Corporation Tax is going up from April 1st. But in a less well publicised change to company tax rules, the next tax year will also see existing definitions of group companies replaced by an expanded definition for ‘associated companies’ – with direct implications for tax liabilities.
The main rate of Corporation Tax will increase from 19% to 25% from April 1st. But at the same time, tiered rates and reliefs are being re-introduced so only businesses with profits over £250,000 will pay the full 25%. Smaller businesses with profits under £50,000 will see no increase in Corporation Tax at all. Those that fall between these upper and lower thresholds will be eligible for marginal relief on the 25% rate.
But under the new associated company rules, those thresholds will be divided evenly between all of the business entities in a group. So if you have five companies operating in a group, the upper 25% threshold will kick in when profits for each pass £50,000.
A broader definition of association
What is also important for business groups to know is that the definition of what will count as a single entity for tax purposes has been considerably extended. Under current rules, the ‘51% threshold’ applies when determining if one company or business entity counts as a subsidiary or part of the same group as another. This means that more than 50% of the share capital of one company has to be owned by another ‘parent entity’ for it to count as being part of the same group.
But under the new rules for associated companies, the 51% threshold will be replaced by the much broader (and, in some senses, looser) concept of ‘control’. Companies will be defined as associated for the purposes of corporation tax if one is determined to ‘control’ the other (or another entity controls both). The criteria for ‘control’ will be determined on the level of demonstrable financial, economic and organisation interdependence that exists between two (or more) companies.
One significant practical consequence of this new definition is that companies owned by the same individual will now be treated as a single entity for tax purposes, even if they operate in very separate markets with little operational overlap.
On the other hand, one of the exceptions to the ‘control’ test is companies operated by spouses or other close family members, which will continue to be treated as separate entities for tax purposes unless there is clear commercial and operational overlap. Other exceptions relate to dormant and passive holding companies. So in other words, if a company is economically inactive, it won’t be counted in the calculation to reduce tax thresholds across the group.
What all of this means is that some of the supposed tax benefits of avoiding a formal group structure in favour of a looser ‘associated’ affiliation between companies have now certainly disappeared. All entities operating under the same ownership or ownership structure will now be treated as one for the purposes of corporation tax, regardless of whether there is a formal holding company at the apex or not. In some ways, the changes make consolidating into a formal group structure more attractive once again, for example to allow profit and losses to be spread evenly across a group to reduce tax liabilities.