Jennifer Adams considers the tax implications of companies becoming 'associated'.
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It is not unusual for small company directors, their family members, or other business partners to have interests in multiple companies.
However, should any of those companies be deemed as 'associated', those directors may wish to review the current structures and tax strategies of those companies.
The importance of the 'associated companies' rules
For many years, all companies were taxed at a flat rate of 19%; however, Finance Act 2021 changed the rate, such that companies now pay an effective rate of 19% on taxable profits of up to £50,000, 26.5% on profits between £50,000 and £250,000 (under marginal relief), and 25% on profits of £250,000 and over.
Finance Act 2021 also changed how associated companies are defined, thereby impacting the tax rate and whether tax is paid in quarterly instalments. The more associated companies there are, the lower the profit threshold of each tax rate band (e.g., where there are two associated companies, each profit threshold is divided by two, so that the 25% rate kicks in for each company when profits exceed a relatively modest £125,000, instead of £250,000).
What is an 'associated company'?
An associated company is a company over which another company has significant influence or control (but not outright control) over another, or the same person or persons has control of both. The definition of 'control' includes (but is not limited to) a person possessing or being entitled to acquire more than 50% of the company's ordinary share capital, voting power, distributable assets or profits on a winding-up.
It does not matter where the companies in question are resident; however, dormant companies are ignored, as are 'passive' holding companies where dividends pass straight through to the shareholders.
Note that a company only needs to be associated for one day in the corporation tax accounting period for it to be counted as an associate.
'Substantial commercial interdependence'
Should two or more companies be 'associated', to come under these rules, they must also have 'substantial commercial interdependence'. However, the rules apply only to the attribution of rights held by associates of participators; rights held by the participators themselves are always considered. 'Associates of participators' include relatives (spouses or civil partners, parents, grandparents, children, grandchildren, siblings), partners, and some trustees and settlors.
When considering whether there is substantial commercial interdependence, HMRC will look to the degree of financial (e.g., supporting loans between the companies), economic (e.g., where one company’s activities support or benefit the other) or organisational interdependence (e.g., operating from the same premises with the same management team) between the companies concerned.
Company tax payment deadlines
Associated companies may also impact company tax payment deadlines. A company must make quarterly payments if it is deemed to be large (i.e., where it has taxable profits of at least £1.5m). This threshold is, however, divided by the number of associated companies at the end of the last accounting period. A typical situation may be where an individual directly holds 100% of the shares in three separate trading companies and is associated with a company owned by their spouse by virtue of control. As these companies will be associated, each is treated as 'large' if its taxable profits exceed £375,000 and would immediately come into the quarterly payments regime.
Companies with low profits but a large number of associates are protected from coming within the quarterly payments regime if their corporation tax liability is less than £10,000.
Practical tip
It can be relatively easy to fall into the associated companies 'trap'. For example, a married couple may each own and run two completely different and separate companies. However, if the husband's company makes a loan to his wife’s company, the companies will be deemed associated should the husband's company be entitled to the assets on a winding-up of the wife's company.
