividends to its shareholders, and has no other income or expenses.
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