Refresh your knowledge of Corporation Tax associated company rules

Zyla Accountants outline the associated companies rules that take effect from April 2023

As part of the March 2021 Budget, Rishi Sunak, the then Chancellor of the Exchequer, announced that the corporation tax main rate would rise to 25% from April 2023 for companies with taxable profits above £250,000. Corporation Tax rates for companies below £50,000 remain at 19% (for profits between £50,000 and £250,000, the effective marginal rate is 26.5%). Additionally, the associated companies rules will be reintroduced, allowing companies under common control to share the £50,000 and £250,000 thresholds instead of being limited to companies owned by 51% of the same company.

It is required that profits be prorated between the two Corporation Tax financial years where a company's year end does not coincide with the 31 March Corporation Tax financial year under Section 8 CTA 2009.

After the Mini Budget on 23 September 2022, the move to the 25% main Corporation Tax rate was briefly abandoned.

What is the impact of associated companies on Corporation Tax?

A change in April 2023 will reintroduce the concept of associated companies into Corporation Tax thresholds, which are currently divided among 51% group companies. This means that Corporation Tax thresholds will be divided between companies under common control, not just companies in a 51% group.  In addition to overseas companies, dormant companies aren't counted as associated companies.

Companies are considered associated under Section 18E of the CTA 2010 if one company controls the other or both companies are controlled by the same individual. Even if companies are associated for parts of an accounting period, they will be treated as associated for the whole accounting period.

A winding up requires consideration of ownership of share capital, voting rights, distributable profits, and entitlement to assets under Sections 450 and 451 CTA 2010. When determining whether control exists, the rights and powers of a person's "associates" may need to be considered.

How are 'associates' rights and powers treated?

As part of determining whether companies are associated, Section 451 CTA 2010 includes the rights and powers of "associates" of a person.

According to the legislation, a person (defined as "P") has the following rights and powers:

• Any company that P, or P and associates of P, controls

• A company controlled by P, or a company owned by P and its associates

• Anyone associated with P

• Two or more of P's associates.

A very broad definition of what constitutes an associate is given in Section 448 CTA 2010. Trustees of any settlement in which P is a settlor; trustees of any settlement in which any relative of P (living or deceased) is or was a settlor; and trustees of any settlement in which P has shares or obligations of a company subject to a trust, as well as the trustees of any settlement in question.

The term "relative" refers to a spouse, civil partner, parent, child, or distant forebear.

Whenever P owns shares or obligations of a company that are subject to a trust, then any other company with an interest in those shares or obligations is considered an associate. Deceased persons' estates also have provisions. Whenever P owns shares or obligations of a company that are part of an estate of a deceased individual, any other company that owns those shares or obligations is considered an associate.

The personal representatives of the deceased are considered associates when P owns shares or obligations of a company that are part of the estate of the deceased.

Even when associates' rights and powers make the difference between control existing or not, those rights and powers are only included when there is substantial commercial interdependence.

In what sense is substantial commercial interdependence defined?

In the Corporation Tax Act 2010 (Factors Determining Substantial Commercial Interdependence) Regulations 2022, commercial interdependence is defined in the same way as employment interdependence. The tests involved in Employment Allowance calculations are familiar to tax practitioners.

It is important to consider three aspects when determining whether there is substantial commercial interdependence: financial, economic, and organizational 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 achieve the same economic objective. Normally, one benefits the other or their activities involve common customers.

• Organisational interdependence refers to the existence of common management, common employees, common premises and common control.

It will usually be apparent whether businesses are interconnected, which is often the case in family businesses. It may, however, be necessary to review the criteria more closely before making a decision.

What factors are considered when evaluating dormant companies?

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.

In accordance with Section 18F CTA 2010, a holding company need not be included if it carries on no trade, has one or more 51% subsidiaries, and its only assets are shares of those 51% subsidiaries. Additionally, in order to be disregarded as an associated company, the holding company must have no income or gains, other than dividends fully distributed to shareholders, and no management expenses.