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Where will exemptions apply for associated companies under the forthcoming corporation tax changes?
From 1 April 2023 companies with taxable profits over £250,000 will pay corporation tax at the main rate of 25%. Companies with taxable profit of £50,000 or less will be subject to corporation tax at the rate of 19% and companies with profit levels between £50,000 and £250,000 will pay tax at 25%, reduced by marginal relief.
Broadly, a company is associated with another company if at any time within the preceding 12 months one company has control of the other or if both are under the control of the same company or person or persons.
Finance Act 2021 Schedule 1 paragraph 18 provides the following exemptions:
- A company will not be treated as an associate of another if it is a passive holding company (broadly where a company only receives dividends from its subsidiaries and pays these to its shareholders, and the company receives no other income or expenses.)
- Where businesses are owned by associates of that person (or persons), if the relationship between one or more companies is not one of substantial commercial interdependence, they will not be deemed as associated. The following factors should be taken into account in determining whether a relationship between two companies amounts to substantial commercial interdependence:
Two companies are financially interdependent if one gives financial support (directly or indirectly) to the other, or each has a financial interest in the affairs of the same business.
Two companies are economically interdependent if the companies seek to realise the same economic objective, the activities of one benefit the other, or the companies have common customers.
Two companies are organisationally interdependent if (in particular) the businesses of the companies have or use common management, common employees, common premises or common equipment.
- Fixed-rate preference shares held by a company are ignored in determining if one company is under the control of another if the company holding the shares is not a close company, takes no part in the management or conduct of the issuing company or of its business, and subscribed for the shares in the ordinary course of a business which includes the provision of finance.
- A company is not under the control of another company if the only connection (past or present) between the two is that one company is a loan creditor of the other and either the creditor company is not a close company or the creditor relationship arose in the ordinary course of the company’s business.
- Where two companies are controlled by the same person by virtue of rights or powers held in trust by that person, those rights or powers are ignored in determining whether the two companies are associated.
Useful HMRC Company Taxation Manuals
CTM03570 provides a definition of associated companies.
Control is defined under several headings:
- Control over the affairs of the company (CTM60220)
- Control right to receive most assets (CTM60230)
- Control rights in a winding-up (CTM60320)
- Control over income of the company (see (3) of CTM60220).
Guidance on specific exemption can be found CTM60105.