Associated Companies for Corporation Tax Purposes

Taylor Keeble
14 minutes ago
3 min read

The main rate of corporation tax in the UK is at 25%. A lower rate of 19% applies if profits are below £50,000. If profits are between £50,000 and £250,000 a marginal tax rate applies.

As well as having a higher rate for corporation tax, all thresholds are reduced if there are associated companies. This means that if three separate companies are associated by say common ownership, and have a profit of £50,000 each, the profits on all companies would not be taxed at 19%. This is due to the associated companies rules.

Associated Companies Rules

As there are three associated companies, the lower and upper thresholds of £50,000 and £250,000 will be divided by 3, resulting in revised thresholds of £12,500 and £62,500. This would result in all three companies paying corporation tax at marginal rates (which would be higher than 19%).

Associated companies rules apply where one company has control over the other, or both are under the control of the same person or persons. Control here means owning 50% or more. The rules for associated companies extend further to connected parties having control over separate companies jointly. So for example if two or more individuals or companies have interests in a company at 25% each (50% in total), and the same companies also own the same percentage of interest in another company, both of these target companies will be considered associated.

Example 1 — Common Controlling Interest

Assume that two companies have unconnected shareholders with the following levels of control:

Company 1:
- Alex: 35%
- Becky: 35%
- Nick: 30%
Company 2:
- Alex: 15%
- Susan: 45%
- Nick: 40%

Even though no one person controls both companies, company 1 and company 2 will be associated as there is common controlling interest due to the combined interest of Alex and Nick.

Example 2 — Interdependence

Relating to a scenario where the shareholders are connected to each other and are associates. Associates for these purposes include relatives such as spouses/civil partners, parents, grandparents, children, grandchildren. The rights of an individual’s associates need only be considered if there is substantial commercial interdependence between the companies. For example, if a husband and wife each have 100% control of their own companies, those companies will not be associated unless there is substantial commercial interdependence between them.

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.

Note that companies that are dormant are not considered associated.

A company will not be treated as associated to another if it is a passive holding company. Passive in this context means a company that only receives dividends from its subsidiaries and pays to its shareholder(s) and receives no other income or incurs any expenses.