As of 1 April 2023, as Corporation Tax rates rise for many businesses around the UK, the former related group company rules have now reverted back to the associated company rules that you may remember from before April 2015.
The ‘new’ associated company rules reduce the limits that determine when a company will:
- Pay Corporation Tax at a rate of up to 26.5% (instead of 19%) of taxable profits, and
- Start to pay quarterly instalment payments (QIPs) where Corporation Tax is due earlier than the normal nine months and one day deadline.
It is therefore important for each company to now confirm how many other companies they are associated with.
Meaning of associated
Under the previous rules, two companies were associated if they were within the same 51% group. However, from 1 April 2023, companies are now associated if one has control of the other, or if two or more companies are under the control of the same person or persons.
Control can be defined in several ways: control over the affairs of the company, through voting power, through share capital, over income of the company, or over assets of the company.
For example:
- Person A controls 51% of Company B and Company C.
- Company C also has a 51% subsidiary, Company D.
Under the previous rules which were in place between 1 April 2015 to 31 March 2023, Companies C and D were associated with each other as they were within the same 51% group, but not with Company B.
However, under the new rules that took effect from 1 April 2023, all three companies are associated as they are all controlled by the same person.
In another example, if all three companies are owned 30% by Person E and 25% by Person F. All three companies are now associated as they are all controlled by the same persons (Persons E and F together control 55% of each Company).
Active worldwide companies require consideration, but dormant companies do not count as associates.
As noted above, it is also important to consider what control a person or persons have over a company, as control could be via, say loan capital, rather than share capital if an individual effectively has a right to move than 50% of the balance sheet.
So, how do the new associated company rules affect the Corporation Tax rates and QIPs limits?
New Corporation Tax (CT) rate
From 1 April 2023, the CT rate of 19% will only be available on profits of up to £50k. There will then effectively be a 26.5% CT rate for profits between £50k and £250k and, over £250k, the CT rate will be 25%.
The limits noted above must also be divided by the number of associated companies (under the ‘new’ rules) in the accounting period – even if they are only associated for a few days in the period.
Companies whose accounting periods straddle 1 April 2023 will pay a pro-rated CT rate.
This means that a company with only £25k profits and five associated companies, would pay £10k of their profits at 19%, and £15k of their profits at 26.5%.
QIPs – large companies
This applies to companies that have taxable profits between £1.5 million and £20 million a year (pro-rated for shorter periods) divided by the total number of associated companies at the start of the accounting period. QIPs are payable six months and 14 days after the start of the accounting period, with three more QIPs payable in three monthly instalments.
If the company was not required to pay QIPs in the previous accounting period (AP), then the first time they exceed the limits it will be a ‘year of grace’, in which QIPs will not be due. Please note that there is no year of grace if taxable profits exceed £10 million (pro-rated for shorter periods and divided by the number of associates).
For example, if Company G has four associates, then £1.5m divided by five arrives at £300k. For the year ended 31 March 2024, with taxable profits of £800k, the CT would be payable in four equal instalments of £50k (i.e., £800k x 25% / 4) on the following dates:
- 14 October 2023, 14 January 2024, 14 April 2024, and 14 July 2024.
Again, the dates will differ for periods of less than 12 months.
This means that companies with small profits, but several associates, may need to start paying their CT liabilities in QIPs. Interest will accrue on any late payments.
QIPs – very large companies
For companies that have taxable profits exceeding £20 million a year (pro-rated for shorter periods) divided by the total number of associates at the start of the accounting period, QIPs will be payable during the period to which they relate.
For example, if Company G has four associates, then £20m will be divided five, to arrive at £4m. Assuming a year end of 31 March 2024, with taxable profits of £6m, the CT would be payable in four equal instalments of £375k (i.e., £6m x 25% / 4) on the following dates:
- 14 June 2023, 14 September 2023, 14 December 2024, and 14 March 2024.
If you have any queries or concerns, our expert team of Business Tax advisors will be able to advise you further. Get in touch on 0114 266 7171.
