Corporation Tax - The Effect of Associated Companies
There are many good commercial reasons to trade using a number of companies rather than a single entity. This is often done to reinforce the identity of subsidiaries or to protect other group companies from the potential liabilities of a risky venture. However, when deciding whether to expand the number of operating companies it is important to consider how this will affect the overall charge to Corporation Tax.
Companies are associated when they are controlled by the same person or persons (whether this is in a group structure or if they stand separately to each other). Both UK and foreign companies are counted for these purposes.
The Corporation Tax rates for a company with no associates for the 2009/10 tax year are as follows:
Taxed at 21% The first £300,000 of taxable profits
Taxed at 29.75% The next £1,200,000 of taxable profits
Taxed at 28% All taxable profits exceeding £1,500,000
However, if there are associated companies these limits are divided equally between them. For example, for a company with two other associates (i.e. three companies in all), the limits must be divided by three. Each company will calculate its tax bill in accordance with the following rates:
Taxed at 21% The first £100,000 of taxable profits
Taxed at 29.75% The next £400,000 of taxable profits
Taxed at 28% All taxable profits exceeding £500,000
The idea behind these rules is to prevent companies running their activities through multiple companies in order to keep their taxable profits in the 21% band.
If the profits of the companies are unevenly distributed the effect of these rules can be to dramatically increase the effective rate of Corporation Tax. This happens when unprofitable companies do not use their 21% tax bands to the full, whilst their associates pay tax at 29.75%.
Non-trading companies do not count as associates although care is needed in the case of non-trading holding companies as they need to pass additional tests if they are to be excluded.
Careful planning is required when setting up additional trading companies to ensure the benefit of the small companies rates is maximised. Should you require any further information or would like to discuss any of the issues outlined above then please contact Charles Green or your regular tax contact on 020 8652 2450.
Should you require any further information or would like to discuss any of the issues outlined above then please contact Charles Green or your regular tax contact on 020 8652 2450.
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