The main rate of corporation tax increased to 25% from 1 April 2023. At the same time, a small profits rate of corporation tax was introduced for companies with profits of up to £50,000. Where the company’s profits are between £50,000 and £250,000, marginal relief applies. This gives an effective rate of corporation tax rate of between 19% and 25%. 

The lower and upper thresholds of £50,000 and £250,000 are reduced proportionately where the company has associated companies. For example, where there is one associated company the thresholds are reduced to £25,000 and £125,000. This could increase the company’s liability to corporation tax for the period. As shown below, where the company has profits of £50,000 its corporation tax bill is increased from £9,500 to £11,375 where it has one associated company.

A company is associated with another where one controls the other or both are under common control. However, the definition of control for this purpose is quite wide. For example, a person is the sole shareholder of company A, and his daughter is the sole shareholder of company B. The two companies could be associated if there are sufficient financial, economic or organisational links between them. If so, they may both have higher corporation tax bills as a result. 

This topic is the subject of the latest episode of The Tax Track podcast. The podcast also considers other areas where the number of associated companies can have an impact, including the requirement to make quarterly instalment payments (QIPs) of corporation tax. The associated companies rules have replaced the previous rules for QIPs. As the associated companies rules apply more widely, a company may now need to make QIPs when it didn’t have to before, or it may have to make QIPs as a very large company as opposed to a large company. Rules similar to the associated companies rules apply with regard to the annual investment allowance. 

The associated companies provisions may be familiar to some as similar rules applied until April 2015, when the UK last had a small profits rate of corporation tax. At that point, the lower threshold was £300,000 and the upper threshold was £1,500,000. This meant that the existence of an associated company could be even more expensive. This was especially the case when there was a significant difference between the small profits rate and the main rate of corporation tax (eg, in financial year 2006 when the small profits rate was 19% and the main rate 30%).

The Tax Faculty has published TAXguide 02/23, which provides further guidance on how to apply the associated companies rules. Time spent listening to the podcast and referring to the TAXguide could count as continuing professional development (CPD) for tax practitioners.

Stephen Relf, Technical Manager, Tax