New Associated Companies Rules

By Graham | March 17, 2023

HMRC recently released new guidance on the ‘associated companies’ test for determining applicable corporation tax rates and payment deadlines. This guidance is particularly relevant to businesses with multiple associated companies and larger businesses not expecting to pay the lower rate. The reintroduction of the small profits rate has also led to changes in the thresholds for payment deadlines. This article will explore the new guidance and its impact on businesses.

Table of Contents

The Small Profits Rate and Applicable Tax Rates:

From 1 April 2023, the main rate of corporation tax increases to 25%, but companies with sufficiently small profits will continue to pay only 19%. The new rules follow the previous ‘small profits rate’ of corporation tax, which was abolished by FA 2014, with the relevant legislation being modelled on that previously in force. Under the new rules, the small profits rate of 19% will apply if a company’s relevant profits (referred to as its ‘augmented profits’) are below £50,000. The main rate of 25% will apply if those profits are over £250,000, and ‘marginal relief’ will be available to give an intermediate overall effective rate if the profits are between these limits. The effective tax rate on profits between £50,000 and £250,000 is 26.5%.

Associated Companies: Definition and Implications:

The concept of ‘associated companies’ is key to the earlier regime and the new rules. If a company has one or more ‘associated companies, ‘ then the thresholds for determining the applicable tax rate and any marginal relief are divided by the total number of associated companies. In broad terms, a company is an associated company of another company if one has control of the other or both are under the control of the same person or persons. This includes non-UK resident companies but excludes dormant and some ‘passive’ entities. Additional complexity can arise in certain situations where the relevant rules require assessing whether there is ‘substantial commercial interdependence’ between two companies rather than simply applying mechanical tests.

Calculation of Marginal Relief and Instalment Payments:

The new HMRC guidance sets out when the small profits rate of 19% applies and how to calculate marginal relief using a prescribed formula. HMRC has also launched a new online marginal relief calculator to assist companies. For accounting periods beginning on or after 1 April 2023, the existence of ‘associated companies’ will also be considered when a company needs to pay corporation tax by instalments as a ‘large’ or ‘very large’ company. The relevant thresholds for instalment payments will typically be the same or lower for companies already close to the thresholds, and tax must be paid earlier.

Impact on Businesses and Cash Flow Forecasts:

The new guidance is relevant to businesses hoping to benefit from the lower rate and larger businesses not expecting to pay the lower rate. The new rules, coupled with the ‘associated companies’ test, will increase complexity and potentially accelerate tax payment deadlines in some cases. Businesses will need to take account of the guidance as they consider budgets and cash flow forecasts for the year ahead.

Associated Companies Pay 26.5% Sooner:

Consider three associated companies, with two companies making profits of £10,000 each and the third making £30,000.

The threshold for 26.5% tax reduces to £16,667 because there are three associated companies. Two companies pay 19%. The third company pays 19% on the first £16,667 and 26.5% on £13,333. Total tax is £1,516 more than a single company with the same overall profits.

Conclusion:

The new HMRC guidance on the ‘associated companies’ test for determining applicable corporation tax rates and payment deadlines is complex but necessary for businesses to understand to prepare for the changes coming into effect from 1 April 2023. The reintroduction of the small profits rate, coupled with the ‘associated companies’ test, will impact businesses in different ways and may sometimes accelerate tax payment deadlines.