An associated company has a significant level of control or influence over another company, or both companies are controlled or influenced by the same person or people.
Associated company legislation was re-introduced in the UK on 1 April 2023, and can impact the corporation tax calculation for the smallest of companies, especially where spouses have partial ownership in each other’s companies.
Identifying associated companies
The most obvious factor for identifying an associated company is when there is significant financial control, ie where a party owns more than 50% of the shares in your company and you own 50% of the shareholding in their company. If another company owns more than 50% of the shares in your company, then an associate company also exists.
There are two other controlling influences to consider when determining an associated company:
Economic interdependence exists when both companies share economic objectives, they have customers in common or the activities of one firm benefit the other.
Organisational interdependence exists when the companies share management, staff, premises or equipment.
Where any of these control factors exist, the companies are associated companies for the whole of the applicable tax year, regardless of changes made to disassociate them throughout the year. For example, if they are associated on 1 April 2023 but a change is made to their shareholdings to disassociate them on 30 April 2023, they will still be associated until 31 March 2024.
Corporation tax implications
From 1 April 2023, the main rate of corporation tax increased from 19% to 25%, except for smaller companies who will benefit from a lower rate of 19%.
Ordinarily, companies with taxable profits below £50,000 will be taxed at 19%, profits between £50,000 and £250,000 taxed marginally at 26.5%, and profits over £250,000 taxed at 25%.
When there is an associated company then these thresholds will be divided between the number of associated companies. For example, if there are 2 associated companies (including yours) then the small profits threshold of £50,000 will be reduced to £25,000 for each company, therefore reducing the profits that are taxed at 19%. Likewise, the higher profit threshold of £250,000 will reduce to £125,000 for each company, meaning that more profits are taxed at the higher rate of 25%.
Corporation tax payments
Previously, if your company profits exceeded £1.5m then your company would have to pay corporation tax on a quarterly basis rather than annually.
The quarterly payment threshold of £1.5m will also be divided across the number of associated companies. For example, if there are 2 associated companies then this will reduce the taxable profits of £750,000 for each company, and if exceeded then quarterly instalments are required.
If you are still unsure if associated company rules apply to you or any of the companies that you are involved in, then please contact the Pillow May team.