On 1 April, the main rate of corporation tax will increase to 25 percent - although companies with sufficiently small profits will continue to pay only 19 percent. The rates will apply as follows:
Standalone companies with profits exceeding £250,000 will be subject to tax at the new main rate of 25%.
Companies with profits below £50,000 will continue to be taxed at the current rate of 19%.
Companies with profits of between £50,000 and £250,000 will be taxed at the 25% rate but will be entitled to marginal relief.
If a company has a number of ‘associated companies’, the relevant thresholds for applying the main Corporation Tax rate will be reduced for each of those companies.
A company will be 'associated' with another if, at any time in the chargeable accounting period:
one company has control of another, or
both companies are under the control of the same person or group of persons.
For example, if an individual holds 100% of the shares in four separate trading companies, all four companies will be treated as 'associated' from April 2023. Each company will, therefore, become subject to Corporation Tax at 25% when its profits exceed £62,500 (i.e. £250,000/4).
Some group companies do not need to be treated as associated companies including:
passive holding companies (broadly where a company only receives dividends from its subsidiaries and pays these to its shareholders, and the company receives no other income or expenses); 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.
Substantial Commercial Interdependence
Some of the factors to consider when determining whether companies are interdependent are as follows (though the below is not an exhaustive list):
the companies seek to realise the same economic objective or
the activities of one benefit the other or
the companies have common customers
Action to take
The above information is a very brief introduction to the changes. There are further intricacies to these new rules, which mean it is best to speak to us as soon as possible if you think you may be affected by the 'associated companies' rules.
It will be important to understand the number of associated companies as soon as possible to estimate tax liabilities.
Please don't hesitate to contact us to discuss these changes in more depth.