New rules on associated companies

New rules on associated companies

From 1 April 2015 the definition of associated companies for corporation tax purposes has been modified.In the past, two companies were treated as associated if they were under common control (subject to various let-outs such as if two standalone companies were commercially independent).  Going forward, a simpler test applies, which looks only to a parent company and its 51% subsidiaries for determining association.

With the move to a flat 20% rate of corporation tax you may think that this change is fairly academic. Whether a company has associates was usually only relevant to determining its rate of tax and to calculate marginal relief (because the relevant profit thresholds were divided by the number of associated companies).

Quarterly Instalments

However, the rules still remain relevant for the purposes of determining whether a company is required to pay its corporation tax by quarterly instalments (“QIPs”).  If a company is “large” i.e. its taxable profits exceed £1.5 million divided by the number of associates it has to pay its corporation tax by four instalments, commencing from month 7 of the accounting period.  This compares to the normal due date of 9 months after the year end.

The change in definition could therefore have a positive cash flow impact for clients with standalone company structures.  Unless companies are within a group, they will not be treated as associated under the new rules.

Example

Fred owns Company A and Company B, which each have a 31 December year end.  Company A makes annual profits of £1 million.  Under existing rules the two companies are associated.  Company A has to pay its corporation tax by QIPs because its profits exceed the relevant threshold (£1.5 million divided by the number of associates = £750k).

Under the new rules the two companies would not be associated and Company A will be below the QIPS threshold.

The new rules apply to accounting periods commencing on or after 1 April 2015.  In Fred’s case, he may want to consider changing his accounting period to 31 March (i.e. having a short period from 1 January to 31 March 2015) to come within the new rules early.

It should be borne in mind that whilst this change offers a benefit to using standalone companies, group structures still have many other benefits such as the ability to group relieve losses.

 

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