Associated companies – how does it work?

Date posted: 11th Jul 2022

As we mentioned in our April tax news (https://www.cliveowen.com/2022/04/corporation-tax-increases-april-2023/) corporation tax rates are rising from April 2023.

The issue of associated companies rears its head after an eight year hiatus from being relevant but what it means is that you need to consider any companies which are associated to the company for whom the corporate tax is being calculated, to determine if a higher rate of corporation tax applies.

A company is deemed to be associated if it is an active company (i.e. not dormant – special rules applies to some holding companies) and:

  1. The companies are under the control of the same person/persons.
  2. One company has control of the other.

Control is determined in accordance with a) share ownership, b) voting power, c) other rights in any documentation e.g. shareholders agreements and d) entitlement to assets on a winding up. In addition, consideration needs to be given to an individual’s associates (spouses etc) and the commercial interdependence of the companies.

It is important to remember that this applies even if the companies are associated for only part of the accounting period (even one day!) and you are also required to consider active overseas companies.

Whilst the corporate tax rate applied is a consequence of being associated, it may mean that companies have to pay tax quarterly instead of annually too.

Example

Sausage Limited is under the control of James Beans who holds 100% of the shares.

Mash Limited is also under the control of James Beans who holds 100% of the shares.

James does not control any other companies.

Sausage Limited’s taxable profits for the period to 30 April 2023 are forecasted to be £800k (the best results for ten years). Mash is anticipating another loss of £100k (following several years of losses).

In the last few years, as Sausage Limited is not part of a corporate group, it simply pays it’s tax bill on 1 February after the accounting period. In this case, the tax due for April 2023 is payable on 1 February 2024. Sausage Limited is forecasting a similar taxable profit for the year to 30 April 2024.

Due to the association with Mash Limited, the starting point for paying tax quarterly is once profits have exceeded £750k in one year, that they are anticipated to exceed £750k in year two. In this case they are and Sausage Limited needs to begin paying the tax for 2024 in November 2023 – before the 2023 tax is due (in February 2024).

Given Mash is making losses, that are presumably going unused, it would be worth considering forming a group, if there are commercial reasons to do so.

If you have any queries regarding corporate tax, group-reorganisations or tax planning, please give us a call.


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