With the Corporation Tax changes now in force, if you have more than one limited company, you need to be aware of the ‘Associated Companies’ rules, which can make things more complicated.
If you control more than one company, your Corporation Tax thresholds may be reduced. This can push profits into higher tax bands more quickly and increase your overall tax bill.
In this article, chartered accountant Elaine Clark, MD of CheapAccounting.co.uk, explains why some company owners need to be aware of more than just the headline Corporation Tax rate changes, which took effect from 1st April 2023.
Corporation Tax changes from April 2023
How we forget how simple the Corporation Tax calculation has become over the last few years.
Now we’re back to the old rules where for anything other than the smallest and most straightforward of companies (less than £50k profit), the tax calculation is complex.
There is a return to the old system of Marginal Relief which allows those with profits between £50,000 and £250,000 to reduce the rate of corporation tax from the 25% main rate.
You can read more about the changes, and example calculations in our guide to the April 2023 CT changes.
Beware the Associated Companies rules
From April 2023, as part of the Marginal Relief calculation, you also need to consider Associated Companies as this will change the lower (£50k) and upper (£250k) limits used in the tax calculation.
The limits are apportioned according to the number of Associated Companies.
| Number of companies | Lower limit | Upper limit |
|---|---|---|
| 1 | £50,000 | £250,000 |
| 2 | £25,000 | £125,000 |
| 3 | £16,667 | £83,333 |
For example, if there are two, then the lower limit is £25k, and the upper limit is £125k. The end result is that you could end up paying more corporation tax than if the profits were all in one company.
For example, if you run two companies each making £80,000 profit, both could fall into the marginal relief band — meaning a higher effective tax rate than if the same profit sat in a single company.
It’s also worth noting that the lower and upper limits are apportioned for short accounting periods, i.e. those of less than one year.
In practice, HMRC looks at who ultimately controls each company – not just ownership, but voting rights and influence.
An Associated Company is one that is controlled by the same person or group of people, or by another company.
Simply put, this means that if you own another company or companies, these are Associated Companies. For example, if you own a property in a separate limited company or have another company for a different business strand.
The rules are designed to prevent business owners from splitting profits across multiple companies to benefit from lower Corporation Tax rates.
A challenge to accountancy software providers
The challenge is for software developers to implement these new rules, especially where the software provides tax estimates and automatically creates accounting entries for tax liabilities.
The complexity of the rules means that relying solely on software for Corporation Tax calculations can be risky.
The complexity of the rules from April 2023 put the preparation and filing of the Corporation Tax return back into the realms of accountants.
More information on the April CT changes
- Try our CT hike calculator.
- Our high-level guide to the April 2023 changes.
- An in-depth, technical explanation of the Associated Companies rules from the ACCA.
- A good technical read on the new rules can be found at RossMartin.co.uk.
- Official notes on Marginal Relief.
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