Associated companies and impending corporation tax rate changes

Associated companies can be a murky area of UK corporation tax, particularly when you’re navigating the upcoming changes to corporation tax rates. If your business is part of a group structure or has related entities, understanding how HMRC treats these relationships—and how the changes coming into force from April 2023 will affect you—is essential for proper tax planning and compliance.

What does “associated” mean for corporation tax purposes?

HMRC defines associated companies using specific criteria set out in the Corporation Tax Act 2010. Two or more companies are treated as associated if one has control over the other, or both are under the control of a third person or entity. Control can be direct (shareholding) or indirect (through intermediaries), and it includes situations where someone has the ability to direct the company’s affairs in practice, even without formal ownership.

This definition matters because corporation tax relief thresholds and rates can be affected by how many associated companies you have. Put simply: if you have associated companies, those entities collectively share certain tax reliefs and rate thresholds, rather than each receiving their own full allowance.

The profit threshold and associated company relief

Historically, the main practical implication of being associated concerned the small profits rate and marginal relief. From 1 April 2023, the corporation tax landscape changed significantly. The main rate of corporation tax for all large companies increased to 25% (effective for profits over £250,000), whilst smaller companies with profits of £50,000 or less still pay 19%.

Between £50,000 and £250,000, companies benefit from marginal relief. However—and this is crucial—the £50,000 and £250,000 thresholds are divided by the number of associated companies. If you have two associated companies, each gets a threshold of £25,000 instead of £50,000, and the upper limit becomes £125,000 rather than £250,000.

Planning ahead: the 1 April 2023 changes in detail

The increase to the 25% main rate was a significant shift. What many accountants and business owners found even more important to understand is how associated company relationships interact with these new thresholds. If your group has grown, or you’re considering acquiring or establishing a new entity, you need to map out the tax implications carefully.

A practical example: if you operate three associated companies and each has a profit of £60,000, each company pays tax on some profits at 25% rather than just 19%. Without proper planning, your overall group tax bill could be substantially higher than if the entities were not associated for tax purposes.

That said, there are situations where entities might not be treated as associated despite common ownership. The rules can be complex, particularly where there are dormant subsidiaries, joint ventures, or historical structures. It’s worth reviewing your group structure with a qualified accountant to ensure you’re not inadvertently triggering higher tax rates, or conversely, that you’re not claiming reliefs you’re not entitled to (which HMRC scrutinises carefully).

Disclosure and compliance obligations

If you have associated companies, you must ensure that your corporation tax return—filed at Companies House via HMRC’s online portal—accurately reflects this status. There’s a specific section within the CT600 return where you disclose associated companies. Getting this wrong can lead to penalties, so accuracy is paramount.

Additionally, if your circumstances change during the tax year—for instance, you acquire a stake in another company—you should notify HMRC promptly. It’s not always a case of waiting until your year-end return; significant changes may trigger an immediate adjustment to your PAYE or corporation tax position.

What you should do now

Review your corporate structure and confirm how many entities are associated with your main trading company. Check your last corporation tax return to ensure associated company disclosures are correct. If you’re considering restructuring, acquiring, or establishing new entities, model the corporation tax implications before you proceed.

This is particularly important for family businesses, management buy-outs, and groups with multiple trading subsidiaries or holding companies. The cost of getting it wrong—in terms of overpaid tax or penalty interest—often exceeds the cost of professional advice upfront.

For tailored advice, contact Severn Accounting — we’re here to help.