Corporation tax & associated companies

From 1 April 2023, the Corporation tax rate changed from 19% to 25% for companies with profits above £250,000. Companies with profits between £50,000–£250,000 will still be taxed at 25%. Still, they may be entitled to marginal relief, where the rate would be progressive between 19% and 25%. 

Companies with profits below £50,000 remain at the old rate of 19%. 

Who can claim Marginal Relief?

To be able to claim marginal relief, your company must: 

1. Have profits between £50k-£250k
2. Be UK resident (does not apply to directors/shareholders)
3. Be a trading company (not a close investment company)
4. Check the number of associated companies it has

 The lower and upper bands of £50k-£250k are for 12 months and are proportionally increased/reduced for shorter/longer periods of account. They are also reduced if you have associated companies. Where two or more companies are "associated" with each other, the Corporation tax lower and higher bands are divided by the number of companies concerned. This is to prevent people from setting up multiple companies and spreading around profits to avoid paying a higher tax rate.

What are associated companies?

Associated Companies for Corporation tax is determined by how closely companies are connected by looking at who controls them – usually by the shareholding – but if they have other links, that may be sufficient to link them too. Setting up multiple companies under the control of various close family members to get around this would still be considered associated. 

A company is an 'associated company' of another company if one has control of the other or both are under the control of the same person or persons. Control can include

1. Control over the affairs of the company
2. Control through voting power 
3. Control through share capital or through issued share capital.
4. Control over income of the company
5. Control over assets of the company

If a company director has a 50% shareholding, then they do not have control. If they have 50.01%, they have control. However, if the other half is a connected person like a spouse, sibling or child, then there is very likely to be an association. 

Dormant companies are ignored

A company is not associated if it is dormant.

Financial, Economic and Organisational Interdependence

HMRC can overlook who owns the shares if there are other reasons to suggest that companies are associated. The following HMRC manuals give examples of substantial commercial interdependence:

1. Financial interdependence
2. Economic interdependence
3. Organisational interdependence

Every case is unique!

The associated companies' rules exemplify why the UK tax system is fiendishly complex. Determining if a company is associated can be complicated, and each should be taken on a case-by-case basis.  

This example quote is from HMRC's manual:

For substantial commercial interdependence to exist, it is not necessary for all three types of links to exist. For example, if there is a sufficient financial link, one company will be an associated company of another even if no economic or organisational links exist.

However, even if substantial commercial interdependence is not present, two companies may still be associated. For example, a husband and spouse may separately own the shares in and run two completely different and separate companies, but the husband has made a loan to his spouse's company and, as part of that loan, is entitled to the company's assets if it is wound up. The two companies will be associated, not through the focus of the interdependence rules - attribution of associates' rights - but because the husband will control both companies through his shareholding and rights to assets on winding up.

Example of the marginal relief calculation

Taxpayer A owns two companies, both with a year-end of 31 March 2024. One of the companies ceases to trade on 30 September 2023 and has profits of £40,000. What is the corporation tax due?

So we have six month accounting period and one associated company, so that the lower band would be 

£50K* 183 days /365 days = 25,068 /2 = £12,534 and the higher band would be £250k * 183/365 = £125,342/2 = £62,671

The profit is over the lower band of £12,534 so the 25% rate applies: 40,000 * 25% = £10,000

The profit is less than the higher band of £62,671, so marginal relief applies.

This formula calculates the marginal relief:

(Adjusted upper limit - taxable profit including distributions) × (taxable profit ÷ taxable profit including distributions) × (Marginal Relief fraction)

The HMRC marginal relief fraction is 3/200

Marginal relief = (£62,671.23 - £40,000) × (£40,000 ÷ £40,000) × (3 ÷ 200) = £340.07

So the corporation tax due is 10,000-340.007 = £9,659.93, which is 24.15%