Corporation tax and associated companies

If you run your business through a limited company, and if the company is small enough, you pay a lower rate of corporation tax.  But you can unintentionally dilute this benefit by setting up and trading through several interdependent companies.  Here is a summary of the tax benefit offered in the UK for having smaller profits, and the risk to watch out for if you operate through more than one company.

THE SMALL PROFITS RATE

The normal rate of tax for companies is 25%.  But the UK government wants smaller businesses to have an easier time of it while they grow.  Therefore, to protect them, companies with profits of up to £50,000 only pay 19% corporation tax.   Profits above £50,000, and up to £250,000, pay a rate in between, but still less than 25%. With profits over £250,000, a company will pay 25% on all profits.

ABUSE OF THE SMALL PROFITS CONCESSION

The problem is, some people have abused the system by splitting related activities between lots of different companies, benefiting from the discounted tax rate several times over.  To catch this, the government has created an associated company rule.

ASSOCIATED COMPANIES

Associated companies are interconnected companies that are under shared control by the same person, or by members of their immediate family (spouses, civil partners, siblings, ancestors, and lineal descendants).  If you and your immediate family own several related companies, then the government can ask for the small profits rate to be split equally between all the related companies.

NON-TRADING COMPANIES

A company that is dormant, or has not traded during the relevant accounting period, is generally discounted.  An accounting period is the (usually 12-month) period for which a company reports its financial accounts.

STRATEGY: WHAT TO AVOID

Try to avoid splitting a single business into several smaller interconnected businesses run by close relatives, as this can result in a higher tax bill, because the small company tax rate may be split equally between those businesses.

STRATEGY: WHAT TO DO

Try to make sure it is evident that any different companies you and close relatives run are independent of one another in terms of customers, organisation, finance and type of trade.  Too much interdependence can mean that the companies will be considered associated for small companies rate purposes.

TAKEAWAY MESSAGE

Don’t try to fool the government into giving you and your family the small companies rate several times over, by splitting one trading company into lots of different companies with different closely-related owners.  You may end up paying even more tax.

However, if your companies are genuinely independent of one another, make sure you keep evidence that each is a different trade, with different customers, financial systems, and organisation.

Although it is an anti-avoidance measure, the associated companies rule is not intended to take away the small companies entitlement from companies which are genuinely different and independent trades.