As announced by Rishi Sunak in his 2021 Spring Budget as Chancellor, the headline rate for companies is due to increase to 25% from 19% from April. Despite concerns from business leaders that this may impact growth, it is expected that the now Chancellor, Jeremy Hunt, will continue with planned rises.
The extent companies pay corporation tax, and when, will be dependent on the level of profits, as well as the number of its associated companies.
Corporation tax rates
From 1 April 2023, standalone companies with profits exceeding £250,000 will be subject the new main rate of corporation tax of 25%, whereas companies with profits below £50,000 will continue to pay tax at the rate of 19%.
Where a company’s profits fall between £50,000 and £250,000, they will pay the main rate tax (25%) on profits, which is then reduced by a marginal relief, resulting in a gradual increase in the effective corporation tax rate.
Companies with a financial year straddling 1 April 2023, will need to split the year into two separate accounting periods, allocating the profits between the two periods accordingly to determine the tax rates to apply. The annual limits will need to be reduced proportionately for accounting periods less than 12 months.
Associated companies
From 1 April 2023, the associated company rules will be reintroduced, replacing the ‘51% group company’ test, mirroring the rules previously in place before April 2015.
For the purpose of determining the rates of corporation tax, a company’s profits are to be divided by the number of associated companies, including the company itself.
Generally, a company is an ‘associated company’ of another at any time when:
- One of the two has control of the other; or
- Both are under common control by the same person or group of persons.
Companies that are owned by ‘associates’, such as immediate relatives and lineal descendants/ascendants (e.g. spouse/civil partner or parents/children), would only need to be considered where there is ‘substantial commercial interdependence’. This will be determined based on the financial, economic and organisation interdependence factors between the companies.
The number of associated companies include worldwide companies, but does not include dormant or passive holding companies.
Effectively, the change in definition will mean that a company will need to review not only the number of companies under control within a group, but also companies outside the group that are under common control by the same shareholder or group of shareholders.
Corporation tax payments
The number of associated companies will also be used to determine if a company falls within the Quarterly Instalment Payment (‘QIP’) regime.
Corporation tax is normally payable nine months and one day after the end of the relevant accounting period, however, where a company is large or very large they are required to pay their corporation tax liability in advance in four quarterly instalments, subject to a few exceptions.
A large company is one whose profits for the accounting period are more than £1.5 million but less than £20 million. A company is a very large company in an accounting period if its profits in the period exceed £20 million. The difference between large and very large company regime is mainly down to the timing of the instalments – very large companies are required to pay their first instalment earlier than those for large companies.
From 1 April 2023, a company will need to divide the limits by the number of associated companies, including itself, when determining whether a company is large or very large for QIP purposes. This could result in more companies finding themselves within the QIP regime.
It will be important to review the number of associated companies to understand the potential impact this may have on the company’s corporation tax rate and to determine if your company falls within the quarterly instalment payment regime, which may have an impact on the cash flow of the business.
Certainly, consideration will need to be given by shareholders who have common control of more than one company and/or group of companies, to understand the impact this has for corporate taxes and reflect on possibilities to reduce the overall number of associated companies.