Since 1 April 2023, the rules have changed such that the rate of corporation tax that a company pays, and when, is now dependent on the level of its profits as well as the number of its associated companies.
Rate of corporation tax
With effect from 1 April 2023, standalone companies with profits exceeding £250,000 are subject to tax at the new main rate of 25%. Companies with profits below £50,000 continue to be taxed at the current rate of 19%. Companies with profits of between £50,000 and £250,000 are taxed at the 25% rate but are entitled to marginal relief.
For groups of companies, the profit thresholds need to be divided by the number of ‘associated companies’ to determine the rate of tax payable.
Associated companies
The previous ‘related 51% group company’ rules have been repealed and replaced by the associated company rules with effect from 1 April 2023. Accounting periods straddling this date will be split into two notional accounting periods and profits apportioned on a time basis. Profits apportioned to the first notional period will be taxed at 19% accordingly and the tax rate applied to profits of the second notional period will be determined by the number of companies associated at any time from 1 April 2023 until the end of that accounting period.
A company is 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.
This change in definition now takes into account control by individuals and could, therefore, bring in companies which were previously ignored. For example, an individual directly holding 100% of the shares in four separate trading companies will see all four companies treated as associated from April 2023. In this example, each company will be subject to tax at the main rate of 25% when its profits exceed £62,500 (£250,000/4).
Some group companies do not need to be treated as associated companies including:
- dormant companies;
- passive holding companies (essentially with no activity other than receiving 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’.
To determine control of a company, it is necessary to look at the shares held by a person as well as their associates. An associate would include the individual’s spouse or civil partner, lineal descendants, ancestors and siblings.
On the face of it, therefore, a company owned wholly by one spouse would be associated with a separate company owned wholly by the other spouse, unless it can be demonstrated that there is not substantial commercial interdependence between the two companies. Examples of instances where there may be substantial commercial interdependence include:
- Financial interdependence – including where one company has made a loan to the other or both companies have a financial interest in the same business.
- Economic interdependence – such as both companies having common customers or the activities of one company benefitting the other.
- Organisational interdependence – which could include the two companies employing the same people, having the same management team or sharing premises/equipment.
Tax residence status of the company is not relevant when determining whether it is an associated company and therefore all worldwide companies are included, unless they meet one of the exclusions above.
Quarterly instalment payments regime
As well as 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 quarterly instalments payment 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, 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.
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.
Taking our earlier example, the four companies would previously have all had separate thresholds of £1.5 million and £20 million respectively for determining whether they fall within the instalments regime. From April 2023, however, each company would be treated as large if its taxable profits exceed £375,000 and very large at the point they exceed £5 million.
The new associated companies definition could therefore result in many more companies finding themselves within the quarterly instalments regime. The new associated company rules for instalment payments only needs to be considered for accounting periods beginning on or after 1 April 2023, with the related 51% group company rules continuing to apply for accounting periods straddling 1 April 2023.
Companies pushed into the large companies quarterly instalment regime for the first time from 1 April 2023 (assuming a 31 March year end) will be required to make their first instalment payment by 14 October 2023 (being six months and 14 days from the start of the accounting period commencing 1 April 2023) unless the ‘year of grace’ provisions apply. Those subject to the very large regime would have had to have made their first instalment payment by 14 June 2023 (being two months and 14 days from the start of the accounting period starting 1 April 2023).
Action to take
It will be important to understand the number of associated companies as soon as possible to estimate tax liabilities and also to determine whether they may fall within the quarterly instalments regime which could have a direct impact on cashflow of the company(ies).
Consideration could also be given to rationalising the number of entities within the group to reduce the number of associated companies. This could be achieved by consolidating active companies and/or dissolving any companies with small/negligible trades.
For individual advice on how this might affect your business, please contact the tax team here.
This article was updated 21 August 2023.