The landscape of corporation tax in the UK has undergone significant changes, especially with the introduction of new associated company rules effective from 1 April 2023. These changes are crucial for businesses to understand, as they directly impact the rate of corporation tax payable. In this blog post, we’ll delve into the intricacies of these new rules and what they mean for your business.
The Basics: New Corporation Tax Rates
Firstly, let’s talk numbers. The corporation tax rate has been restructured as follows:
- Small Profits Rate (19%): For companies with profits up to £50,000.
- Main Rate (25%): For companies with profits exceeding £250,000.
- Marginal Relief: For companies with profits between £50,001 and £250,000.
These rates are straightforward for standalone companies, but things get a bit more complicated when associated companies come into play.
What Are Associated Companies?
An associated company is one that either controls another company or is under the control of the same person or group of persons. The definition of ‘control’ has been broadened and now includes not just share capital but also voting power and distribution entitlements.
The Impact on Tax Rates
When a company has associated companies, the profit thresholds for determining the tax rate are divided by the total number of associated companies plus one. For example, if you have four associated companies, the upper limit of £250,000 would be divided by five (4+1), reducing it to £50,000. This means that each company would move to the main rate of 25% if its profits exceed £50,000.
Exceptions to the Rule
Certain types of companies are not treated as associated companies, such as:
- Dormant companies
- Passive holding companies
- Companies with no ‘substantial commercial interdependence’
Substantial Commercial Interdependence
This is a key term that you’ll want to familiarise yourself with. It refers to the financial, economic, or organisational relationship between companies. For example, if two companies share management or have common customers, they could be considered substantially commercially interdependent.
Quarterly Instalment Payments
The new rules also affect whether a company falls within the quarterly instalment payments regime. The thresholds for this are also divided by the number of associated companies, which could result in more companies needing to make quarterly payments.
Practical Steps
- Review Your Corporate Structure: Understand the number of associated companies you have to estimate tax liabilities accurately.
- Consult Your Accountant: This is a complex area, and professional advice is invaluable.
- Plan for Cash Flow: If you fall into the quarterly instalment regime, plan your cash flow accordingly.
Conclusion
The new associated company rules are more than just a tax technicality; they require a strategic review of your business structure. Understanding these rules is essential for tax planning and compliance. If you have any questions or need further clarification, feel free to reach out to our team at PaperRocket Accounting.
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