Tax update: Associated companies and timing of tax payments

As previously highlighted, new rules came in from April 2023 for groups when determining the number of associated companies.

As a recap, the associated companies rules can impact on both the rate of corporation tax payable and the timing for settling liabilities. In this article we focus on how the new definition can alter the payment date of a company’s tax liabilities.

Associated companies definition 

From 1 April 2023, a company will be associated with another if, at any time in the chargeable accounting period (a) one company has control of another, or (b) both companies are under the control of the same person or group of persons.

This is an extension to the previous rules where, broadly, one company had to be a 51% subsidiary of the other or both companies had to be 51% subsidiaries of the same company. As a result, more companies may now be brought into account, particularly where they are under common control of the same individual or individuals. There are some exemptions and exclusions where certain companies do not have to be treated as associated companies, including:

  • dormant companies;
  • passive holding companies (essentially with no activity other than receipt and distribution of dividends); and
  • companies owned by associates of that person (or persons), providing the relationship between those companies is not one of ‘substantial commercial interdependence’.

The final bullet point above allows for companies to be disregarded where, for example, spouses both separately own their own companies and there is no financial, economic or organisational interdependence between the two entities. Examples of interdependence which could lead to the companies being associated would include loans between the two businesses, common customers, complementary activities of which one company benefits the other and/or common employees, management team or sharing of premises and equipment.

Quarterly instalment payments regime 

A company is deemed to be large and required to make quarterly payments where it has taxable profits of at least £1.5 million. This threshold is, however, divided by the number of associated companies at the end of the last accounting period. A company will normally have a grace period for the first year it is deemed to be large unless its taxable profits for that year exceed £10 million divided by the number of associated companies, again at the end of the last accounting period (and the number of related group companies under the old definition for accounting periods beginning prior to 1 April 2023).

Accelerated instalment payments applies to ‘very large’ companies where taxable profits exceed £20 million, again divided by the number of associated companies at the end of the last period. There is no ‘year of grace’ provisions for companies moving into the ‘very large’ payment regime.

Under the new regime, taking a simple example of an individual separately holding 100% of the shares in two trading companies, they would both have had separate thresholds of £1.5 million and £20 million respectively for determining whether they fall within the instalments’ regime. For accounting periods beginning on or after April 2023, however, each company would now be treated as large if its taxable profits exceed £750,000 and very large at the point they exceed £10 million.

The new associated companies definition could therefore result in many more companies finding themselves within the quarterly instalments regime and required to make tax payments much earlier.

If you would like further advice, please contact Nick Haines.

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