Since April 2015 there has been a single rate of corporation tax for most companies, regardless of their size or level of profits.
From April 2023 there are two rates of corporation tax – 19% for companies with profits up to £50,000 and 25% for companies with profits over £250,000. Profits between £50,000 and £250,000 are taxed at an effective marginal rate of 26.5%.
The position is further complicated because those thresholds of £50,000 and £250,000 have to be shared between associated companies, so your company’s £50,000 profit threshold for paying tax at 19% could be much lower.
Please note that certain investment companies always pay tax at the higher rate, whatever their profits. The reintroduction of a higher rate means that their tax rate increases from 19% to 25% from April 2023. These companies are not considered in this blog, but please do contact me if you have any questions or concerns about this.
What is an associated company?
Companies are associated if one has control of the other, or both are under the control of the same person or persons – ‘person’ here can include another company.
What does control mean?
A person has control over a company if they have, or are entitled to, more than 50% of
- Share capital, or
- Voting share, or
- Income distributed to shareholders, or
- Assets on a winding up of the company
For most companies, control will be determined by shares and votes. Companies with different classes of shares that carry different rights, or with significant loans secured against company assets might have to look deeper.
To further complicate things, we need to consider two different types of control: direct and indirect. Direct control only looks at interests that are directly held by an individual; indirect control looks at interest held by that individual and all of their associates.
Who are my associates?
Your associates would include the following:
- Spouse or civil partner, parents and grandparents, children and grandchildren, siblings
- Business partners
- Trustees of a trust of which you are a settlor or beneficiary
Companies that are associated only because of indirect control, only need to be counted if there is substantial commercial interdependence between them.
What is substantial commercial interdependence?
There are three types of interdependence, as follows:
Financial interdependence – where one company gives financial support to another, for example by providing a loan.
Economic interdependence – where the companies have common customers, or the activities of one benefit the other. For example, the referral of business from one to the other, such as a building company that uses another company for all of its electrical work.
Organisational interdependence – where two companies use shared premises, management team, or employ the same people.
What does all this mean?
Let’s look at an example involving two companies, H and W, that are owned by Mr and Mrs T as follows:
- H is owned 60% by Mr T and 40% by Mrs T
- W is owned 60% by Mrs T and 40% by Mr T
We need to consider whether these two companies are associated. There are three stages to this:
1. First, we look at direct control:
If we only look at the shares held directly by Mr and Mrs T, then clearly Mr T controls H and Mrs T controls W. The companies are not under the control of the same person or persons.
2. Next, we look at indirect control:
Mrs T is an associate of Mr T, which means that when we consider which companies Mr T controls, we need to also include the shares held by Mrs T. When we add the shares held by Mrs T to those held by Mr T, then Mr T holds 100% of H and 100% of W.
The two companies are therefore under the control of the same person and are associated.
3. Finally, we look at commercial interdependence.
a. The two companies are in different sectors – one is a dry-cleaning business and one is a café. There is no trade between the two companies, and neither has lent money to the other. Both have their own premises and employees. In this case, there is no substantial commercial interdependence between the two companies, and they are not associated for the purposes of determining the rates of corporation tax to be paid.
b. H is a roofing company and W is a scaffolding company. The companies have their own premises and employees, however H always uses W to provide the scaffolding needed for its jobs. The activities of the companies are of mutual benefit and so they are associated for the purposes of determining the rates of corporation tax to be paid.
So, what tax rate will I pay?
Let’s look back at the previous example:
1. H has profits of £150,000
With no associates, the profits fall between the £50,000 and £250,000 threshold. H therefore has profits of £50,000 taxed at 19% and the remaining £100,000 taxed at the marginal rate of 26.5%. The corporation tax payable is £36,000.
With one associate, the higher threshold falls to £125,000. All of H’s profits are taxed at the higher rate of 25% and the corporation tax payable is £37,500.
2. W has profits of £40,000.
With no associates, the profits fall below the £50,000 threshold and so profits are charged at 19%. The corporation tax payable is £7,600
With one associate, the threshold falls to £25,000. W has profits of £25,000 taxed at 19% and £15,000 taxed at the marginal rate of 26.5%. The corporation tax payable is £8,725.
I need more information!
The above is a summary of the main issues but of course there are many more – for example, what happens with dormant or overseas companies, what happens when the number of associated companies changes during the year, what types of companies are always taxed at the higher rate?
If you have any questions, or would like more information, please click here to book a call with Kathryn.
