What are the tax implications of associated companies?

Many businesses are set up with numerous companies carrying on different aspects of their activities, and this has been possible to do without any tax downside for a number of years. It has often been advisable to “ring fence” different parts of an organisation for commercial, financial and reporting purposes and many entrepreneurs have taken advantage of this.

From April 2023, the new higher rate of corporation tax of 25% has come into effect for companies with profits over £250,000 per year, and it is introduced on a sliding scale from a profit figure of £50,000. However, HMRC are wary of companies splitting their business between a number of companies so that each one earns less than £50,000 per year and qualifies for the standard smaller company rate which is unchanged at 19%. To prevent this they have brought in a rule (which was in place 10 years ago when there was a similar dual rate of tax) which means that the £50,000 and £250,000 limits are divided between all companies which are controlled by the same person or group of people. This would not be a problem if the limits could be divided between the companies at the owner’s choice to ensure that they are used in full, but that is not the case – the limits are divided equally between the companies irrespective of the amount of their profits. This can be illustrated as follows:

Pedro has a restaurant which he runs through a limited company. The company’s profits are usually around £50,000 per year so he pays corporation tax on them at 19%. He starts up a takeaway and delivery service and decides to set up a new company to ringfence this new enterprise from his established business to limit its financial exposure. In the year ended 31 March 2024, the restaurant makes a profit of £50,000 as usual, and the new business makes a profit of £10,000. The limit for the 19% tax rate is reduced to £25,000 for each company, so the new business only pays that rate, but the established restaurant business has to pay 26.5% tax (the sliding scale rate) on the £25,000 profit exceeding the new reduced limit, an increase of £1,875 tax over what would have been payable on the combined profit of £60,000 under the old rules, and £1,125 more than if the two businesses had been run in the same company for 2023/24.

The rules for working out whether companies are “associated” for this purpose are quite complicated, and include companies which are within a group as well as those that are owned by the same individuals, so advice should be taken if you think that you might be affected.

It is also worth noting that companies with large profits (over £1.5m) have to pay their corporation tax quarterly in advance – the figure of £1.5m is divided between associated companies in much the same way as the £50k/£250k limits described above. Therefore if there are (say) 5 associated companies, the limit is reduced to £300k and this could catch the main trading company of a group even if the overall profit for all of the companies is well below £1.5m.

Author: Patrick Hoare, Business Services Manager, Plus Accounting

Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site

Date published: 02 October 2023

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