From 1 April 2015, the rules for identifying which companies are “associated” for corporation tax purposes will be simplified.
The current tax regime means that if a company’s profits are more than £1,500,000 it will pay corporation tax at 21%, but if its profits are less than £300,000, it only pays tax at 20%. If the profits are between these two limits, what is known as a marginal relief applies. When companies are “associated”, the two profit limits have to be divided by the number of associated companies.
Under the new rules the small company profit rate of corporation tax will be abolished so most companies will pay tax at 20%, and issue of “associated companies” no longer applies. It is still relevant, however, when calculating whether a company’s profits are large enough to mean that it has to pay corporation tax by instalments. This occurs when a company’s profits exceed certain limits, at which point it will be required to pay corporation tax in four equal instalments, every quarter starting half way through the accounting period. If profits are not large enough, the tax is paid in one lump sum nine months after the end of the accounting period. To calculate whether a company is required to pay in instalments, the company’s profits limits are divided by the number of associated companies. From 1 April 2015 companies will be associated only if they are members of a “51% group” to make it simpler.
With effect from 1 April 2015 companies will be “associated” only if they are members of a group owned by a company. So if a company directly owns 25% of the shares in a number of other companies, those companies would not be “associated” and company’s profits would be looked at separately when determining whether or not it had to pay corporation tax by instalments. But, if that company owned at least 51% of the share capital of, say, four subsidiaries, the five companies would be “associated.” The profits limit would be divided by five in determining whether each company is liable to pay corporation tax by instalments.
The new rules will simplify which companies need to pay by instalments, so if you own several companies, now is a good time to look at the structure of those businesses within a group to ascertain if it is structured in the most operationally and tax efficient way.