From 1st April 2023, the number of companies that your company is associated to will increase the risk that not only will those companies have to pay a higher rate of tax on their profits, but that this tax may have to be paid more regularly and far sooner.
Changes in corporation tax rates:
Until 31st March 2023, the corporation tax rate in the UK was 19%.
From 1st April 2023, for accounting periods beginning on or after 1st April 2023, the applicable tax rate depends on the level of profits:
- Profit up to £50,000 (the lower limit) – 19% (known as the small profits rate)
- Profits between £50,000 and £250,000 – the company pays a blended rate between 19% and 25%
- Profit greater than £250,000 (the upper limit) – 25% (known as the main rate)
On the face of it, this simply means that more profitable companies pay tax at a higher rate. However, there is a sting in the tail – the lower and upper limits are reduced by the number of associated companies by dividing the limit by the number of associated companies plus one.
So, for example, if your company had profits of £50,000 and has 5 associated companies, your company would go from paying tax at 19% on those profits to tax of 25%, because the upper threshold is reduced to £41,667 i.e. £250,000 divided by six (five plus one). It is therefore important to establish whether your company has an associated company and, if it does, how many.
It is also worth saying that the thresholds are adjusted by the length of the accounting period – a shorter period will reduce the thresholds.
What is an associated company?
A company is an associated company if:
- Two companies are controlled by the same person; or
- One company controls another
Control is very widely defined and often requires detailed analysis to identify if any companies are associated with another. Moreover, a company can be an associated company, no matter where it is resident, and so if you are linked to an overseas company, this will apply.
There are of course exceptions to what counts as an associated company. These include:
- Dormant companies; and
- Holding companies that simply act as a pass through for dividends and do nothing else
We have included a case study here to explain the wider reach of the rules and to demonstrate how an associated company applies in the ‘real world’
A family runs a property business where the father, mother and daughter hold between them in equal shares 100% of the shares in three separate companies (each hold a third). Historically, each company’s profits have been around £100,000 per year. Pre-April 2023, this meant that they paid tax at 19%.
However, from 1st April 2023, the new rules mean that each company will pay 25% on their profits. This is because all three companies are associated with one another which means that the upper threshold is reduced from £250,000 to £83,333.
You may ask ‘how can this be?’, as each company is only one third. And if this wasn’t bad enough, there is also a knock-on effect which may mean that your company pays tax sooner and much more often.
Associated companies are now more likely to fall into the quarterly instalment payments regime
Under the new rules, a company is much more likely to fall under the quarterly instalments payments (QIPs) regime, as the thresholds are reduced in the same way as they are for working out the rate of tax that the company pays.
Most companies pay corporation tax once a year, 9 months and 1 after the year end. However, where a company is large, or very large, they must pay their taxes in quarterly instalments on set dates. The dates are based on the year end and follow the following pattern:
- 6 months and 13 days after the first day of the year end
- 3 months after that
- 3 months later
- 3 months and 14 days after the end of the accounting period
(Please note that these dates are adjusted by the length of the accounting period).
A very large company pays tax earlier. Broadly speaking all the dates are four months earlier than they are with large companies with the final instalment not getting the 14 days extra.
- A ‘large’ company is a company that has profits of more than £1.5million but less than £20million per annum
- A ‘very large’ company is a company that has profits of more than £20million per annum
As always, late payments will attract interest and potential penalties.
If we take the example above but increase the profits of each company to say £1million, then you can easily see how these new rules will mean that they will have to pay tax sooner.
What does this mean?
Under the new rules, more companies will be required to pay tax at a higher rate and earlier. This will impose more strain on cash flow management as well as requiring businesses to compile more accurate projections of profitability to avoid heavy interest charges on underpayments of tax.
What next?
If you would like to how these rules will impact you and how to mitigate them, please contact Thomas Adcock.
