Navigating the New Corporate Tax Landscape: Associated Companies from April 2023

As of 01 April 2023, the landscape for corporate taxation in the UK has undergone a significant shift, with the return of some old rules on associated companies.

This change in legislation, combined with the increase in the main rate of corporation tax (25%, up from 19%), creates new risk and opportunity around how businesses are structured and the management of their tax liabilities. The risk will be of particular concern to businesses with multiple stand-alone companies or multiple groups, as well as to non-resident landlord companies, who could see the amount of tax and the frequency of tax payments increase unless further planning is undertaken.

So, what are the implications of the changes and why should businesses consider changing their group structures in response?

Understanding Associated Companies

Firstly, let’s demystify the term ‘associated companies’. Broadly speaking, companies are considered associated with each other if one company controls the other, or if both companies are controlled by the same person(s). This control factor, while broad in its scope, is crucial in determining the tax implications for businesses.

The associated companies rules are broader in scope than the prior ‘51% related companies’ rules - which, generally only linked companies in a group – whereas the new rules can link companies in separate groups with common owners.

How Associated Companies Affects Tax

The rate of tax that a company pays is directly linked to its augmented profits. Augmented profits encompass taxable total profits along with certain distribution income. Critically, the corporation tax rate varies based on the level of augmented profits and the thresholds set at £50,000 (the lower limit) and £250,000 (the upper limit). This means that from 1 April 2023:

1. Augmented profits of £50,000 or less are subject to a rate of 19%, known as the ‘small profits rate.’
2. Augmented profits ranging from £50,001 to £250,000 incur a 25% rate, with ‘marginal relief’ available.
3. Augmented profits exceeding £250,000 are taxed at the ‘main rate’ of 25%.

However, when a company has associated companies, these profit thresholds are divided by the number of associated companies. So, if a company has five associates, the thresholds are divided by six. This division affects not only the tax rates but also factors into any calculations for marginal relief. Therefore, it can significantly alter a company or group’s tax liability.

The number of associated companies will also impact the thresholds that are relevant for determining Quarterly Instalment Payments, so there is also a potential cash-flow impact in the change of rules.

Prior to 1 April 2023, if an in individual controlled two groups, each consisting of three companies, then each group might only have divided the relevant thresholds by three. This created some tax opportunities, which some businesses would have structured themselves around, that the new rules may eliminate.

Non-resident landlord companies should also be alert to the fact that they are unable to claim marginal relief. This means that they should expect to pay 25% on all profits and, in some cases, it may be prudent consider whether the business structure is still viable given the significant increase in the rate of UK corporation tax.

What is the solution?

Now, let’s connect the dots between associated companies and why it might be wise to simplify existing business structures:

1. Reduced tax liability: By consolidating entities or simplifying group structures, you can reduce the number of associates companies and may find yourself positioned in a lower tax bracket. This can directly translate into reduced tax liability, allowing you to retain more of your profits.
2. Simplified compliance: Multiple entities mean multiple layers of administrative complexity. Considering the impact of the associated companies rules is only one factor. Streamlining reduces the burden of compliance, freeing up resources for other endeavours.
3. Eliminating redundant costs: Each entity carries its own set of expenses, from accounting fees to legal costs. Eliminating superfluous entities can help limit expenditure, bolstering results and available cash.
4. Access to tax benefits: Some tax credits, allowances and incentives are tied to specific group structures and might be optimised through a simplified group structure.
5. Efficient planning: A simpler structure can facilitate more efficient tax planning and can be more attractive to outside investors or key management/employees looking to take equity in the business.

Should you restructure?

For many Owner-Managed Businesses (OMBs), the shift from the 51% related companies rule to the associated companies rule is a pivotal moment. If your existing corporate structure was tailored to the now-defunct 51% rule, or if your structure has not been reviewed since the change to associated companies rules were announced, or if you are a non-resident landlord company, then (re) assessment is likely to be advisable.

Affected OMBs may wish to think about completing:

• An impact assessment - to examine the ownership structure of your group to identify associated companies and thus the expected tax thresholds for determining the rate and timing of tax payments.
• A legal structure check - to evaluate legal structures. Do they still align with immediate business objectives? For non-resident landlords, is it still commercially necessary to be situated offshore?
• A review of long-term objectives – to agree the long-term business goals and shareholder objectives and consider whether the current setup supports these plans.
• A tax efficiency evaluation – to pull the above together and assess whether there are opportunities for tax savings. Collaboration with suitably qualified and experienced professionals at each step is vital to ensure that the risks and opportunities are managed.