Most smaller companies pay corporation tax on their profits at the “Small companies rate” – presently 20%. However if profits exceed £300,000 the average rate of corporation tax payable gradually increases, until at profits of £1,500,000 and above all profits are taxable at the main rate of corporation tax, 30%.
Enterprising entrepreneurs might be tempted to make the most of the small companies rate, and transfer certain parts of their businesses to separate companies. If each separate company made profits of £300,000 or under, the possible tax saving could be significant – a reduction in tax payable from 30% of “grouped” profits, to 20%.
Not surprisingly the Revenue saw that strategy coming, hence the Associated Company rules.
Basically if two, on the face of it, separate companies are owned or controlled by persons who the tax man considers to be “Associated” then the amount of profits that each company can earn at the small companies rate (20%) is reduced pro rata. For example if two companies are judged to be associated in this way each company can earn up to £150,000 at the 20% rate. (£300,000 divided by the number of associated companies, in our example 2.)
It is easy to see that companies may be associated if they are both owned and controlled by the same person(s). Unfortunately the Revenue will also associate companies owned by the following groups as well.
1. Husband, wife, or civil partners, including separated but not divorced couples.
2. Parents, grandparents and more remote forebears.
3. Children or grandchildren or remoter issue.
4. Brothers or sisters, including half siblings but not step.
5. Business partners.
6. Certain trustees or personal representatives.
7. Certain beneficiaries of a settlement, or estate.
It is beyond the scope of this article to describe in detail the interesting possibilities that these associated groups can produce. For example spouses of business partners can be taken into account. To add to the mix the Revenue have also granted a concessionary treatment in the case of certain related persons, whose separate business interests have no “substantial commercial trading interdependence”.(This concession does not extend to husbands, wives and minor children.)
So beware. If a husband and wife each own totally independent businesses, they will be associated under these rules. Consequently each company can only earn up to £150,000 at the 20% corporation tax rate. Substitute any of the other 7 categories listed above and potentially large numbers of companies may be associated. If 6 companies are associated each can only earn up to £50,000 at the 20% rate.
If you are concerned that you may be caught by these rules, please call to discuss. This is a complex area of taxation, with its own unique “grey” areas.