Associated Companies

From 1 April 2023, the rate of corporation tax that a company is subject to depends on the level of its augmented profits (CTM03915 – S.18L CTA 2010). The rate of tax is based on a comparison of the company’s augmented profits against the corporation tax thresholds of:

• Where augmented profits are £50,000 or less, a rate of 19% applies (known as the ‘small profits rate’).
• Where augmented profits are between £50,001 and £250,000, a rate of 25% applies, but marginal relief is available.
• Where augmented profits are more than £250,000, a rate of 25% applies (known as the ‘main rate’).

FA 2021, Sch 1; CTA 2010, SS 18A – 18D.

The upper and lower limits are reduced where there are ‘associated companies’ – in such cases, the profit limits are divided equally among all of the associated companies. Certain types of companies (such as close investment-holding companies) cannot claim the small profits’ rate or marginal relief regardless of the number of associated companies involved.

Do note that the thresholds for quarterly instalment payments (QIPs) are also divided by the number of associated companies (COM95001) in equal proportions.

Definition of an associated company

Companies are associated with each other if one company controls the other, or both companies are controlled by the same person, or persons (S.18E CTA 2010). The definition of ‘person’ in the Taxes Acts is very wide. It includes for instance, a company, an individual, or individuals, trustees of a trust, or partners in a partnership.

Associated companies – meaning of control

The definition of ‘control’ has the same meaning as it does for the close company rules (CTA 2010, SS 18E(5) refers to CTA 2010 S. 450 and S. 451 CTA 2010; see CTM60210). This status is determined by evaluating voting power, share capital, and rights to assets or income.

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.

Rights of associates

In considering control by shareholders, we are required to attribute the rights of “associates” (S.18G CTA 2010). Associates include spouses, civil partners, blood relatives, and trustees or settlors of trust beneficiaries (see CTA10/S448).

Example

Company A is owned 100% by the husband and runs a plumbing business. Company B is 100% owned by his wife, and she is a hairdresser. They are automatically associated with each other, and therefore you have 2 associated companies. However, the legislation only enables this automatic association to be, if there is “substantial commercial interdependence” (SCI) between the companies concerned.

S18G is supplemented by regulations at SI2022/1203 (CTM03950). SCI is to determine if separate companies are connected through financial, economic, or organisational links. It determines whether companies are treated as “associated companies” for Corporation Tax thresholds or Employment Allowance rules.

The CTM03785, CTM03790, and CTM03795 manuals provide detailed information on what it means by financial, economic, or organisational links for the purposes of the corporation tax.

The NIM06595 manual provides the employment allowance counterpart.

Minimum controlling combinations

The control test under the associated companies’ rules can be met where one company controls another or where both are under the control of the same person or persons. Essentially, this means that if one person on their own is unable to satisfy the control tests, the control test will still be met if the same group of persons, when taken together, have control.

HMRC guidance provides useful examples: CTM03941

Some other key factors to consider

• A company may be an ‘associated company’ no matter where it is resident for tax purposes (i.e. worldwide companies are included). Example: I have 2 companies, one in the UK and one in the USA, and I am the controlling shareholder of both with 100% ordinary share capital. These two companies would be associated.
• The legislation (S18A CTA 2010) states that the small profits rate of 19% is not available to non-resident companies, including those with UK permanent establishments. However, HMRC’s guidance at CTM03905 indicates that branches may be eligible if a treaty non-discrimination article applies.
• Companies are associated for a whole chargeable accounting period if they are associated at any point in time during the accounting period. Therefore, companies that join or leave the group during the year are included, even though they are only associated for part of the period (CTA 2010, S 18E(1), (2). This means that a company can be associated for a full accounting period even if they are part of the same group for a single day during said accounting period.
• When reviewing sub-subsidiaries, i.e. where one company controls another, which in turn controls another, it is not necessary to multiply the holding downwards to work out whether the sub-subsidiary is associated. For example, if A Ltd owned 51% of B Ltd, which in turn owned 51% of C Ltd, both B Ltd and C Ltd are associated companies of A Ltd even though A Ltd only indirectly controls 26% of C Ltd (i.e. 51% of 51%). This differs from the position for group relief, which requires you to multiply through the respective shareholdings.
• Dormant companies are excluded. (CTA 2010, S18E(3).
• A special rule in CTA 2010, S. 18F(2), treats a non-trading holding company as dormant provided it is ‘passive’. CTM03592 outlines the meaning of passive company.

Useful links:

CTM03900

https://www.att.org.uk/corporation-tax-rates-and-associated-companies-faqs

For more information, please contact us at: consultancy@vantagefeeprotect.com

Kabita Tank
Tax Advisor