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TAXguide 02/23: Associated companies

Technical release

Published: 05 May 2023 Update History

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The reintroduction of two rates of corporation tax from 1 April 2023 means that the associated company rules now apply. This TAXguide provides a high-level guide to the associated company rules.


On 1 April 2023, the main rate of corporation tax (CT) increased to 25%, but certain companies with smaller profits continue to pay only at 19%. 

Under the new rules the small profits rate of 19% will apply if a company’s relevant profits (referred to as its ‘augmented profits’) are below £50,000. The main rate of 25% will apply if those profits are over £250,000. Companies with profits between these limits will be subject to marginal relief and will pay an effective CT rate of somewhere between 19% and 25%. HMRC’s manuals at CTM03900 onwards explain this computation in more detail.

Where a company has one or more ‘associated companies’, the relevant thresholds for applying the main rate are divided by the number of non-dormant associated companies, plus one, effectively splitting the potential benefit between them. For example, if a company has one associated company, the £50,000 and £250,0000 profits limits are halved.

The number of associated companies is also relevant when ascertaining the deadline for the payment of CT. ‘Large’ companies are those companies with annual profits chargeable to corporation tax in excess of £1.5m but that do not exceed £20m. ’Very large’ companies are those with profits of more than £20m. Both large and very large companies must pay their CT by quarterly instalments electronically. However, the £1.5m and £20m thresholds are divided by the number of associated companies to decide whether a company is large or very large.  It should be noted that the "de minimis" threshold of £10,000 tax below which instalments are not required does not reduce by reference to the number of associated companies.

It is therefore important to understand which companies are associated as this can have a significant impact on the CT rate, the quantum of tax due and when this is payable. 
This TAXguide covers:

  • The definition of an associated company
  • Determining control
  • Attribution of rights and powers
  • Substantial commercial interdependence
  • The legislation

Please note that this guide provides a high-level introduction to the associated company rules; it does not provide complete commentary on this complex area. The application of the rules will turn on the facts of each case.

The definition of an associated company

A company is an associated company of another company if one has control of the other, or both are under the control of the same person or persons. (s18E(4), Corporation Tax Act 2010 (CTA 2010))

An associated company is counted even if it is only an associate for part of an accounting period. A company’s tax residence is irrelevant – it may be an associated company no matter where it is resident in the world.

However, an associated company that has not carried on any trade or business at any time during the accounting period is disregarded (see also HMRC’s manuals concerning the extension of this exclusion to certain non-trading companies carrying on a business of making investments at CTM03945).

Determining control

‘Control’ for the purpose of the associated company rules  generally shares the same definition as the rules for close companies (see s450 and s451, CTA 2010). 

A person is treated as having control a of a company if they:

  • exercise direct or indirect control over the company’s affairs;
  • are able to exercise direct or indirect control over the company’s affairs;
  • or are entitled to exercise direct or indirect control over the company’s affairs.

Case law indicates that control has a wide meaning here, similar to its ordinary interpretation, but control is at the participator or general meeting level, not at the administrative or board level.

The legislation also states that a person will be regarded as having control of a company if they possess or are entitled to acquire:

  • the greater part of the voting power in the company;
  • the greater part of the share capital or issued share capital of the company; 
  • the greater part of the income where distributions are made to participators, or
  • the greater part of the assets which would be available for distribution among participators on any winding up.

Ordinarily it is possible to identify control by reference to the share capital and voting powers of the company. It is important to review an up-to-date copy of the company’s memorandum and articles of association. An obvious example is a 51% subsidiary, which will be associated with both its parent company and any other 51% subsidiaries of the same parent company. 

HMRC’s manuals contain further guidance on the meaning of control at CTM60220.

It is possible for more than one person (or group of persons) to have control of a company at the same time (see CTM03941).

The close company rules are subject to the following special rules for associated companies:

  • attribution to persons of rights and powers (see below);
  • fixed-rate preference shares (see CTM03942);
  • loan creditors (see CTM03943); and
  • trustees (see CTM03944).

Attribution of rights and powers

When considering how much control a person has, you may also need to also consider their associates and whether their rights need to be attributed. For example, the shares of a husband and wife could be accumulated to consider if they had control (over 50%) – the assumption being that together they could influence the affairs of the company.

A person’s associates include the following:

  • relatives (spouse; civil partner; parents; grandparents; children; grandchildren; siblings; other liner ancestors or descendants (eg, great grandparents, great grandchildren, but not aunties or cousins));
  • partners in any partnership where they are also a member (this includes a general partnership, Limited Partnership, Scottish Limited Partnership or Limited Liability Partnership);
  • the trustees of a settlement where the person is the settlor; their ‘relative’ is (or was) the settlor; or the person is a beneficiary;
  • the personal representatives of a deceased person (where the person has an interest in shares or obligations of a company which are part of the estate of the deceased person).

However, the attribution of rights held by associates of participators only applies where there is substantial commercial interdependence between the two companies concerned. See below for more detail on this point.

Where there is no substantial commercial interdependence, the only rights attributed to the person are those of:

  • their nominees; and
  • any companies which the person controls or the person and their associates control together.

See CTM03948 and CTM03949. HMRC’s manuals at CTM60150 onwards contain more detail on associates whose interests in the company may need to be amalgamated.

Substantial commercial interdependence

The purpose of this rule is to take the existence of other companies into account, for the purposes of the small profits rate, where there is a substantive relationship between the relevant companies but not where any ‘association’ is an accident of circumstance, including circumstance of family relationships that do not extend into business.

The rules apply only to the attribution of rights held by associates of participators. Rights held by the participators themselves are always taken into account, whether or not there is substantial commercial interdependence between the companies concerned.

When considering whether there is substantial commercial interdependence, regard should be given to the degree of financial, economic, or organisational interdependence between the companies.

This TAXguide sets out at a high level below what each of these might mean. However, it is important to note that each case will turn on its own facts and circumstances.

Financial interdependence

Two companies are financially interdependent if one gives financial support (directly or indirectly) to the other, or each has (directly or indirectly) a financial interest in the affairs of the other.

An example of financial interdependence would be the provision of a loan from one company to another. HMRC’s manuals at CTM03785 provide further detail on this.

Economic interdependence

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.

An example could be where there is the routine sharing of contacts and customer base such as a father who was a builder and routinely used his son’s electrical company on construction projects. Clearly there is an economic link between the entities. HMRC’s manuals at CTM03790 provide further detail on this.

Organisational interdependence

This could apply where two companies employ the same people, have the same management team, or share premises/equipment.

For this to be in point it would be expected that the viability of one business is in some way linked to the other. It does not automatically apply to all businesses operating from shared premises. However, even if the businesses operate at arms-length, organisational interdependence could still apply. HMRC’s manuals at CTM03795 provide further detail on this.

Tax Faculty

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