From 1 April 2023, the definition of an associated company widened significantly. As a result, many businesses that were previously treated as standalone are now associated for Corporation Tax purposes, even where they are not part of the same accounting group.
Where companies are associated, profit thresholds are divided by the number of associated companies, including the company itself. This can reduce thresholds substantially and bring companies into the Quarterly Instalment Payments regime much earlier than expected.
Under the Quarterly Instalment Payments regime, Corporation Tax needs to be estimated and paid during the accounting period itself, rather than nine months and one day after the year end. If this is only identified as part of the normal year end compliance process, instalments may already be overdue.
What Is an Associated Company?
Companies are associated where one company controls another, or where both are under the control of the same person or persons.
For these purposes, a “person” can be an individual, a group of individuals, or another company. Control is widely defined and includes voting rights, share capital, rights to income and rights to assets on a winding up. Companies owned by relatives may also be treated as associated.
The rules apply worldwide. Non-UK companies can create association, and businesses do not need to be in the same accounting group to be associated for Corporation Tax purposes.
Why This Matters
Corporation Tax thresholds are divided by the total number of associated companies.
This affects the £50,000 and £250,000 marginal rate limits, the £1.5 million large company threshold, the £20 million very large company threshold and the timing of Corporation Tax payments.
For example, if six companies are under common ownership, the £1.5 million large company threshold becomes £250,000 per company. Companies that were previously outside the regime may now be treated as large and required to pay tax by instalments.
Large companies pay Corporation Tax in four instalments starting in month 7 of the accounting period. Very large companies begin payments in month 3.
Company becoming large under new rules
Wife (W) and Husband (H) own A Ltd, B Ltd, C Ltd, and D Ltd (through two separate corporate groups), as illustrated below:
Under the old rules (up to 31 March 2023)
• A Ltd and B Ltd are associated with each other (2 associates)
• C Ltd and D Ltd are associated with each other (2 associates)
• Large Company QIPs threshold for each company is £750k (i.e. £1.5m / 2 associates).
• None of the companies’ taxable profits exceed £750k, so they were not within QIPs regime.
Under the new rules (from 1 April 2023)
• A Ltd, B Ltd, C Ltd, and D Ltd all associated with one another (4 associates)
• This is because Wife and Husband control all the companies, (even though there are two ‘corporate groups’).
• Large Company QIPs threshold for each company is £375k (i.e. £1.5m / 4 associates).
• All the companies’ taxable profits exceed £375k, so they will enter the QIPs regime.
The four companies would however be subject to a grace period of a year as it would be the first accounting period in which these companies are large. In the subsequent financial year, the company would be expected to pay their corporation tax in quarterly instalments.
Example – Large Company – Year 1
Scenario
- Accounting period: 1 April 2023 – 31 March 2024
- In the prior accounting period, the company had no associated companies.
- In the current accounting period, the company has six associated companies (including itself).
- Taxable profits: £400,000
- Corporation Tax rate: 25%
Threshold calculation
As the company now has five associated companies, the large company threshold is divided by six (being 5 + 1), reducing the £1.5 million threshold to £250,000.
As taxable profits of £400,000 exceed £250,000, the company is treated as a large company for Corporation Tax purposes. However, as this is the first accounting period in which the company is large, this is a grace year and the Quarterly Instalment Payment regime does not apply, so the normal due date continues to apply.
Accordingly, Corporation Tax of £100,000 (£400,000 × 25%) is payable on 1 January 2025, being nine months and one day after the 31 March 2024 year end.
Example – Large Company – Year 2
Scenario
- The above scenario remains the same, but this is the next accounting period: 1 April 2024 – 31 March 2025
As the company continues to have five associated companies, the large company threshold remains reduced to £250,000 (£1.5 million divided by six), and as taxable profits of £400,000 exceed this threshold, the company remains a large company for Corporation Tax purposes.
This is not a grace year, and therefore the Quarterly Instalment Payment regime applies, meaning the total Corporation Tax liability of £100,000 is payable in four equal instalments of £25,000 due on 14 October 2024, 14 January 2025, 14 April 2025 and 14 July 2025.
Therefore, two payments must be made before the end of the accounting period, with the remaining two due after 31 March 2025.
