The article is a simplified guide regarding associated companies for Corporation Tax.
From 1 April 2023 the single corporation tax rate was removed and associated company rules have once again become an important factor when calculating Corporation Tax.
Table of contents:
1) Why are Associated Companies important?
2) The process of identification of Associated Companies?
3) What is an Associated Company?
4) Control Complication with Associated Companies
5) Substantial Commercial Interdependence
9) Close Investment-Holding Companies (CIC)
10) Corporation Tax Payment Deadlines
Why are Associated Companies important?
From 1 April 2023 the Corporation Tax rate will depend on the profits in an accounting period based on:
- £50k and below – small profits rate 19%
- Between £50k and £250k – a marginal rate 26.5%
- Above £250k – main rate 25%
These thresholds are based on a single company with no associates over a 12 month period. The limits will therefore be lower when:
- An accounting period is less than 12 months (thresholds are reduced proportionately) and
- When there are associated companies, the thresholds are divided by the total number of these
For example a company with 4 associates (for dividing purposes you add in the company itself) will have a lower limit of £10k (£50k / 5) and upper limit of £50k (£250k / 5). However, the entry on the CT600 will be 4.
A company only needs to be associated for 1 day for it to be counted as an associate in the Corporation Tax accounting period. When counting associates, the company itself is counted is not counted as one on the CT600.
Associated companies can also impact the company tax payment deadlines, which are explained at the end of the article.
The process of identification of Associated Companies
The following process is applied when determining whether companies are associated with each other.
- Step 1 – How many companies are under the control of a person or persons (ignoring any associates’ holdings/rights)?
- Step 2 – Are any companies in a ‘substantial commercial interdependence’ relationship?
If there is no ‘substantial commercial interdependence’ in existence (see below) between the relevant companies, the number of associated companies is simply found at stage (1) above. This would mean, for example, that any companies that were controlled by the associate(s) of a shareholder would be ignored. Therefore, two companies that are separately controlled by a husband and wife would not necessarily be associated with each other.
What is an Associated Company?
Two companies are associated if:
- One has control of the other, or
- The same person, or persons, have control of them both
Companies that are not based in the UK are not excluded, so all companies worldwide need to be considered. Dormant (where no trade or business has taken place) or “passive” holding companies where dividends are passed straight through to the shareholders can however be ignored for the associated company rules. More information regarding this can be found below.
Control Complication with Associated Companies
It should be easy to identify where one company controls another (as in a group structure), however things get more complex when considering whether companies are controlled by the same person or persons.
To identify this we need to identify the “minimum controlling combinations” for each company. This means establishing which groups of people have control, but would not have if we excluded a person. If two companies have identical minimum controlling combinations they are associated companies.
For example, assuming that none of the below are relations of each other:
| Company 1 is owned by | Company 2 is owned by | |
| 35% Mr Red | 20% Mr Red | |
| 35% Mrs Black | 45% Mr Green | |
| 30% Miss Blue | 35% Miss Blue |
No one person controls a company, however Company 1 (65%) and Company 2 (55%) are associated due to Mr Red and Miss Blue having a minimum controlling contribution in both companies.
If the situation was slightly different, but still not related.
| Company 1 is owned by | Company 2 is owned by | |
| 55% Mr Red | 20% Mr Red | |
| 15% Mrs Black | 45% Mr Green | |
| 30% Miss Blue | 35% Miss Blue |
Mr Red and Miss Blue control Company 2 (55%) and also control company 1 (85%), however, as Mr Red does not need Miss Blue to control Company 1, as he already owns 55%, this therefore means the companies are not associates!
How the minimum controlling combination works, where:
- England Ltd is owned by A 45%, B 45% and C 10%
- Wales Ltd is owned by A 15%, B 36%, D 34% and E 15%
The minimum controlling combination groups for England Ltd are:
- 90% = A 45% and B 45%
- 55% = A 45% and C 10%
- 55% = B 45% and C 10%
The minimum controlling combination groups for Wales Ltd are:
- 51% = A 15% and B 36%
- 64% = A 15%, D 34% and E 15%
- 70% = B 36% and D 34%
- 51% = B 36%, and E 15%
Here A & B both control England 90% and Wales 51%.
If the two companies are not associated resulting from the share ownership, you need to consider Step 2: Substantial Commercial Interdependence. It is also worth noting that associated companies can arise from a loan (that is not in the normal course of their business). Fixed Rate preference shares can also create associates. The finer details can be found here.
Substantial Commercial Interdependence
The rights of an individual’s associates only need to be considered where there is Substantial Commercial Interdependence between two companies. When this is the case we need to take into account the rights and powers of each of the shareholder’s associates when looking at whether the companies are under common control.
Associates include relatives (spouses/civil partners, parents, remote forebears (e.g. grandparents), children, remote issue (e.g. grandchildren), siblings, brothers and sisters), business (partnership) partners, and some trustees and settlors.
Please note it is only direct family relationships, so this excludes in-laws, aunt or uncle, niece or nephew, cousin, stepsister or stepbrother, step-parents and common law spouse.
The three areas to consider are:
- Financial – one company financially supports the other company (directly or indirectly), or each has a financial interest in the affairs of the same business. Even though it is usually company to company; a loan from a family member may cause a company to be associated under the ‘loan creditor’ rules since they may be entitled to more than half the assets of that company on a notional winding-up.
- Economic – the companies have the same economic objective, common customers, or the activities of one benefit the other.
- Organisational – the companies have common management, employees, premises or equipment.
Only one of the above is enough for substantial commercial interdependence to exist. For example, if a company lends to another, that may be enough to constitute substantial commercial interdependence even if there is no other link between them.
If a pub has split its drink sales and catering sales into different companies, those companies are likely to be economically interdependent (as they have the same customers and the activities benefit each other) as well as organisational (same premises, staff and so on) as well as financially.
What is Substantial?
Helpfully(!) “Substantial” is not defined, HMRC consider that both the degree of interdependence and the period during which it exists in a Corporation Tax Accounting Period should be taken into account.
Substantial has been described in other areas of tax, which implies the threshold could be around 10% .
Ultimately, the application of the ‘substantial commercial interdependence’ concept is a subjective one and will depend on the particular facts and circumstances.
When reviewing such circumstances, HMRC’s objective is to ensure that companies are not treated as ‘associated’ simply by accident of ‘circumstance’ (under the ‘associate attribution’ provisions), where there is no material business relationship between them.
Loan Creditors
As mentioned above, control can be less obvious and can involve looking at the distribution of the company’s assets on a notional winding-up among its shareholders and certain loan creditors. This was established in the case of Executive Benefits Services (UK) Ltd [2011] TC 00803.
However, ‘normal’ trade creditors, lease creditors, and bank borrowings and loans are not treated as loan creditors and are ignored for the ‘control’ test (CTA 2010, s. 453(4)). It is emphasised that only ‘normal’ trade creditors are excluded from the ‘loan creditor’ definition. Therefore, for example, if a trade creditor balance remains outstanding for longer than the normal commercial period, with no steps being taken to collect it, HMRC may seek to treat it as a ‘loan creditor’ (especially if there is any form of ‘connection’ between the parties).
Passive Holding Company
This is one where:
- it carries on a business of making investments in the accounting period;
- it carries on no trade throughout the accounting period;
- it has one or more 51% subsidiaries throughout the accounting period; and
- it is a passive company throughout the accounting period.
For it to be a passive company:
- it has no assets in the period other than shares in its 51% subsidiaries; dividends meeting conditions (3) and (4) below; assets representing such dividends; or the right to receive such dividends;
- it has received no income in that period other than dividends;
- the redistribution condition is met in that any dividends received are at least fully passed onto the shareholders;
- any dividends received are exempt distributions of a qualifying kind;
- no chargeable gains accrue to it in that period;
- no expenses of management of the business are referable to the period; and
- no qualifying charitable donations are deductible from the company’s total profits for the period.
Close Investment-Holding Companies (CIC)
The default position is that any Close Company is subject to the main rate of Corporation Tax unless it meets the permitted purpose tests which are where:
- It is (wholly or mainly) carrying on a trade on a commercial basis;
- It is (wholly or mainly) making investments in land, or estates or interest in land, in cases where the land is, or is intended to be, let commercially;
- It has the purpose of holding shares in and securities of, or making loans to, one or more companies each of which is a qualifying company.
It is important to note that letting a property to an unconnected party will meet the definition to not make a company a CIC. However, it must let out the property for the whole accounting period to meet the definition. The legislation assumes that the letting of land is on a commercial basis unless the land is let to a connected person to the company. A connected person in this scenario also means connected companies.
This means that if a company lets property to a connected company, and the arrangement is not covered by one of the other permitted purposes (e.g., the first company is a group holding company and the tenant is a subsidiary, trading on a commercial basis), the land or property-holding company will be exposed to CIC status. There is an article on the tax adviser website which covers this.
Corporation Tax Payment Deadlines
The usual payment deadline for small companies is 9 months and 1 day after an accounting period. However, when a company is large or very large the payment deadlines are sooner.
- A company is large when it has profits of £1.5 million to £20 million.
- A company is very large when it has profits of over £20 million.
However, these thresholds are reduced for associated companies.
A company is neither a large nor very large company if the company’s tax liability for the CTAP does not exceed £10,000. This de minimis limit is reduced on a pro rata basis if the CTAP is less than 12 months. Further to this:
A company is considered ‘large’ for a corporation tax accounting period (CTAP) if its taxable profits (including dividends received from other UK companies but excluding group dividends) are more than £1.5m but not more than £20m.
A company is not considered large for a CTAP if its taxable profits for the CTAP do not exceed £10m and either:
- for any part of the proceeding 12 months, the company did not exist, or it did exist but had no accounting period, or
- it was not a large or very large company for any accounting period falling or ending in the preceding 12 months.
Thus, where a company first generates sufficient profits to fall within the quarterly instalment payment regime as a large company, its requirement to pay quarterly instalments will normally be deferred to the following CTAP.
A company is considered ‘very large’ for a CTAP if its taxable profits (again including dividends received from other UK companies but excluding group dividends) are more than £20m. Unlike for large companies, there is no one year grace period when a company becomes very large.
A company that is only liable to corporation tax for an accounting period because of the realisation of a chargeable gain will be treated as ‘large’ rather than ‘very large’ if the £20m threshold (proportionately reduced for a short accounting period) is exceeded.
A large company
With a 12-month corporation tax accounting period (CTAP) will pay instalments:
- 6 months and 13 days from the start of the accounting period;
- 3 months after the first instalment;
- 3 months after the second instalment (i.e. 14 days after the end of the CTAP); and
- 3 months and 14 days from the end of the accounting period.
For example, for a large company which has a 12-month CTAP which ends on 31 December 2024, instalment payments will be due on:
- 14 July 2024
- 14 October 2024
- 14 January 2025
- 14 April 2025
A very large company
With a 12-month accounting period will pay instalments:
- 2 months and 13 days from the start of the accounting period;
- 3 months after the first instalment;
- 3 months after the second instalment; and
- 3 months after the third instalment.
A very large company making up its accounts to 31 December 2024 each year will have instalment payments due on:
- 14 March 2024
- 14 June 2024
- 14 September 2024
- 14 December 2024
This therefore means a very large company has to pay all of its Corporation Tax due before the end of the accounting year!
With the associated company rules bringing more companies into account, this can mean some companies that were large turn into very large, which brings forward the tax payment date. This can have an impact on cashflow.
As the Corporation Tax payments are based on estimates during the year, interest is either paid or charged on any over or under payments accordingly. The interest rates are not the same as the small profits payment deadlines.
Assistance
This article does not cover everything you need to be aware of. If you require any further information or assistance with identifying Associated Companies please contact us. A member of our team will be happy to help.
