Do you have an associated company and why does it matter?

Prior to April 2023, you would be deemed to have an associated company if your company held more than 50% of the shares in another company. This meant determining whether you had any associates was quite straight forward. This all changed in April 2023 when new legislation was introduced, and not surprisingly, the new rules are much more complex!

Firstly, why does it matter? 

Well, corporation tax rates also increased in April 2023 and the rates that apply to small and large companies now differ. Only companies with annual taxable profit of up to £50,000 will continue to pay tax at 19%. A company with taxable profit of over £250,000 will pay tax at 25%. A company with taxable profit between £50,000 and £250,000 will pay a rate somewhere between 19% and 25%, depending on the level of profit.

If you have an associated company, these corporation tax rate bands are shared between the number of associates you have.  For example, if you have 2 other companies which are deemed to be ‘associates’ the bands are shared as follows:

Lower band of £50,000 becomes £16,666

• each company can earn up to £16,666 before the higher rate starts (note that marginal relief will be applied to profit over £16,666 but effectively it means the first £16,666 is taxed at 19% and the remainder up to £83,333 is taxed at 26.5%)

Higher band of £250,000 becomes £83,333

• each company will pay tax at 25% on annual taxable profit that exceeds £83,333

Additionally, large companies (annual taxable profit above £1.5 million), are required to make quarterly corporation tax payments. The profit threshold is divided by the number of associated companies at the end of the accounting period, which means more companies could be brought into the quarterly instalment regime.

New rules for determining associated companies

An associate arises when:

• one company has control over another (such as holds 51% of the shares), or
• the companies are under the control of the same company, person or persons.

Control generally means owning more than 50% of the shares but other things such as voting power, dividend rights and rights on winding up, may also be relevant and give control. HMRC state that, ‘A person controls a company if that person exercises, is able to exercise, or is entitled to acquire direct or indirect control over the company’s affairs’ (CTM60220).

Control by the same company is reasonably straight forward. For example, if A holds more than 50% of the shares in B, who holds more than 50% of the shares in C, all 3 companies fall under the control of A and therefore they will be associated.

In cases where there are several shareholders, and no one holds a majority shareholding, we need to look at the minimum combination of shareholders, that is identical, and which gives control over each company.

Here are a few examples.

Example 1

Company A is owned 100% by Sue. Company B is owned 60% by Sue and 40% by Brian.

The 2 companies are associated, because Sue owns a controlling share in both.

Example 2

Company A is owned 50% by Sue, 30% by Brian and 20% by Mike. Company B is owned 30% by Sue, 20% by Brian and 50% by Mike.

No single person has control of either company by means of the shares. Therefore, we look at the minimum controlling combination of each company, that is given by the same group of people.

Company A can be controlled by Sue and Brian 80%, or Sue and Mike 70%.

Company B can be controlled by Sue and Mike 80%, or Brian and Mike 70%.

There are 2 minimum controlling combinations of A – Sue and Brian, and Sue and Mike. There are 2 minimum controlling combinations of B – Sue and Mike, and Brian and Mike.  Sue and Mike are an identical ‘group’ that can control both A and B; therefore, A and B are associated.

As previously noted, control is not always given solely by virtue of the shares. If control is given by other means this will also need to be considered.

Attributing the rights of shares of associated people

The second consideration is whether we need to attribute the rights or shares of ‘connected people’. This is only necessary if substantial commercial interdependence exists between the companies. This could be a loan provided by one company to another, companies sharing the same premises/customers/employees, or where the activities of one company benefits the other.   HMRC guidance on substantial commercial interdependence.

If such interdependence exists, then the rights or shares of the associated people in each company are added together for the purpose of determining whether there is control. Each person is treated as if they hold the combined shareholding, not just their own.

An associated person could be your spouse, civil partner, parent, child, sibling or other blood relative, partner (of partnerships) and some trustees and personal representatives. Associates per HMRC
If, say, you are the sole owner of a company and your spouse is the sole owner of another company (running completely different businesses), the companies would not normally be associated. However, if your company has provided a substantial loan to your spouse’s company, the 2 companies will be associated.

Here are some further examples.

Example 3

Company A is owned 50% by Omar and 50% by Candy. Company B is owned 100% by Candy.

Company A has provided a substantial loan to Company B, and Omar and Candy are married. Substantial commercial interdependence exists; therefore, the shares of Omar and Candy are added together. Omar is treated as holding 100% of the shares in A, and Candy is too. As Candy also holds 100% of the shares in B, the 2 companies are associated.

Had the loan been made by Omar and not Company A, there would not be any commercial interdependence between the companies. Therefore, the shares of the associates would not need to be attributed and the companies would not be associated.

Example 4

Company A is owned 100% by Carlos. Company B is owned 40% by Carlos, 40% by Rosa and 20% by Joe.

The 2 companies will only be associated if there is substantial commercial interdependence and either Carlos and Rosa or Carlos and Joe are ‘associates’ of each other. If say Carlos and Rosa are associates, then each of them will be considered to hold a controlling interest in company B. As Carlos also holds a controlling interest in company A, the companies will be associated.

Additional points

• If a company is an associated company of another company for any part of the accounting period, it will be treated as an associate for the whole period.
• The rules apply to overseas companies too, regardless of tax residence.
• A company is not treated as associated if it is dormant (throughout the whole period) or is a passive holding company (the company only receives dividends from its subsidiaries and pays these to shareholders, and the company receives no other income or expenses).
• If your company does not exist wholly or mainly to trade or to invest in land for commercial letting to unconnected persons, then it could fall under the definition of a ‘close investment holding company’ and as such it will not be able to take advantage of the small company’s corporation tax rate. All profits will be taxed at 25%.

Summary of points you need to consider

1. Do you have control or hold more than 50% of the shares, in any other company?
2. Do you hold any other interests in companies and if so what shareholding to you hold?
3. Is there any variation in the rights that attach to the shares held in the other company, such as voting rights, rights to dividend distributions, rights on winding up?
4. Do any of your relatives hold interests in companies in which there are commercial links between their company and your company?
5. Is your company a close investment holding company (CIHC)? (HMRC definition CIHC)