Corporation Tax rates and Associated Companies - FAQs
From 1 April 2023, two rates of corporation tax (CT) apply - a main rate of 25% and a small profits rate of 19%. The rules dictating which rate applies to a company in any accounting period can be complex, and include a requirement to identify ‘associated companies’.
These FAQs are designed to help tax agents navigate the practicalities of these new rules. They are not intended to be comprehensive guidance or to cover all aspects of corporation tax rates and associated companies. Specific advice should always be sought where needed.
More information can be found in the relevant legislation (Part 3A CTA 2010 for the new rates and s18E – s18J CTA 2010 for associated companies) and in HMRC’s Company Taxation Manual at CTM03900 onwards.
Please use the menu below to navigate these FAQs.
CT rates basics
When did the CT rate rules change?
The rules changed from 1 April 2023.
Accounting periods which straddle that date have to be split into two notional accounting periods – one ending on 31 March 2023 and the other starting on 1 April 2023. Only the profits of the second notional accounting period (i.e. the one starting on 1 April) will fall within the new rates. The first notional accounting period (ending 31 March) will be taxed at 19% under the old rules.
See below for more on the treatment of straddling periods.
Under the rules in place from 1 April 2023, the CT rate a company pays in an accounting period depends on the level of its ‘augmented profits’ (broadly taxable profits plus exempt non-group dividends – see below):
- At or below the ‘lower limit’ – small profits rate of 19%
- Above the ‘upper limit’ – main rate of 25%
- Between the upper and lower limits – main rate of 25% less marginal relief (see below)
Unlike income tax, the relevant CT rate applies to all of a company’s profits. For example, once a company’s augmented profits exceed the upper limit, the entirety of their taxable profits will be taxed at 25% (and not just the amount by which they exceed the upper limit).
What are the upper and lower limits?
The limits are:
- Lower limit = £50,000
- Upper limit = £250,000
Note that these limits are much lower than those which applied in 2014/2015, when we last had two rates of corporation tax. This means that many more companies need to worry about paying corporation tax main and marginal rates this time round.
The upper and lower limits may be even lower for some companies, as they need to be:
- reduced proportionately if an accounting period is less than 12 months; and
- divided by the total number of ‘associated companies’.
For example:
- A company with a six-month accounting period will have a lower limit of £25,000 and an upper limit of £125,000.
- A company with three associated companies will have a lower limit of only £12,500 (£50,000 divided by four) and an upper limit of £62,500 (£250,000 divided by four).
Identifying the number of associated companies is therefore key to ensuring that a company applies the correct CT rate. Associated companies are discussed further below.
For the purposes of working out which CT rate applies, we compare the augmented profits for the accounting period to the upper and lower limits applicable to the company (i.e. after adjusting for associated companies and short accounting periods).
In summary, for the purposes of calculating augmented profits, we add exempt dividends from non-group companies back to total taxable profits.
Augmented profits are defined in s18L CTA 2010 as:
- the company’s taxable profits for the period; plus
- any exempt distributions of a qualifying kind received by the company that are not excluded.
For these purposes, a distribution is an ‘exempt distribution of a qualifying kind’ if it is a distribution that falls within paragraph A, B, G or H of s1000(1) CTA 2010. This includes any of the following distributions if they are exempt from corporation tax:
- a dividend;
- a distribution of assets;
- an amount treated as a distribution of assets or liabilities; or
- a bonus issue following a repayment of share capital.
A distribution is ‘excluded’ (and therefore not taken into account when looking at augmented profits) if it is received from:
- a 51% subsidiary;
- a fellow 51% subsidiary of the same company; or
- a trading company or relevant holding company that is a quasi-subsidiary (broadly a consortium company).
For these purposes, for a company to be a 51% subsidiary, as well as holding more than 50% of the ordinary share capital, it also has to be entitled to more than 50% of any profits available for distribution and more than 50% of assets on a winding up.
How is marginal relief calculated?
When a company’s augmented profits fall between the upper and lower limits, all of their profits will be taxed at the main rate of 25%, less marginal relief.
Marginal relief is calculated using the following fraction:
(F x (U-A)) x (N / A)
Where:
- F = the standard marginal relief fraction.
- U = the upper limit applicable to the company.
- A = augmented profits.
- N = taxable total profits.
The marginal relief fraction is set by legislation. For FY 2023 and 2024 the fraction is 3/200.
For example, a company with taxable and augmented profits of £100,000 and no associated companies would pay the following CT:
| Main rates CT at 25% | £25,000 |
| Less marginal relief: (3/200 x (250,000 - 100,000) x (100,000 / 100,000) = | (£2,250) |
| Total CT | £22,750 |
Due to how marginal relief works, profits which fall between the upper and lower limits are taxed at an effective tax rate of 26.5%.
HMRC provide a helpful calculator which can be used to calculate CT for companies which are subject to marginal relief.
Why is the effective tax rate 26.5% on profits subject to marginal relief?
26.5% is the effective tax rate which applies to profits which fall into the ‘marginal relief zone’ - i.e. between the lower and upper limits. It is surprisingly high as, once profits pass the lower limit, the benefit of the 19% small profits rate is lost completely (i.e. all profits are taxed at the main rate less marginal relief).
The 26.5% isn’t an actual tax rate, but an effective one. However, it’s important to be aware of it, as relieving profits which fall in the marginal relief zone will save a significant amount of tax. For example, a company with £80,000 of profits which makes an additional £1,000 of pension contributions could save corporation tax of £265.
How is CT calculated for periods which span 1 April 2023?
The new CT rates only apply from 1 April 2023. Accounting periods which straddle that date have to be split into two notional accounting periods – one ending on 31 March 2023 and the other starting on 1 April 2023.
Only the profits of the second notional accounting period (i.e. the one starting on 1 April 2023) will fall within the new rates. The first notional accounting period (ending 31 March 2023) will be taxed at 19% under the old rules.
For example, for a 31 December 2023 year-end there will be two notional accounting periods:
- 1 January 2023 to 31 March 2023
- 1 April 2023 to 31 December 2023
The profits apportioned to the first period will be taxed at 19%. The profits apportioned to the second period need to be compared to the lower and upper limits, but as this is not a 12-month period, it will be necessary to time apportion these limits. In the example above, the reduced lower limit would be £37,671 (275/365 x £50,000) and the reduced upper limit £187,841 (275/365 x £250,000).
You may need to reduce the upper and lower limits further if there are any associated companies in the second period. There is more on straddling periods in HMRC’s guidance at CTM03955, and you can find more about apportionment of profits in a dedicated ATT technical article.
The small profits rate
Can all types of companies benefit from the small profits rate?
No. Some companies are excluded from the small profits rate, including:
- Non-UK resident companies
- Close investment holding companies (see below)
These companies will always be subject to the main rate of CT, regardless of their level of profits.
What is a close investment holding company?
A ‘close investment holding company’ (‘CIHC’) cannot access the small profits rate, regardless of the level of its profits or how many associated companies it has.
A CIHC is defined in s18N CTA 2010. This states that any close company will be a CIHC, unless it exists wholly or mainly for a ‘permitted purpose’. Permitted purposes broadly include:
- Trading
- Investing in land or property for commercial letting
- Being a service or holding company for a group company carrying out one of the above activities.
A company that only holds listed investments is unlikely to exist wholly or mainly for a permitted purpose, and is therefore highly likely to be a CIHC. HMRC’s guidance at CTM03951 also indicates that a company which simply holds a bank deposit account is likely to be a CIHC.
Is a property company a CIHC?
As noted above, investing in land or property for commercial letting is a permitted purpose. A company that exists wholly or mainly for commercial letting will therefore not be a CIHC.
For these purposes, s18N(3) CTA 2010 states that any letting of land is taken to be commercial unless it is to a person ‘connected’ with the company (following the wide definition in s1122 CTA 2010). This means that, for example, letting land or property to a director or shareholder will not count as commercial letting, even if a market rent is charged.
When it comes to property companies, the key question is therefore who the land/property is let to – if it is wholly or mainly to connected parties then it will most likely be a CIHC. This will depend on the facts and circumstances. If it can be shown that the company actually exists wholly or mainly for commercial letting to third parties, then it will not be a CIHC.
Is a group property company a close investment holding company?
As noted above, the definition of a ‘close investment holding company’ in s18N CTA 20210 excludes companies that exist wholly or mainly for:
- Trading
- Investing in land or property for commercial letting
- Being a service or holding company for a group company carrying out one of the above activities.
A group property company will not fall into the first category as it is not trading.
It is also unlikely to fall into the second category, as it will be letting the property to a connected party, which under s18N(3) is not deemed to be ‘commercial letting’ of land.
However, a group property company may fall into the third category. This includes companies which exist wholly or mainly for the purposes of other trading companies in the same group. This condition is likely to be met, and the property company therefore not be a CIHC, if the property held is rented out for the use of other trading companies in the group.
If a non-resident company has a UK permanent establishment would it be eligible for the small profits rate on its UK profits?
The legislation (s18A CTA 2010) states that the small profits rate of 19% is not available to non-resident companies, including those with UK permanent establishments. However, HMRC’s guidance at CTM03905 indicates that branches may be eligible if a treaty non-discrimination article applies.
Even if a non-discrimination article does apply, you would need to divide the standard lower limit of £50,000 and upper limit of £250,000 by the number of associated companies (which includes non-resident companies). In a group context, these limits are likely to be very low. In practice, this is likely to mean that most branches will not be eligible for the small profits rate.
Associated Companies
As set out above, the number of associated companies a company has can affect the rate of CT it pays. Being able to identify what is, and isn’t, an associated company is therefore very important.
What is an associated company?
Associated companies are defined in s18E CTA 2010.
Broadly, two companies will be associated if:
- one has control of the other, or
- the same person, or persons, have control of both of them.
See below for more on the meaning of ‘control’ for these purposes.
A company can be an associated company no matter where it is resident for tax purposes. That means an associated company can include one which is non-UK resident.
It also does not matter if the companies were only associated for part of an accounting period – they will be treated as associated companies for the whole period.
Can any companies be ignored when it comes to associated companies?
Two types of companies can be ignored:
- ‘dormant’ companies that have not carried out a trade or business at any time in the accounting period (or, if the company was only associated for part of the accounting period, that part); and
- passive holding companies (see below)
These companies do not need to be included when looking at the number of associated companies.
What is a passive holding company?
A passive holding company is not counted as an associated company.
The conditions to be met to be a passive holding company are set out in s18F CTA 2010.
These conditions are that, throughout the accounting period in question, the company:
- does not trade;
- has one or more 51% subsidiaries;
- has no assets other than shares in those subsidiaries;
- has no income other than dividends which are exempt from CT and meet the ‘redistribution condition’ (see below);
- has no chargeable gains; and
- has no expenses of management or qualifying charitable donations.
When it comes to dividends, the ‘redistribution condition’ requires the holding company to pay out a total amount of dividends in the accounting period which is at least equal to the amount of dividend income it received during that period.
If the company does not meet all of the above conditions, it will not be a passive holding company and could therefore be an associated company.
How do we define control for these purposes?
Control here has the same meaning as for close companies, as set out in s450 and s451 of CTA 2010.
Broadly, a person controls a company if they exercise, are able to exercise, or are entitled to acquire direct or indirect control over the affairs of that company. This definition is therefore very broad.
HMRC’s guidance at CTM60210 covers this definition of control in more detail.
Do we just look at percentage shareholdings when it comes to control?
No. Per s450 CTA 2010, a person will be treated as having control of a company if they possess or are entitled to acquire any of the following:
- The greater part of the share capital.
- The greater part of the voting rights.
- Entitlement to receive the greater part of the income of the company, if the whole of this income were to be distributed amongst participators.
- Rights to receive the greater part of the assets of the company available for distribution on a winding up.
We therefore need to look beyond mere share capital ownership, and also consider voting rights and other rights individuals and companies may have. Particular care needs to be taken with alphabet share structures (which may have different voting rights) and rights which non-shareholders such as loan creditors may have.
Specific exclusions do however apply to exempt certain fixed rate preference shares, loan creditors and trustees from the definition of control for these purposes (see s18H to s18J CTA 2010 and CTM03942, CTM03943 and CTM03944). These exist mainly to exempt commercial investments, loans etc. from being taken into account when looking at associated companies.
How do we identify if two or more companies are under common control?
As noted above, two companies will be associated if:
- one has control of the other, or
- the same person, or persons, have control of both of them.
It should, generally, be fairly obvious if one company controls another. However, it can be more complicated to determine whether companies are controlled by the same person, or persons, especially where there are multiple shareholders.
For this test, we need to identify the ‘minimum controlling combinations’ for each company - i.e. the groups of people who have control, but would not have if we excluded any one person. Companies may have more than one minimum controlling combination, and it is necessary to identify them all. If two companies have an identical minimum controlling combination, they will be associated.
For example, assume two companies have unconnected shareholders with the following levels of control:
A Ltd
- Mr X – 35%
- Mr Y – 35%
- Mrs Z – 30%
B Ltd
- Ms W - 45%
- Mrs Z – 40%
- Mr X – 15%
The minimum controlling combinations of A Ltd are:
- Mr X + Mr Y = 70%
- Mr X + Mrs Z = 65%
- Mr Y + Mrs Z = 65%
The minimum controlling combinations for B Ltd are:
- Ms W + Mrs Z = 85%
- Ms W + Mr X = 60%
- Mrs Z + Mr X = 55%
Even though no one person controls both companies, A Ltd and B Ltd will be associated as they have a common minimum controlling combination in Mr X and Mrs Z.
More on minimum controlling combinations can be found in HMRC’s manuals at CTM03941.
If no single person has a shareholding of more than 50% do we still need to worry about associated companies?
Yes – you still need to look at whether any companies are under common control of the same persons, which means identifying the minimum controlling combinations.
You may also have to attribute interests held by the person’s associates if there is substantial commercial interdependence between the two companies (see below).
When do we take into account interests of associates?
When looking at whether companies are under common control, we may need to not just consider the rights of individual shareholders, but also the interests held by their ‘associates’. However, this is only necessary where there is ‘substantial commercial interdependence’ between the two companies in question (see below).
For these purposes, ‘associates’ include relatives (spouses, civil partners, siblings, children/parents and beyond), partners and some trustees and personal representatives. Per HMRC’s guidance (see CTM60150), being a ‘relative’ requires a blood relationship. Therefore half-siblings can be associates, but step-siblings will not be.
For example, a company owned by a partner or spouse will only be an associated company if there is substantial commercial interdependence between the two companies. Where this is the case, we attribute the interests of associates (which includes relatives and spouses) when looking at whether the companies are under common control.
What is meant by ‘substantial commercial interdependence’?
There are three types of commercial interdependence:
- Financial – one company financially supports the other, or each has a financial interest in the affairs of the same business.
- Economic – the companies have the same economic objective, common customers or the activities of one benefit the other.
- Organisational – the companies have common management, employees, premises or equipment.
Not all of these need to be present – one alone may be enough for substantial commercial interdependence to exist. In all cases, the degree of interdependence needs to be considered. Each case will depend on its specific circumstances . HMRC’s guidance however makes it clear that there has to be genuine interdependence – an ‘accident of circumstance’ alone is not sufficient (see CTM03800).
It is also worth noting that it is the interdependence of the companies, not the shareholders, that is important. For example, if the shareholder of Company A lends money to Company B, that would not create financial interdependence, but could do so if the loan were made from Company A instead or secured over its assets.
HMRC provide helpful examples in CTM03785, CTM03790 and CTM03795 which illustrate their view of substantial commercial interdependence.
Do we always need substantial commercial interdependence for companies to be associated?
No – companies that are under common control will still be associated, even if there is no commercial connection between them. Substantial commercial interdependence is only required when deciding whether the interests of associates need to be assigned to individuals.
For example, Mr X and Mr Y each control 50% of A Ltd and B Ltd. Those two companies will be under common control of the same persons, and therefore be associated, even if there are no other links between A Ltd and B Ltd or Mr X and Mr Y.
Are corporate members of the same LLP associated companies?
For two companies to be associated, one must control the other or they must be controlled by the same person or persons. Whether this applies to corporate members of an LLP will depend upon the facts.
As set out above, we may need to attribute the interests of a person’s associates to them when looking at control, but only if there is substantial commercial interdependence between the two companies in question.
In a scenario where A Ltd and B Ltd are trading jointly via an LLP, there is likely to be substantial commercial interdependence between the two companies – they have the same economic objective, common customers etc. Therefore, if the individuals controlling A Ltd and B Ltd are associates, the interests of each will be attributed to the other and the two companies will be associated.
However, if the individuals controlling A Ltd and B Ltd are not associates, then no attribution of rights can take place. Therefore, provided there is no connection between the individual shareholders of A Ltd and B Ltd, and no other arrangements which could give rise to common control, they will not be associated companies simply by virtue of being members of the same LLP.
Other issues
Are quarterly instalment payments affected by the changes to the CT rules?
For accounting periods beginning on or after 1 April 2023, the quarterly instalment payments (QIPs) limits look at associated companies (using the definition above) rather than 51% group companies.
Tying commencement to accounting periods makes the commencement rules simpler for QIPs than for CT rates.
The old rules continue to apply for QIPs for accounting periods beginning before 1 April 2023, with the switch to associated companies only coming in for accounting periods beginning on or after 1 April 2023. For example, for a 31 December year-end, you would look at 51% subsidiaries for the year-ended 31 December 2023 but switch to looking at associated companies for the year ending 31 December 2024.
The other main difference between CT rates and QIPs is that, for QIPs purposes, we look at the number of associated companies at the start of the accounting period only. Unlike with the CT rates rules, we don’t need to worry about companies becoming or ceasing to be associated part way through the period.
Are the associated companies rules the same when it comes to other aspects of the tax system?
There are two aspects of the tax system that have rules similar to the associated companies rules:
- Employment Allowance
- Annual Investment Allowance (AIA)
For the purposes of determining whether a company is entitled to claim the employment allowance, the rules around what is an associated company are very similar to those for CT. These include the attribution of associates’ interests where there is substantial commercial interdependence.
However, different rules apply when considering if the AIA of £1m has to be shared between groups of companies, or companies under the control of the same person that are related to each other. It is therefore possible that a company needs to be taken into account for the purposes of the AIA, but is not an associated company for CT rates purposes (and vice versa).
Further comparisons with the employment allowance and AIA rules can be found in an article for AccountingWEB written by ATT technical officer Emma Rawson.
What questions should we ask clients to help us identify associated companies?
As a minimum, you should consider asking:
- What other interests in companies do clients have?
- What rights etc. attach to any shares held?
- Do clients’ relatives and other associates have interests in companies, and if so what links are there between the companies in question?
- Are any companies non-UK resident, dormant, passive holding companies or close investment holding companies?
What should I disclose regarding associated companies?
The CT600 merely requires the total number of associated companies to be disclosed. However, companies may wish to include further details in the accompanying corporation tax computation. Such disclosure may be of benefit should HMRC seek to enquire into the position in future, or open a discovery assessment.
Agents should also consider setting out their understanding of the associated companies position, and any assumptions made, in the letter or email sent to the client when computations and returns are sent for approval prior to submission.