Associated companies and corporation tax

Two companies are associated if one controls the other, or both are controlled by the same person or group of people, at any time in the accounting period. Control broadly means owning or being entitled to more than half of the shares, votes, income or assets, as defined in sections 450 and 451 of the Corporation Tax Act 2010. Associated companies share the corporation tax limits between them, so a group of companies can't each claim the full £50,000 small profits band.

Both limits are divided by the number of associated companies plus one. A company with one associated company has limits of £25,000 and £125,000; with two, £16,667 and £83,333; with three, £12,500 and £62,500. Each company applies its own reduced limits to its own profits. The division is equal, whatever each company earns, so a loss-making start-up still takes a full share of the limits away from its profitable sister company.

Usually, yes. A holding company controls its subsidiary, so they are associated, and both limits for each company are halved to £25,000 and £125,000. The exception is a passive holding company under section 18F of the Corporation Tax Act 2010, which is treated as not carrying on a business and so is ignored. That only works where the holding company owns nothing but its subsidiaries' shares and simply passes dividends straight through to its shareholders.

It's a holding company that does nothing except own shares in its 51% subsidiaries and pass their dividends on. Throughout the accounting period it must carry on no trade, own no assets other than shares in its 51% subsidiaries, have no income other than exempt dividends, pay out at least as much in dividends as it receives in the period, make no chargeable gains, have no management expenses and make no charitable donations. If all of that is true, it doesn't count as an associated company.

Only dividend money waiting to be paid on. A passive holding company must have no assets other than shares in its 51% subsidiaries, but the law ignores a dividend it has received, and any asset representing it, where that dividend is passed on to its shareholders in the same period. So a bank account that simply receives a subsidiary's dividend and pays it out to shareholders is fine. Keeping surplus cash, a deposit or a loan to a subsidiary means it is no longer passive.

It can. One of the section 18F conditions is that no expenses of managing the holding company's investment business are referable to the period. Accountancy, filing and professional fees incurred by the holding company itself are likely to be management expenses, so paying them can make it an associated company for the whole year. Many groups arrange for the costs to be met elsewhere, but the arrangement needs to be genuine, and it's worth checking with your adviser before the year end.

Yes, at least the same amount. The redistribution condition in section 18F requires the holding company to pay dividends to its own shareholders in the accounting period totalling at least the dividends it received in that period. If a subsidiary pays £100,000 up to the holding company and only £60,000 goes on to the shareholders before the year end, the condition fails, and the holding company counts as an associated company for that year. Timing of dividends near the year end needs care.

No, provided it carried on no trade or business at any time in the accounting period, or in the part of the period when it was associated. A truly dormant company with no activity is ignored. A company that holds investments, lets a property or earns interest is likely to be carrying on a business, even if it seems inactive, and so counts. A non-passive holding company is usually treated as carrying on a business of holding investments.

Yes. A company is associated for an accounting period if it was associated for any part of it, so a company acquired, or set up and trading, two months before the year end reduces the limits for the whole 12 months. The same applies to a company that leaves the group part way through. The only exception is a company that carried on no trade or business at all during the part of the period when it was associated.

Not automatically. Since April 2023, the shares of relatives and business partners are only counted as yours for this purpose if there is substantial commercial interdependence between the companies, looking at financial, economic and organisational links. A spouse's unrelated business, run separately, is normally not associated with yours. If the companies share customers, staff, premises or funding, they may be. Shares you hold yourself always count, wherever the other shareholders are.

Yes. A company can be an associated company wherever it is resident, so an overseas subsidiary, or an overseas company owned by the same shareholders, reduces the UK company's limits just like a UK company would, provided it carries on a trade or business. It's easy to overlook when the overseas company files no UK returns, so groups with international interests should list every company under common control, not just the UK ones, when working out their corporation tax.

At most £1,875 a year for each company affected. For a company with profits between £50,000 and £125,000, halving the limits always costs exactly £1,875, because marginal relief falls by 3/200 of the £125,000 reduction in the upper limit. The cost tapers to nothing at profits of £25,000 and at £250,000. A company with profits above £250,000 pays 25% either way, so it isn't affected at all, which is why the rule mainly matters for smaller groups.

Each extra pound of profit between the limits is taxed at an effective 26.5%. That's the 25% main rate plus 1.5% from the marginal relief withdrawn as profits rise, because the relief is 3/200 of the gap between profits and the upper limit. On profits of £100,000, for example, a company with no associated companies pays £22,750, an average of 22.75%. Associated companies lower the band, so that 26.5% slice starts and ends at lower profits.

No. The holding company's rate is based on its augmented profits, which are its taxable profits plus certain exempt dividends, but dividends from its own 51% subsidiaries, or from a company in the same 51% group, are left out. So a holding company receiving £500,000 of dividends from its trading subsidiary still has its small taxable profits taxed at 19% if they are within its limits. Dividends from a minority stake, though, are added to augmented profits.

Not on that holding alone, because 40% isn't control. It becomes associated if you control it some other way, for example through a casting vote, rights to acquire more shares, or by adding shares held by a company you control. It is also associated if the same group of people who control your company together control it too. Where a relative or business partner holds the rest, their shares count only if there is substantial commercial interdependence between the companies.

Yes. For accounting periods beginning on or after 1 April 2023, the £1.5 million profits threshold for paying corporation tax in quarterly instalments is divided by the number of associated companies plus one. A group of a holding company and two subsidiaries could therefore find a company paying instalments once its profits pass £500,000. There is a first-year exception: a company that wasn't large in the previous 12 months needn't pay by instalments, unless its profits exceed £10 million, a figure that is divided in the same way.

Both limits are reduced in proportion to the length of the period, and then divided between associated companies. A six-month accounting period, with one associated company, has limits of £12,500 and £62,500. This often arises when a new subsidiary is formed or a year end is changed to line up with the rest of the group. The associated company count still applies to the short period, based on whoever was associated at any time during it.

Rarely, and it shouldn't be the reason. If you still control both companies, nothing changes. Shares held by relatives are ignored only where there's no substantial commercial interdependence between the companies, and a real gift of control has wider consequences, including capital gains tax on the gift, inheritance tax and loss of control. With the cost of an associated company capped at £1,875 a year per company, restructuring ownership to save it rarely makes sense.

No. A passive holding company can't own any assets other than shares in its 51% subsidiaries, or have any income other than dividends, so property let to the trading company fails two conditions at once. The holding company then counts as an associated company and both companies' limits are halved. For many groups that's a price worth paying for keeping property away from the trading company, but it should be part of the decision about where the property sits.

Only if the holding company has no other job to do. The saving is at most £1,875 a year for each subsidiary with profits between £25,000 and £250,000, and nothing where profits are above £250,000. A holding company kept passive can't hold surplus cash, own property, lend to the group or charge for services, which are often the reasons for having one. For a group protecting significant cash, the associated company cost is usually small by comparison.