Associated Company Rules

From the 1 April 2023 there were two key changes which affect the amount and timing of tax payable by companies. Firstly, the main rate of corporation tax increased to 25%. Secondly, new 'Associated Company' rules replaced the old 'related 51% companies' rules (51% rules) which had applied up to 31 March 2023.

The new Associated Company rules that define a ‘group’ for corporation tax payment purposes are significantly more complex and wider reaching than the old 51% rules and could increase the rate of corporation tax payable and bring forward the date when it needs to be paid.

From the 1 April 2023 there were two key changes which affect the amount and timing of tax payable by companies. Firstly, the main rate of corporation tax increased to 25%. Secondly, new 'Associated Company' rules replaced the old 'related 51% companies' rules (51% rules) which had applied up to 31 March 2023.

Under the new Associated Company rules, a company is associated with another company if at any time within the preceding 12 months one company has control of the other or both are under the control of the same company, person or persons. 

Although elements of the new rules are similar to the old 51% rules, the Associated Company rules are generally likely to bring more companies into the definition than the old 51% rules.

It is expected that the new Associated Company rules mean the relevant thresholds that have to be applied for tax payment purposes may be the same as under the old 51% rules but could be lower in many cases. This in turn will mean that more companies will pay tax at the 25% full rate of corporation tax, and more companies will have to pay tax earlier than previously because they fall within the Quarterly Instalment Payment (QIPs) regime.

• Rate of tax payable: The 19% corporation tax rate will still apply to companies with sufficiently low profits, but a consequence of the new Associated Company rules could mean some unexpectedly pay tax at either the marginal rate or the main 25% rate because they have more associated companies under the new rules, so that the relevant thresholds need to be apportioned between more companies.
• Timing of tax payable: Companies that pay tax at the main rate, this could see themselves entering the QIPs regime as a ‘large’ or even ‘very large’ company. These rules bring forward the date when tax is due (see below for further detail of the due dates). Given the rise in interest rates generally, including the rates applied to late payments of corporation tax, the cost impact could be significant. The late interest cost may be highest where a company did not previously pay its tax liability via QIPs at all, or its payments are accelerated through it being 'bumped' into the very large company QIPs regime.

Although the new Associated Company rules apply to all companies, private equity backed and family-owned businesses in particular should take notice of the impact the new rules could have upon them.

Private Equity (PE) Backed Companies

• The old 51% rules usually worked so that the number of companies in each portfolio investment group was considered in isolation for tax payment purposes. 
• The new Associated Company rules may require all investments that a PE fund controls to be taken into account in order to assess the number of associated companies.

This could see PE backed companies falling into the QIPs regime as a large or very large company and their corporation tax payment dates being brought forward. See below for more information on the timing of payments.

Family-owned businesses

Under the new rules an individual’s associates have to be taken into account. Generally, a person’s associates include their spouse/civil partner, business partner and other lineal relatives, as well as a number of other associations.

For family-owned businesses the old 51% rules generally only required consideration of companies within the same corporate group and didn’t extend to common ownership by association. So, the new rules may not only mean that more companies are associated companies for tax payment purposes, but also that the analysis of which are associated companies under the new rules may well be complex.

For example, two companies could be associated even if the businesses are generally separate but they are controlled by two individuals that are associates of each other. There are various exemptions to this rule including the substantial commercial independence exception which considers the financial, economic and organisational interdependence of the relevant businesses.

Previously, companies with sub-subsidiaries could be controlled in ways that did not make them group companies. For example, if A Ltd owned 51% of B Ltd, which in turn owns 51% of C Ltd. With this scenario, for the old 51% rules, A Ltd and C Ltd would not be part of a group as the effective ownership of C Ltd from A Ltd is less than the minimum requirement of 51%. However, with the Associated Company rules, A Ltd and C Ltd are associated.

Control by minimum controlling combination

For companies to be associated companies under the new rules, there has to be the same ‘minimum controlling combination’. Suppose two companies have the following shareholdings:

Mr X and Mrs Y can together control A Ltd and B Ltd. However, Mr X controls A Ltd on his own and is therefore the ‘minimum controlling combination’. The minimum controlling combination of B Ltd is Mr X and Mrs Y. Since the companies do not have the same minimum controlling combination, they are not related.

Overall, the Associated Company rules add a layer of complexity that needs to be considered based on the fact pattern of any given scenario.

Timing of payments

For companies that do not fall into the QIPs regime, payments of corporation tax must be made on or before the normal due date of payment which is nine months and one day after the end of the accounting period. For a company with a year ended 31 March 2024, the normal due date of payment for corporation tax would be 1 January 2025.

However, a large or very large company has to pay estimated tax by instalments on earlier dates that start before the end of the relevant accounting period. A company is considered large if its taxable profits are more than £1.5 million and it is considered very large if its taxable profits exceed £20 million in an accounting period.

These thresholds are reduced proportionally where the company has related 51% group companies, or for periods starting from 1 April 2023, where the company has associated companies. There is also a one-year 'grace' period for large companies in certain circumstances, meaning that late payment interest may not apply the first time a company breaches the large company limits. There is no one-year grace period for very large companies. 

For a company with a year ended 31 March 2024 QIPs dates and amounts would be as follows:

For companies with 31 March 2024 year ends that now fall within the QIPs regime as a very large company, two payments should have been made to HMRC in the first six months of the period (by 14 September 2023).

Late payment interest applies for QIPs and other late payments as published by HMRC and based on Bank of England base rates. With late payment interest rates currently high, companies should ensure they understand when they are required to make corporation tax payments to avoid incurring high late interest charges. Interest on late tax is tax deductible.

The new rules may leave companies in the same position as under the old 51% rules, but for many companies, they could lower the payment thresholds.

The new Associated Company rules could therefore mean the acceleration of the timing of tax payments with potentially unexpected interest charges and/or an increase in the rate of corporation tax due.

The analysis of how the rules apply is expected to be particularly complex for PE backed and family businesses.

Actions

Finance leaders should:

• Review their ownership structures to determine how the new rules will impact them and whether there could be additional associated companies with the result that tax payment due dates could be accelerated.  
• Model the impact of the new Associated Company rules on their cash forecasts taking into account the rate at which corporation tax will be payable and the timing of payments. Provision may also need to be made for interest charges. 
• If you are a PE backed business or if you are a family business with other companies owned by family members meaning the analysis of how many associated companies you have is complex, you may want to plan on the basis that tax will be due on the earliest date.
• Diarise QIP payment dates leaving enough time to carry out relevant calculations to estimate the corporation tax liability to minimise under and over payments. 

If you require support or advice on the new Associated Company rules, estimating QIP payments or any other corporation tax topics please contact Andrew Hawley or your usual Crowe contact.