Rules for Associated companies: How to Avoid Hidden Tax Risk

HMRC has recently increased its focus on the correct application of the associated company rules and has issued letters to businesses that may have incorrectly claimed marginal relief without considering associated companies.

The associated company rules were reformed in April 2023. However, we still see companies getting this wrong. Failure to comply can lead to unexpected Corporation Tax consequences.

In this blog, we explore what the associated companies rules are, what this means, and how they can affect your Corporation Tax affairs.

The Rules for Associated Companies: How to Avoid Hidden Tax Risks

What are associated companies?

Associated companies are corporate entities linked to another through common ownership or significant control.

Two or more companies are associated if:

• One company has control of the other; or
• The same person, or persons, have control of both companies.

A company can be associated regardless of where it is resident for tax purposes. This means that associated companies can include those which are non-UK resident. The definition of control is quite broad. A person is deemed to control a company if they exercise, can exercise, or are entitled to acquire control over the affairs of that company (whether direct or indirect).

Associated companies rules – are there hidden connections?

It’s important to note that businesses do not need to operate in the same sector. Nor does an individual need to hold a majority shareholding in each company for the rules to apply.

In determining whether companies are under common control, the legislation requires consideration to be given to the rights and powers of a person’s associates. However, these rules are only applied where there is substantial commercial interdependence between the companies.

There are three broad categories of interdependence that HMRC identify – financial, economic, and organisational.

It is common for business owners to structure companies between spouses, civil partners, children, or other family members. Whilst legal ownership may suggest that the companies are separate, HMRC may look beyond the share register and consider whether the businesses operate as part of a wider commercial arrangement.

How do associated companies impact corporation tax rates?

The corporation tax rate payable depends on a company’s level of augmented profits (taxable profits plus exempt non-group dividends), as shown below.

Augmented Profits	Corporation Tax Rate
Up to £50,000 (lower limit)	19%
More than £50,000 and less than £250,000	25%, reduced by marginal relief
£250,000 or more (upper limit)	25%

The presence of associated companies reduces the profit thresholds proportionately. For example, where a company has one associated company (two companies in total), the lower and upper limits are halved to £25,000 and £125,000 respectively.

Ensuring the number of associated companies is correctly identified is therefore essential to applying the correct Corporation Tax rate and calculating any available marginal relief accurately.

Can associated companies affect when corporation tax needs to be paid?

Corporation Tax is usually payable nine months and one day after the end of an accounting period. However, companies classified as large or very large must pay Corporation Tax through Quarterly Instalment Payments (QIPs).

A company is generally considered:

• Large if its annual taxable profits exceed £1.5 million but are below £20 million.
• Very large if its annual taxable profits exceed £20 million.

As with corporation tax rate thresholds, these limits are divided by the number of associated companies. For example, where there are two associated companies, the thresholds reduce to £750,000 and £10 million respectively.

One key difference is that, for QIP purposes, only companies associated at the start of the accounting period are taken into account. By contrast, the Corporation Tax rate rules consider companies that were associated at any point during the accounting period.

Getting the number of associated companies right is therefore essential, not only for determining the correct tax rate, but also for establishing when corporation tax must be paid.

How can AAB help?

When it comes to getting associated companies right, the rules aren’t always straightforward. Whether you’re setting up a new company, restructuring an existing group, incurring significant capital expenditure, or simply unsure if your businesses are associated, it’s worth getting your position right.

At AAB, our Business Advisory specialists can help you understand how the associated company rules apply to your circumstances. We’ll identify any risks, explain your options clearly, and help you plan ahead with confidence.

If you are interested in our support or have any questions, please do not hesitate to reach out to Daniel Orange, Gillian Rushton, Adam Woodward, a member of our Business Advisory team, or your usual AAB contact.