From 1 April 2023 the rules changed so that the rate of corporation tax that a company pays, and when, is dependent on the level of its profits as well as the number of its associated companies.
Rate Of Corporation Tax
Standalone companies from 1 April 2023 with profits exceeding £250,000 will be subject to tax at the new main rate of 25%. If profits are below £50,000, companies will continue to be taxed at the old rate of 19%. Companies with profits between £50,000 and £250,000 will be taxed at the 25% rate but will be entitled to marginal relief, thereby giving an overall effective tax rate of between these two rates.
For groups of companies, the profit thresholds will need to be divided by the number of ‘associated companies’ to determine the rate of tax payable.
With effect from 1 April 2023 the current ‘related 51% group company‘ rules have been repealed and replaced by the associated company rules. Accounting periods straddling this date will be split into two notional accounting periods with the profits apportioned on a time basis. Profits apportioned to the earlier notional period will be taxed at the 19% rate with profits falling in the notional period post 1st April 2023 being taxed at the new corporation tax rates, determined by the number of associated companies at any time from 1 April 2023 to the end of the accounting period.
What is an Associated Company?
Broadly a company is an associated company of another if one has control of the other or both are controlled by the same person or persons. A person is treated as having ‘control’ of a company if that person exercises, is able to exercise, or is entitled to acquire direct or indirect control over the company’s affairs. If two or more connected persons satisfy any of the above conditions, then they will also be treated as having control of the company.
The change in the rules means that companies that are controlled by individuals are now taken into account, whereas previously they were ignored. For example, where an individual directly holds 100% of the shares in four separate trading companies, from 1 April 2023 all four companies will be treated as associated. Each company will therefore be subject to tax at 25% when its profits exceed £62,500 (£250,000/4). This will therefore be the same as for each company within a group where the group has four associated companies.
Associated companies can include both UK and Non-UK tax resident companies but excludes dormant companies and some ‘passive’ entities. Companies owned by associates of that person or persons, providing the relationship between the companies is not one of ‘substantial commercial interdependence’ do not need to be treated as associated companies. The factors that need to be considered in determining whether a relationship between two companies amounts to substantial commercial interdependence includes financially interdependent (eg providing financial support), economically interdependent (eg having related customers) and organisationally interdependent (eg use of common management, employees, premises or equipment).
Quarterly Instalment Payments (QIPs)
In addition to determining what rate of corporation tax will apply, associated companies will also need to be considered, to establish whether a company is large or very large for the QIPs regime.
When Will A Company Be Considered Large?
A company will be considered large where its taxable profits exceed £1.5m. Assuming the profits are below £10m then any company falling within QIPs will be deferred to the following accounting period. This is known as the ‘year of grace’. However, where profits exceed £10m then companies will fall into QIPs in the reporting period to which the profits relate.
Under the new associated companies rules, these limits (£1.5m and £10m) will also need to be divided by the number of associated companies at the end of the last accounting period. Taking our earlier example, where an individual directly holds 100% of the shares in four separate trading companies, the four companies would previously have had separate thresholds of £1.5m or £10m respectively for determining whether and when they fall within the instalments regime.
From 1 April 2023, however, each company will be treated as large if its taxable profits exceed £375,000 and will be immediately into the QIPs regime if their profits exceed £2.5m.
Companies in the QIPs regime will need to pay their corporation tax by four instalments, with the first instalment being 6 months and 14 days from the start of the accounting period and each subsequent payment being quarterly thereafter.
Accelerated instalment payments will apply to ‘very large’ companies where taxable profits exceed £20 million, again divided by the number of associated companies. There is no ‘year of grace’ provisions for companies moving into the ‘very large’ payment regime.
It is important to consider the number of associated companies to determine the applicable tax rate and whether or when each company will fall within QIPs. This will have a direct impact on cashflow. Consideration could also be given to rationalising the number of entities within a group to reduce the number of associated companies. This can be done in a number of ways.
Please do contact your local Whitings Office if you would like further information on any aspects discussed in respect of the associated company rules.
Disclaimer - All information in this post was correct at time of writing.