26 Sep 2023

Return of the associated company: corporation tax rules

Insights, Publications

You may not have heard of Toby Guzzle, but he was the first recorded user of a phrase that you will have heard. A character in the 1716 play The Cobbler of Preston, he said: “’tis impossible to be sure of any thing but Death and Taxes”. Three centuries later, quite possibly we should be adding a third certainty: the reintroduction of old tax legislation.

Those with experience on their side may remember the relatively complex old associated companies rules, included within the Corporation Tax Act 2010 (CTA10). These rules were previously repealed and replaced with a more simplified set of rules known as the ‘related 51% group companies’ rules.

Given the reintroduction of marginal relief for corporation tax, from 1 April 2023, the Government repealed the related 51% companies rules and brought back the associated companies rules.

How the rules work

Where a company’s accounting period spans 1 April 2023, the period is notionally split into two periods:

  1. A first period ending on 31 March 2023, where the related 51% group companies rules are applied;
  2. A second period commending on 1 April 2023 where the new associated company rules are applied.

As a reminder for some, and an introduction for others, the two companies being associated can impact on a company’s ability to claim marginal relief and also whether or not corporation tax payments need to be made under the quarterly instalment payments regime (known as QIPs). The threshold amounts (i.e. marginal relief limits and QIP thresholds) are divided by the number of associated companies.

Two companies are defined as being associated if either:

  • one company is under the control or another; or
  • both are under the control of the same person or persons (CTA10 s25).

The tax residency and place of incorporation of each of these companies is not relevant here.

Detailed definitions

At this point, it’s helpful to refer to the legislation to understand the definition of ‘control’ and then ‘associate’.

Control (CTA10 s450 & s451)

A person (P) is treated as having control of a company (C) if P:

a)      exercises;
b)      is able to exercise; or
c)       is entitled to acquire, direct or indirect control over C’s affairs.

There may also be rights attributed to a person:

a)      of any company of which the person has, or the person and associates of the person have, control;
b)      of any two or more companies within (a);
c)       of any associate of the person; or,
d)      of any two or more associates of the person.

Associate (CTA10 s448)

A person’s (P’s) associates are:

a)      P’s relatives (husband, wife, or civil partner; parents and remoter forebears; P’s children and remoter issue; P’s siblings);
b)      P’s partners in any partnership;
c)       The trustees of a trust P is ‘involved with’ (P or a relative of P [living or dead] is a settlor of the settlement or P is a beneficiary of the settlement); and
d)      The personal representatives of a deceased person (where P has an interest in the estate).

It is worth noting that:

  • Control may also be exercised by a loan creditor of the company (someone who has lent funds to the company);
  • Two or more companies are associated for an accounting period even if they were associated for a single day in that accounting period; and,
  • If one company has not carried out a trade or activity during the accounting period, then it can be ignored for the associated company rules.

Substantially commercially interdependent companies

Given the above, it would be reasonable to conclude that companies which are associated by virtue of being wholly owned by relatives would be associated, due to being within the definition of an associate in CTA10 s448. However (as specified in CTA10 s18G), that only applies so long as the companies are substantially commercially interdependent (SCI).

Whether or not two companies are SCI depends on three areas, outlined within the employment allowance legislation (para 3, Sch 1, National Insurance Contributions Act 2014):

  1. Financially interdependent – direct or indirect financial support (i.e. loans) between the companies; or a direct or indirect financial interest in the other company’s activities.
  2. Economically interdependent – the companies seek to realise the same economic objective, have common customers or the activities of one company benefit the other.
  3. Organisationally interdependent – both businesses have common management, employees, premises and/or equipment.

In addition, where an associated company is dormant (i.e. no activity occurs in the company) or is a passive holding company (i.e. the company has no activity other than receiving and distributing dividends), then this company would be ignored for the purpose of the associated company rules.

Next steps

If HMRC finds that tax has been underpaid under marginal relief, or paid late under QIPs, as a result of not enough associated companies being taken into account, it is likely that either penalties and/or interest will be charged. If HMRC discovers the relationship in a future year and looks back to prior returns, then the amount of interest arising could be quite high given that the interest rate currently stands at 7.75% p.a.

Given the complexity and nuances of the associated company rules, we would recommend that companies seek professional advice if they believe that there is any risk of a company having associated companies.

For more information about how our business tax specialists can help you, please get in touch with your usual BKL contact or use our enquiry form.