As we all know, tax regulations often undergo changes that can significantly impact companies and their operations.
One such recent development is the alteration of corporation tax rates, which came into effect on 1 April 2023. There is now a Main Rate of 25%, a Small Profits Rate of 19% and a Marginal Rate of 26.5%.
The rate at which a company will be taxed depends on its ‘augmented profits’, which needs a closer look. Additionally, the notion of ‘associated companies’ adds another layer of complexity, which will require careful consideration and strategic planning.
So what are augmented profits? Augmented profits are defined as the company’s total taxable profits of the period plus any exempt dividends from non-group companies. Group companies for these purposes are where the company receives a dividend from a 51% subsidiary or the company receiving the dividend is a 51% subsidiary itself.
The rate of tax is based on a comparison of the company’s augmented profits against the corporation tax thresholds of £50,000 (the lower limit) and £250,000 (the upper limit). However, these limits will be reduced if there are any ‘associated’ companies.
Where two or more companies are ‘associated’ with each other, the corporation tax thresholds mentioned above will be divided by the number of companies concerned e.g. if a company has one associate, the thresholds will become £25,000 and £125,000 respectively.
Companies are associated with each other if one company controls the other, or both companies are controlled by the same person or persons. However, the following types of companies can be ignored:
- Dormant companies
- Holding companies where their only source of income are dividends from its subsidiaries, which are subsequently distributed to shareholders.
In determining whether a person has control and therefore whether two companies are associated, it may be necessary to attribute the holdings of a person’s ‘associates’ to them. This is only necessary where there is ‘substantial commercial interdependence’ between the two companies.
Associates are defined as:
- an individual’s relatives, as illustrated in the diagram below.
- business partners (but not co-directors).
- trustees of trusts set up by the individual or any of their immediate family.
It is also important to bear in mind that companies which are regarded as ‘large’ are required to pay their corporation tax liabilities in instalments and this is also affected by the associated companies rules. Ordinarily a company is ‘regarded as ‘large’ if its taxable profits exceed £1.5m, but this limit is reduced if there any associated companies. For example, if a company has two associates, it will be regarded as large if its taxable profits exceed (£1.5m / 3) £500,000.
As you will appreciate, these rules add a layer of complexity to a company’s tax affaris, so we may need to ask you if there are any other companies that you or your associates are involved with. This will ensure you pay the right amount of tax.
As ever, please do let us know if you have any big changes planned either in your business or personal life so that we can help you consider all the relevant tax issues.