Tax Implications for Associated Companies (Finance Act 2021)
Overview Directors with interests in multiple companies should review structures if companies are “associated,” as the Finance Act 2021 significantly changed corporation tax rules.
Impact of Finance Act 2021 The Act introduced tiered corporation tax rates (19%, 26.5%, 25%). For associated companies, the profit thresholds for these rates are divided by the number of associated companies. This means higher tax rates can apply at significantly lower individual company profit levels (e.g., £125,000 instead of £250,000 for two associated companies).
Defining ‘Associated Company’ A company is associated if another has significant influence/control over it, or the same person(s) control both (e.g., over 50% share capital/voting power). Dormant or passive holding companies are generally excluded. Association for even one day in a tax period counts.
‘Substantial Commercial Interdependence’ For certain rules (especially regarding “associates of participators” like relatives), associated companies must also show “substantial commercial interdependence.” HMRC assesses this via financial (e.g., loans), economic (e.g., mutual benefit), and organizational (e.g., shared premises/management) ties.
Company Tax Payment Deadlines Associated companies also affect quarterly tax payments. The £1.5 million profit threshold for “large” companies (requiring quarterly payments) is divided by the number of associated companies. However, companies with a corporation tax liability under £10,000 are exempt from this regime.
