What is an associated company? Alex Till, Chief Executive of MENTA, explains how associated companies affect corporation tax.

What are associated companies?

Broadly speaking, a company is an associated company of another company when either:

• one company has control of the other company
• both companies are under common control

This includes non-UK resident companies but excludes dormant and some ‘passive’ entities.

Where businesses are under common control but the relationship between one or more companies is one of ‘substantial commercial interdependence’ they will not be deemed as associated.

This broad definition, with the exclusions for dormant and ‘passive’ entities, as well as companies of ‘substantial commercial interdependence’, can be complex. It’s therefore important to seek advice when necessary.

What is the corporation tax rate from 1 April 2023?

On the 1 April 2023, corporation tax changes were introduced:

• The main rate of corporation tax increased from 19% to 25% where profits exceed £250,000.
• Where company profits fall below £50,000, a lower rate of corporation tax of 19% will continue to be applied.
• When profits fall between £50,000 and £250,000, a special Marginal Relief kicks in with the result that profits falling in the margin (between the £250,000 and £50,000 limits), will be charged an effective rate of 26.5%.

Example

For a company whose profits are £80,000, marginal relief would apply and their corporation tax liability is found by multiplying their profits by 25% and then deducting marginal relief:

Taxable total profits - £80,000 × 25% (the main rate)	£20,000
Less: marginal relief (3/200 X £250,000 - £80,000)	£2,550
Tax due	£17,450

You can read more about corporation tax rates and reliefs on GOV.UK. A new online Marginal Relief calculator has also been launched to assist companies with their calculations.

How do associated companies affect corporation tax?

When a company has one or more associated companies, the limits for identifying the applicable tax rate and any ‘marginal relief’ would be divided by the total number of associated companies involved.

Example

For example, Mr A is the director and sole shareholder of Company A which operates a bakery. His partner runs a clothes shop through Company B. The two companies are in different lines of business and there are no links between them as they operate entirely independently. Therefore, despite the two companies being operated by associated individuals, they are not associated companies for tax purposes.

However, if the circumstances were different and Company A and Company B were considered associated, the upper and lower limits would be apportioned between the two companies, and this would increase the amount of corporation tax due.

If we extend our example of a company whose profits are £80,000, the upper limit is reduced from £250,000 to £125,000.

Taxable total profits - £80,000 × 25% (the main rate)	£20,000
Less: marginal relief (3/200 X £125,000 - £80,000)	£675
Tax due	£19,325

About the author

Alex Till is the Chief Executive of MENTA, a leading provider of support for businesses of all shapes and sizes who have provided business advice and support to over 35,000 businesses taking them through their journey of knowledge to the point of establishing their business and securing funding for start-up costs and working capital.

See also

What is the corporation tax rate from 1 April 2023?

Find out more

Corporation Tax (GOV.UK)

Calculate Marginal Relief for Corporation Tax (GOV.UK)

Images

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Publication date: 9 May 2023

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.