As the 25% Corporation Tax main rate draws near, it's time to once again become familiar with the Corporation Tax associated company rules
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
9 December 2022
Chris Campbell outlines the associated companies rules that take effect from April 2023
How are Corporation Tax rates changing from April 2023?
Back in the March 2021 Budget, Rishi Sunak, the then Chancellor of the Exchequer, announced the main rate of Corporation Tax would increase to 25% from April 2023 for companies with taxable profits above £250,000, with the Corporation Tax rate for companies with taxable profits below £50,000 remaining at 19% (an effective marginal rate of 26.5% applying for taxable profits between £50,000 and £250,000). He also announced the reintroduction of the associated companies rules, so the £50,000 and £250,000 thresholds will be shared between companies under common control as opposed to only between companies in a 51% group.
Where a company’s year end does not coincide with the 31 March Corporation Tax financial year, Section 8 CTA 2009 requires profits to be pro-rated between the two Corporation Tax financial years.
For a brief period, the move to the 25% main Corporation Tax rate was to be abandoned following the Mini Budget on 23 September 2022, as the Chancellor at that point, Kwasi Kwarteng, advocated the retention of the 19% Corporation Tax rate. That was before his successor, Jeremy Hunt, then reverted to the original plan.
As April 2023 approaches, tax practitioners will be considering how the changes will affect them and their clients.
How will associated companies affect the Corporation Tax rate?
Whilst Corporation Tax thresholds are currently divided between the number of 51% group companies, the April 2023 changes will reintroduce the concept of associated companies. In short, this means that Corporation Tax thresholds will be divided between companies under common control, not just companies in a 51% group. Whilst overseas companies are included in the number of associated companies, dormant companies are not.
Section 18E CTA 2010 provides that companies will be associated if one company controls the other or both companies are under the control of the same person. Companies will be treated as associated for the whole of an accounting period if they are associated for any part of that accounting period, even if they are associated for different parts of the accounting period.
The definition of control follows the normal rules within Sections 450 and 451 CTA 2010 in that it is necessary to consider ownership of share capital, voting rights, entitlement to distributable profits and entitlement to assets on a winding up. When determining whether control exists, it may be necessary to consider the rights and powers of a person’s “associates” when applying the criteria.
How are the rights and powers of “associates” treated?
Where there is substantial commercial interdependence, Section 451 CTA 2010 includes the rights and powers of “associates” of a person when determining whether companies are associated.
The legislation refers to a person (defined as “P”) and states that P is attributed the rights and powers of:
- any company which P, or P and associates of P, controls
- any two or more companies controlled by P, or P and associates of P
- any associate of P
- any two or more associates of P
Section 448 CTA 2010 gives a very broad definition of what is considered an associate. This includes any relative or partner of P; the trustees of any settlement in relation to which P is a settlor; the trustees of any settlement in relation to which any relative of P (living or dead) is or was a settlor; and if P has an interest in any shares or obligations of a company which are subject to any trust, the trustees of any settlement concerned.
For this purpose, “relative” is defined as a spouse or civil partner, a parent or remoter forebear, a child or remoter issue, or a brother or sister.
Where P is a company and has an interest in any shares or obligations of a company which are subject to any trust, any other company which has an interest in those shares or obligations is treated as an associate. There are also provisions where the estate of a deceased person is concerned. Where P is a company and has an interest in any shares or obligations of a company which are part of the estate of a deceased person, any other company which has an interest in those shares or obligations is treated as an associate.
In cases where P has an interest in any shares or obligations of a company which are part of the estate of a deceased person, the personal representatives of the deceased are treated as associates.
It is important to note that even where the rights and powers of associates make the difference between control existing and it not, those rights and powers are only included where there is substantial commercial interdependence.
What is meant by substantial commercial interdependence?
The Corporation Tax Act 2010 (Factors Determining Substantial Commercial Interdependence) Regulations 2022 uses the same definition for commercial interdependence as for Employment Allowance purposes. Tax practitioners who are used to dealing with Employment Allowance calculations will therefore be familiar with the tests involved.
In deciding whether there is substantial commercial interdependence, it is necessary to consider three aspects: the extent to which there is financial, economic and organisational interdependence.
- Financial interdependence covers the situation where one company gives financial support (directly or indirectly) to the other, or each has (directly or indirectly) a financial interest in the other's activities.
- Economic interdependence considers situations where companies seek to realise the same economic objective. Normally, the activities of one benefit the other or their activities involve common customers.
- Organisational interdependence considers the existence of common management, common employees, common premises and common control.
In most cases, it will be obvious whether businesses are interlinked, which will often be the case in many family businesses. But in other cases, it will be necessary to review the criteria more closely before reaching a conclusion.
How are dormant companies considered?
Companies do not need to be counted as associated companies where there is no active trade or business being carried out. Special rules apply for holding companies.
A holding company need not be included per Section 18F CTA 2010 if it carries on no trade, has one or more 51% subsidiaries and its only assets are shares in those 51% subsidiaries. To be disregarded as an associated company, it is also necessary for the holding company to have no income or gains, other than dividends fully paid out to shareholders, and have no management expenses or charitable donations.
Let us know your views
The new Corporation Tax rates will present tax practitioners with several technical challenges over the coming months and we encourage Members to let us know where these cause issues.
We welcome Members’ input to inform our work on consultations or other tax-related matters – email tax@icas.com to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by Members.