Associated Companies

Corporation tax (CT) rates will be changing from April 2023. The rates will be as follows:

• Small profits CT Rate: is being reintroduced from April 2023, where the companies that qualify will be able to pay 19% on Taxable Total Profits plus exempt dividends received that do not exceed £50,000
• Main CT rate will be 25% where a standalone company’s augmented profits exceed £250,000
• Main CT rate but with deduction for marginal relief: where profits are between £50,000 - £250,000 and the company is not a close investment-holding company in that period

In case, there are two or more companies associated with each other, these limits will be divided by the number of companies involved. If there are only 2 companies involved this means that thresholds will be divided by 2 with a potentially significant increase to the tax payable for either or both of them.

Basically, a company is an associated company of another when there is common control or one of them controls another.

A person is treated to having control of a company if they can exercise or are entitled to acquire direct or indirect control over the company’s affairs.

In particular, if they can acquire a greater part of the share capital, take a greater part of the voting power and/or receive a greater part of the distributions or the assets of the company among the participators.

How to understand if companies are associated?

To determine if companies’ relationship is that of substantial commercial interdependence or not, the following factors should be taken into account:

• Financial interdependence: It can be direct and indirect financial support between the 2 companies.
• Economic interdependence:  Companies can be economically interdependent if they have the same economic goals, the activities of one benefit the other, or if they have common clients.
• Organisational interdependence: when two companies have common employees, common equipment, or common premises such as property or office.

In case two companies do not have common dominators to share there would not be substantial commercial interdependence between companies and each company should pay its corporation tax liability separately and cannot regard the other.

HMRC stated that each case is different and will depend on its own specific circumstances and hence it is important to get professional advice when determining if the companies are associated or not.  

Talk to us if you have any queries regarding the associated companies.