In April 2023, the government changed the rules on Corporation Tax so that the level of profit made determines the rate at which tax is paid.
Previously, companies paid Corporation Tax at a flat rate of 19%, irrespective of the level of profit they made. Since then, however, only companies with taxable profits under £50k pay Corporation Tax at 19%. The rate for companies with profits exceeding £250k is 25%, while companies with profits between £50k and £250k pay Corporation Tax on a sliding scale between 19% and 25%, depending on their level of profit.
For more details about Corporation Tax rates, read our blog, Corporation Tax Changes from 1st April: How Making Strategic Decisions Could Save You Money!
At the same time, the government also made changes to the rules on Corporation Tax as it applies to ‘associated companies’, impacting those business owners with interests in more than one limited liability company.
What is an associated company?
The definition of an associated company changed with the introduction of the new rules in April 2023. Before this date, to be associated, one company had to be a 51% subsidiary of the other or both companies had to be 51% subsidiaries of the same company. Since 1st April 2023, a company is considered to be associated with another if, at any time during the relevant accounting period:
- One company controls the other or,
- Both companies are under the control of the same person or persons.
This definition includes non-UK resident companies, but dormant companies and some passive holding companies (companies where there is no activity other than the receiving or distribution of dividends), are excluded.
Determining who controls a company requires looking at the shares held by an individual and their associates (including their spouse or civil partner and siblings).
Control may also be indicated where there is evidence of ‘substantial commercial interdependence’ between companies. This may be:
- Financial, e.g. where one company makes a loan to the other or both have a financial interest in the same business.
- Economic, e.g. where both companies have common customers or the activities of one company benefit the other.
- Organisational, e.g. where the companies share employees, management, premises or equipment.
What are the Corporation Tax rules for associated companies?
When a company has one or more associated companies, the tax thresholds are divided by the total number of companies it’s connected with. So, while a stand-alone company will have to pay Corporation Tax at 19% on its first £50k of profit, if it’s associated with another company, the £50k threshold will be divided by two (i.e. the total number of associated companies), meaning that both companies will have to pay at a higher rate on profits over £25k.
Is it tax-effective for you to own multiple companies?
It doesn’t make sense to own multiple companies unless you have a very good reason. If you operate two associated businesses – one that has a healthy profit and the other less so, you’ll likely find yourself paying more tax than you need to, simply because you have more than one company.
While the less profitable business will get little benefit from paying Corporation Tax at 19%, the more profitable one will be penalised because tax will be charged at the higher rate after £25k, rather than after £50k.
In a situation like this, it may well be worth considering operating the second business as a self-employed sole trader, as a partnership, or – where it’s possible to do so, transferring the ownership of one business to a spouse or other relative.
Inca Can Help Reduce Your Corporation Tax Bill!
If you control more than one business, the new rules on associated companies may have resulted in you paying more Corporation Tax than you need to.
Inca can review your situation and advise on the options you have to mitigate your position so you pay less in Corporation Tax. Contact one of our advisors today for an initial discussion. Call us on 01235 868888 or email us at [email protected].
