The reintroduction of old rules mean that, once again, it’s important that UK companies understand the impact on their tax and cashflow position.
2023 saw the reintroduction of the old associated company rule, which had been abolished by then Chancellor George Osbourne from April 2015.
For those who remember, the rates of Corporation Tax were more complicated until 2015, with lower and upper limits driving small and main rates of corporation tax, together with marginal relief. The need to calculate the correct number of associated companies added further complexity.
Since 2015, things have been simple with just one rate of Corporation Tax and a simplified 51% group company rule. However, from April 2023 the concept of associated companies has been reintroduced.
The importance of control
The key metric for determining whether a company is associated with another is ‘control’. In its simplest form, one company is associated with another if one company controls the other, or both companies are controlled by the same person(s) either now or in the future. There is a ‘test’ of control which is defined by voting power, ordinary share capital, distributable profits and rights on a winding up. Person(s) can be a company, an individual(s), trustees of a trust, or partners in a partnership.
Control also considers the rights and powers of a person’s associates, where there is substantial commercial interdependence. Associates include an individual’s spouse, civil partner, and siblings. You can also be associated by way of having “substantial commercial interdependence” with another company. This can exist as financial, economic or organisational interdependence.
There are some special considerations for control established by fixed rate preference shares, loan creditors and controlling trustees, which are not covered in this article.
The control test will still be met if the same group of persons, when taken together, have control of both companies. I.e. if a group of people controlling each company is identical then the control test is met and the companies are associated.
To consider this we would need to look at the “minimum controlling combination”. e.g. three unconnected persons, A, B and C, hold one-third of the shares in a company. There are three minimum controlling combinations: A and B together, B and C together, and A and C together. As control is held by any two together, the addition of another person to the controlling combination is superfluous and not required to form a control group. If there is another company where B’s and C’s shares together give them control both companies would be considered under common control and associated.
Once control has been established, a company then needs to determine its number of associates. There are a number of factors to bear in mind:
Worldwide companies are included, whereas dormant companies and passive holding companies are excluded;
When companies join and leave a group during the accounting period, they are associated for the whole accounting period; and
If one company controls a company, which in turn controls another company, it is not necessary to multiply downwards through the holding. It is only the direct shareholding which is considered.
The impact of associated companies
For Quarterly Instalment Payments (QIP) purposes, the new associated company rules have replaced the related 51% group company rules, impacting whether a company is determined to be large or very large.
This means that it can be more likely that a company will fall into the large company QIP regime or the very large company QIP regime. For more details on the impact on QIPs read our article.
Also from April 2023, the rate of Corporation Tax has a ‘small profits rate’ of 19% for companies with profits up to £50,000 and a ’main rate’ of 25% for profits above £250,000, with marginal relief available in between.
These profits limits are reduced where there are associated companies, as the profit limits are divided by the number of associated companies. Previously, the related 51% group rule also applied, and the associated company rules replace this. For more details on the impact on the new corporation tax rates, see our article.
The rules also impact companies that claim under the Patent Box regime and capital allowances long life asset rules.
The concept of control is also relevant for Transfer Pricing purposes (being the price of transactions between connected companies) which can impact tax reporting. If you think your company is affected by Transfer Pricing read our article.
Understanding the number of associated companies you have should be established as soon as possible. This may determine the rate of Corporation Tax which applies for your company and the speed at which the QIP regime applies. Both of these can result in quicker and higher cash payments due to HMRC, which will impact cash flow.
Simplifying your group could be considered to reduce the number of companies, provided this is commercially viable, particularly where there are multiple entities with minimal activity or trade, or there is an opportunity to merge. This may be particularly relevant if you are an acquisitive group that regularly acquires companies. There may be further tax implications as a result of this, which are not covered in this article.