Severn Accounting
Tax & Accounting

Associated company rules – implications post 1 april 2023

By Ali Jaw ·

From 1 April 2023, the rules governing associated companies underwent significant changes that have direct implications for corporation tax, research and development (R&D) relief, and profit attribution. If your business is part of a group structure or you work closely with related entities, understanding these new rules is essential to ensure compliance and optimise your tax position. At Severn Accounting, we’ve helped numerous Worcester-based businesses navigate these changes, and we’re sharing what you need to know.

What Changed on 1 April 2023?

The primary change relates to how HMRC defines “associated companies” for tax purposes. Previously, the definition was relatively broad and based on voting power and control thresholds. From 1 April 2023, the rules have been tightened, particularly in relation to the profits threshold for small profits relief and the definitions used for R&D tax relief purposes.

The key legislative update came through the Finance Act 2023 and affects how you calculate whether your company qualifies for reliefs and how profits are measured for associated company purposes. Importantly, the changes apply to all accounting periods ending on or after 1 April 2023, so if your year-end falls after this date, you’ll be affected.

Impact on Small Profits Relief and Corporation Tax

One of the most significant changes concerns the small profits relief threshold. Previously, companies could claim small profits relief (now called the “small profits rate”) if they fell below certain profit thresholds when considered alongside associated companies.

From 1 April 2023, the threshold for determining associated companies has been refined. The key threshold to note is that if your profits fall within the range of £50,000 to £250,000 (marginal relief applies), you’ll need to carefully identify all associated companies to ensure you’re not inadvertently putting yourself into a higher tax bracket.

Here’s what you should check:

  • Identify all associated entities: Companies where you have significant influence or control, directly or indirectly
  • Calculate combined profits: Aggregate your profits with those of associated companies for the relevant period
  • Apply the correct rate: Ensure you’re using the 19% main rate or the appropriate marginal rate depending on your total combined profits

R&D Relief Recalculations Required

The R&D relief regime has also been affected by the associated company rule changes. If you claim R&D relief and work with connected parties—whether through outsourced development, shared facilities, or collaborative projects—the revised definition of “associated companies” may alter your qualifying expenditure calculations.

From 1 April 2023, you should review any prior R&D relief claims involving associated companies. Outsourced expenditure claimed at uplift rates or subcontracted development work may be affected if the recipient is now classified differently under the new rules.

If you’re claiming under the research and development relief scheme (either R&D tax credits for SMEs or the patent box), document your associated company relationships clearly. HMRC has become increasingly focused on these claims, and the new definition gives them clearer grounds for challenge if relationships aren’t properly recorded.

Practical Steps to Take Now

If you operate as a standalone company with no related entities, the changes may have minimal impact. However, if you’re part of any group structure—whether that’s a holding company, sister companies, or joint ventures—we recommend the following:

Review your shareholder structure: Map out all entities in which you hold stakes or over which you exercise control. This includes voting rights, management control, and de facto influence.

Document your position: Keep clear records of why entities are, or are not, associated for tax purposes. This documentation will be invaluable if HMRC enquires.

Recalculate relief entitlements: If you claimed small profits relief or R&D relief in periods spanning 1 April 2023, check whether the thresholds and calculations remain correct under the new definition.

Amend returns where necessary: If you’ve identified errors in previous returns, voluntary disclosure to HMRC (though not mandatory) demonstrates good faith and may reduce penalties.

Conclusion

The associated company rule changes from 1 April 2023 aren’t dramatic, but they do require careful attention if your business sits within a wider corporate structure. Missing the implications could mean claiming relief you’re not entitled to, or conversely, missing relief you should be claiming.

The rules are nuanced, and context matters enormously—what counts as “associated” depends on your specific circumstances. Rather than trying to navigate these changes alone, getting specialist advice early is invariably more cost-effective than dealing with an HMRC enquiry later.

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