What is an Associated Company?

The number of associated companies can affect the tax rate a company pays from April 2023. So companies will need to know what is an associated company to determine its tax rate. UK Corporation tax rates increase from 19% from April 2023 for companies with profits over a small profits threshold. Companies with profits over the main threshold will pay the main tax rate of 25%. Companies between these thresholds will pay a tapered rate. The thresholds are £50,000 and £250,000 but are divided by the number of associated companies. So what is an associated company?

Who has direct control of a company?

Direct control of a company is usually owning over 50% of the company’s shares. However, it could also be having a majority of: voting rights, income payable to shareholders; or assets distributable on a wind-up. An individual, a group of people, or another company could control a company. Only consider a group of people as controlling, if that group can’t be reduced while still having control. So if John has 35%, Paul has 35%, George, 15% and Ringo 15%, the only controlling group is John and Paul.

What is substantial commercial interdependence?

Substantial commercial interdependence is when two companies rely on each other in any significant way. For more details on this please read this section in HMRC’s internal manual.

Who has indirect control of a company?

If two companies have substantial commercial interdependence (see above), you also have to consider indirect control of a company. An individual or group of people who don’t have direct control over a company, may have indirect control over it by adding the shares of people they have an influence over. These people include a spouse and blood relatives. So if an individual owns 40% and their spouse owns 11%, that individual indirectly controls the company on their own.

What is a group of companies?

If one company controls another company, they are a group of companies. If the controlling company is controlled by another company and/or also controls other companies, they are all in the same group of companies. The group could be any number of companies – think of a family tree of companies with at least a 50% ownership link between them all.

What is an associated company?

A company is associated with another company if they are both directly controlled by the same individual or the same irreducible group of people, or they are in the same group of companies. An association also exists if there is substantial commercial interdependence between two companies and the same individual or group of people indirectly control both companies. For an accounting period, you need to include any company that was associated for at least part of the accounting period. You can ignore any companies that are not trading.

How to work out your company’s tax threshold

Once you’ve worked out which companies are associated with yours, add them all up. Then add one to that total for your own company to get your number. Then divide the £50,000 and £250,000 thresholds by your number. So if you have 1 company that is associated with yours. Add one for your own company, so your number is 2. Then £50,000 divided by 2 equals £25,000, and £250,000 divided by 2 equals £125,000. So you’ll pay 19% tax if your annual profits are less than £25,000. You’ll pay 25% corporation tax if your annual profits are more than £125,000. If you’re inbetween those thresholds, you’ll pay a tapered rate between 19% and 25%. See corporation tax rated from April 2023 for more information.

Can you reduce the number of associated companies?

If you have direct control over more than one company, could you sell some shares in one company so that you no longer control it? If there is no substantial commercial interdependence (see above), you could transfer those shares to a close family member. There’s no capital gains tax to pay on shares transferred to a spouse.

Are any of your companies not making much profit? It may be worth closing that company and moving its business into another company.

Our clients can ask us to help them work out how many associated companies their company has. Also, how they might be able to reduce the number of associated companies. This is all included in our low-cost fixed monthly fees.