Corporation tax has gone through significant changes in recent years, particularly for businesses with Associated Companies who have found the process of tax management become notably more difficult. The impact of new Associated Companies rules on corporation tax will be outlined in the following breakdown, courtesy of Williamson and Croft.
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New Associated Companies Rules
In April 2023, changes were made to group company rules. The ‘related 51% group company’ rules (which were used by companies under common control to decide shared corporation tax thresholds) were rescinded and replaced by the Associated Companies Rules.
As defined by HMRC, “A company is an ‘associated company’ of another company if one of the two has control of the other, or both are under the control of the same person or persons”. Control can include having significant influence over another company including having a say in the control of their:
- Voting.
- Share Capital.
- Income.
- Assets.
Corporation tax changes
In April 2023, the UK changed its policy on corporation tax rates. Key points included:
- A corporation tax rate increase to 25% for companies with profits of over £250,000
- ‘Marginal Relief’ became available for businesses with profits between £50,000 and £250,000.
- A 19% tax rate remained for companies with profits of less than £50,000.
- A new calculation for deciding a company’s tax liability was introduced – F x (U-A) x (N/A).
- In this sum F = The standard marginal relief fraction (3/200)
- U = The upper limit
- A = Augmented Profits
- N = Taxable Total Profits
The Impact of Associated Companies Rules on Corporation Tax
These changes meant an increase in administrative work needed to ensure compliance with recent legislation. No longer can businesses apply a percentage to profits to work out tax liabilities, with the formula (F x (U-A) x (N/A)) having to be used instead. These updates mean that extra due diligence and planning when working out taxes is critical.
The potential downside of this for businesses is that they now have to share tax thresholds, subsequently paying a higher tax rate in the process. In addition, a new influx of business types is affected by these changes, including relevant investment businesses and family-owned companies that will need to change their approach to taxation.
Calculation example
To outline this calculation a little clearer, let’s run through an example. A pharmaceutical company earns augmented profits of £300,000 and taxable profits of £270,000.
Step 1: Apply the calculation. Referring to the calculation (F x (U-A) x (N/A)) and the breakdown outlined above, this would appear as follows:
3200 x (250,000-300,000) x 270,000300,000
Step 2: Break down each section to easily calculate.
- (U-A) 250,000 – 300,000 = -50,000.
- Multiply -50,000 by 0.015 (equal to 3/200) = -750
Step 3: Multiply by (N/A)
- First work out (N/A) – 270,000/300,000 = 0.9
- Next, multiply -750 by (N/A = 0.9) = -675
Step 4: This pharmaceutical company pays Corporation Tax with a marginal relief of £675.
Why were these changes implemented?
Under these new rules, more businesses, including family-owned groups are affected by group company rules. This change helps to prevent tax avoidance practices since companies could previously split their businesses into separate entities in order to avoid paying higher rates of tax.
Need some guidance?
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