What are ‘Associated Companies’ in 2023?

Corporation Tax, Limited Company, News, Planning,

We’ve explained previously the changes taking place in Corporation Tax this year. One aspect, that of Associated Companies, deserves more attention than we gave previously, as it will affect the rate of Corporation Tax that may become payable. Additionally, the definition of an Associated Company is not as clear as you may first think!

How do Associated Companies affect the Corporation Tax rate?

The rate of Corporation Tax that’s payable is now dependant on the profits made in the period, but the applicable limits are divided by the number of Associated Companies.

The current rates:

  • Profits below £50,000 – small profits rate of 19% 
  • Profits above £250,000 – main rate of 25% 
  • Profits between £50,000 and £250,000 – main rate of 25% less marginal relief.

If an accounting period is less than a year, these limits will be reduce proportionately but if there are Associated Companies, the limits will be shared between them all.

For example, if a company has three Associated Companies, the lower limit reduces to £12,500, being £50,000 divided by four, and the upper limit to £62,500 (£250,000 divided by four).

So, what is an Associated Company?

Two companies are deemed to be associated if:

  • One has control of the other OR
  • The same person or people, have control of them

It is the second of these points that may cause confusion. 

If control of two companies rests with the same parties, even if they aren’t the only shareholders or people of influence, those companies will be deemed to be Associated.

Substantial Commercial Interdependence 

There are three types of commercial interdependence:

  1. Financial – Where one company supports the other, or each has a financial interest in the same business. 
  2. Economic – The companies have the same economic objective, shared customers or the activities of one benefit the other. 
  3. Organisational – where the companies share management, employees, premises or equipment. 

Any one of these can be enough to classify companies as Associated. In some cases, more than one will apply. 

Family owned businesses will require careful planning, and there may be some existing businesses where changes may need to be made to minimise the impact of the new rules. Speak to us if you’re in any way concerned.

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