Companies with associated businesses

Rishi Sunak’s urge to change corporation tax from 1 April 2023 will return this tax to a multi-rate system.

With a small company rate of 19%, a main rate of 25% and a progressive marginal relief, the days of the present single rate tax are numbered.

Because the movement from 19% to the full 25% is predicated on fixed, taxable profit break points, HMRC have re-introduced an anti-avoidance process that will stop companies from fragmenting their trade into two or more companies such that each associated business only pays corporation tax (CT) at the small company rate (19%).

Effectively, the £50,000 and £250,000 break points will be divided by the number of associated companies plus one.

This restriction will not only apply to future associations but also to existing associated company relationships that exist prior to 1 April 2023.

The challenge for advisers before 1 April 2023

It may be possible to reduce the impact of these changes to present associated companies by undertaking a formal review . The idea would be to see if related companies could be restructured in some way to minimise CT payable.

Landmark’s Spotlight Library for 2022-23 includes a publication covering this topic ‘Planning for corporation tax increase April 2023’. In the article the following example illustrates how restructuring could help.

You may want to review your company structures prior to 6 April 2023. For example, if you have one company with taxable profits of £40,000 and one company with taxable profits of £5,000, the company with the taxable profits of £40,000 will not benefit from the small profits rate as the profits are above the lower limit of £25,000 that applies to a company with one associate. Merging the companies will mean that there is only one company and the combined profits of £45,000 will be charged at the small profits rate of 19%.

Quoted from our Spotlight publication ‘Planning for corporation tax increase April 2023’.

But how are HMRC defining ‘associated company’?

A new definition of ‘associated company’ applies for the purposes of working out the upper and lower limits from 1 April 2023 onwards. You will need to use this definition to work out whether, and if so how many, associated companies a client has in order to determine the lower limit and upper limit that apply.

A company is associated with another company in an accounting period if it meets the definition of an associated company for any part of the accounting period. The companies do not need to be associated for the whole accounting period to be taken into account.

A company is an associated company of another at any time when:

  • one of the two has control of the other; or
  • both are under the control of the same person.

Where a company has two or more associated companies, each company is counted to determine the number of associates that the company has, even if the companies are associated for different parts of the accounting period.

Clear as mud…

Again, we can call on a recent addition to the Spotlight Library ‘What is an associated company?’ to explain this to clients.

This offers ongoing benefits for clients

It is worth stressing when you approach corporate clients who may benefit from restructuring, that any reduction in CT savings will be ongoing, as will the need to keep any eye on associated relationships as profit levels change in future years.

Rishi Sunak’s changes have opened the door to new advisory services, and one that practitioners will need to embrace.

How Landmark’s services can help

Our Fee Builder marketing pack for June 2022 covers this topic and provides a range of support documentation you could use to approach clients. It includes the two Spotlight publications mentioned above.

If you sign up for a month’s trial before 1 July 2022, you would have free access to these resources and could make a start considering which of your corporate clients may benefit from a restructuring fact-find.

Complete the order form at the bottom of this page>>

Bob Edwards

Bob has been working with practices across the UK offering novel ways to improve cross-sales and increase new client acquisitions. He is also interested in "step changes" in legislation that offer challenges, and therefore opportunities, for practitioners to provide new recurring and one-off support services to clients.

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