With the Corporation Tax hike only a few months away, if you have more than one limited company, you need to be aware of new ‘Associated Companies’ rules, which make things even more complicated.
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 take 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 new Associated Companies rules
From April, as part of the Marginal Relief calculation, we also have to consider Associated Companies as this will change the lower (£50k) and upper (£250k) limits used in the new tax calculation.
The limits are apportioned according to the number of Associated Companies.
For example, if there are two then the lower limit is £25k and the upper £125k. The end result is that you could end up paying more corporation tax than if the profits were all in one 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.
An Associated Company is one that is controlled by the same person or group of people or under the control of 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.
A challenge to accountancy software providers
The challenge is for software developers to code in these new rules, especially where tax estimates are given in the software and accounting entries are automatically created for tax liabilities.
Somehow I think the ambitions of software companies to allow the end user to file their own Corporation Tax return may now be a step too far.
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.