What is the associated companies rule for Corporation Tax in the UK?

Full answer

The associated companies rule prevents business owners from artificially splitting a company into multiple entities to keep each below the GBP 50,000 small profits rate threshold and benefit from the 19% Corporation Tax rate rather than the 25% main rate. CT rate structure from April 2023 -- GBP 0-50,000 profits: 19% small profits rate -- GBP 50,001-250,000: marginal relief applies (effective rate between 19% and 25%) -- Above GBP 250,000: 25% main rate Threshold division for associated companies The thresholds (GBP 50,000 lower limit and GBP 250,000 upper limit) are divided by the number of associated companies including the company itself: -- 1 company alone: limits GBP 50,000 / GBP 250,000 -- 2 associated companies: limits GBP 25,000 / GBP 125,000 per company -- 3 associated companies: limits GBP 16,667 / GBP 83,333 per company -- 5 associated companies: limits GBP 10,000 / GBP 50,000 per company Definition of associated companies (CTA 2010 s18E-18S) Two companies are associated if at any time in the accounting period: -- One company controls the other, or -- Both companies are under common control (same person or group of persons) Control is determined by shareholding, voting rights, rights to income/assets on winding up, or by contractual/practical ability to direct the company's affairs. Common ownership and family links For individuals, shares held by "associates" (close family members: spouse, parent, child, sibling) may be attributed together when determining common control. This means two companies owned separately by a husband and wife may still be associated if they have "substantial commercial interdependence" -- HMRC applies a three-limb test: financial, economic and organisational interdependence. Dormant company exclusion A dormant company (one with no significant accounting transactions in the period) is generally excluded from the associated company count -- providing some relief for group structures with holding companies or dormant subsidiaries. UK permanent establishments of overseas companies Overseas companies with UK permanent establishments are included in the associated companies count where they are under common control with a UK company. HMRC guidance: Statement of Practice SP 1/2011 provides detailed guidance on associated company rules (originally issued for pre-2023 rules but the principles remain largely applicable).

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