I’ve updated this post on 20 May 2020
This guide is applicable for tax years to 31 March 2015
For the tax year 2020/2021, corporation tax is set at a single rate of 19% regardless of the amount of taxable profit a Limited Company has.
However, up until 31 March 2015, there were two rates of corporation tax put in place by HMRC meaning companies with taxable profits of more than £300,000 had to pay a higher rate of tax. This threshold was known as the small profits threshold.
Associated Companies affected how a company would cross that small profits threshold and therefore have to pay the higher rate of tax.
Corporation Tax Rates and Thresholds
Here is a summary of the historic HMRC corporation tax rates and small profits thresholds.
|Corporation tax rate for profits below £300,000 threshold||20%||20%||20%||20%||19%|
|Corporation tax rate for profits over £300,000 threshold||23%||21%||20%||20%||19%|
Since 1 April 2015 there is only one rate of corporation tax, regardless of taxable profits, meaning associated companies are no longer relevant for corporation tax purposes.
What was an Associated Company for Corporation Tax?
An associated company for corporation tax was defined as:
- one company that controlled another;
- a company that was controlled by the same companies or people.
So if one company owned 35% of another, it would not be considered an associated company.
But if a company had 4 subsidiaries and it owned 51% in each, then all five of the companies would be associated.
Trade was irrelevant, HMRC looked at who is controlling each of the Companies either via shareholding or Directorship to decide which rate of corporation tax they should be paying.
Calculating Corporation Tax With Associated Companies
Associated companies had to share the tax threshold of £300,000. So where there are 2 or more associated Companies the small profits threshold needed to be divided between them.
For example, if one company has control of 3 others, the £300,000 threshold would be divided by 4. Meaning the small profits threshold for each is £75,000.
If any of those Companies had taxable profits of more than £75,000 they would then need to pay tax at the higher rate.
Are Dormant Companies Associated for Corporation Tax?
A Dormant Company is one that is not trading and not liable for corporation tax. For this reason, it is not considered an associated company for corporation tax purposes.
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