This week's post is a two-parter. Today, we will cover the changes to Corporation Tax, and next week, we can delve into some worked examples of the impact.

As always, the Government likes to keep us on our toes, constantly changing not just the rates but also the way taxes are calculated.

For almost a decade, we had a simple flat rate of Corporation Tax, calculated at 19% of your taxable profits.

However, from 1st April 2023, this changed. The main corporation tax rate increased to 25%, and we saw the reintroduction of a small profit rate of 19%.

What is an Associated Company?

At its most basic, companies are associated if one controls the other or both are controlled by the same person.

So, if you are the only shareholder or director and fully control two companies, then they are very likely to be associated.

Up to 31st March 2023, the associated company status was easier to determine where we had the “51% group company rule” for group companies. Now, though, control can be harder to determine, and the rules are far more complex.

For example, two companies could be associated even if the businesses are generally separate but are controlled by two individuals who are associates of each other.

A person’s associates can include a spouse, lineal descendants and siblings.

If a company looks like it might be associated just because the controlling individuals are associated (i.e. Husband controls company A and Wife controls company B), then you may be able to ignore these, providing the relationship is not of “substantial commercial interdependence”.

Next obvious question, what the bloody hell does “substantial commercial interdependence” mean…

Examples where this may exist include:

• Financial Interdependence - One company has made a loan to the other or both have an interest in the same business

• Economic Interdependence - Share common customers or one company benefits the other with the activities it carries out

• Organisational Interdependence - Employing the same people, sharing employees, management, premises or equipment

Other companies you can ignore

If you have a company that is dormant or a passive holding company (i.e. it just holds shares in another company and doesn’t actively carry out a trade), then these can be ignored when considering associated companies.

What does this all mean?

Have you managed to keep up? These changes are incredibly complex for business owners to get to grips with - so much for simplifying tax…

The bottom line for most is that you will pay more Corporation Tax, but how much more is not that straightforward.

You need to fully lay out all of your business interests and those of individuals who may be associated with you and go through this list with your accountant to determine which companies are associated.

Aside from confusion, your gut reaction may be to try to merge various companies into one to avoid the thresholds being split. This would be an overreaction at this stage.

Next week, I will share some worked examples with various profits and numbers of associated companies to show that, in some circumstances, having associated companies may slightly lower your tax bill.

Keep an eye out for the follow-up next week.