By Becky Bowness, head of tax, Armstrong Watson
Following the Corporation Tax rate increase on April 1, the rate of tax a company now pays depends on its level of profits and whether the company has any “associated companies”.
For a business with no associated companies, the position is as follows:
- The first £50,000 of taxable profits are taxed at 19 per cent (small profits rate)
- The next £200,000 of taxable profits are taxed at a marginal rate of 26.5 per cent
- Any taxable profits over £250,000 are taxed at 25 per cent (main rate)
If a company has associated companies, unfortunately, the threshold for the various Corporation Tax rates will be reduced.
What is the impact of the marginal rate?
Companies that have taxable profits within the marginal rate (profits between £50,000 and £250,000), will face a gradual increase in the effective rate of Corporation Tax they pay.
The effective rate of Corporation Tax for a standalone company at various profit levels will be:
| Profits | £50,000 | £75,000 | £100,000 | £150,000 | £200,000 | £250,000 |
| Effective CT rate | 19.00% | 21.50% | 22.75% | 24.00% | 24.63% | 25.00% |
Where a company has associated companies, the above rates will apply from a lower profit level.
What is an associated company?
In broad terms, a company is an associated company of another company if one company has control over the other or both are under the control of the same person(s).
The rules to determine associated company status are complex but are key in the determination of the correct Corporation Tax rate to apply to a company’s profits.
If a company has one or more associated companies, the thresholds for determining the applicable tax rate are divided by the total number of associated companies, for example, if a company is deemed to be associated with another company, the thresholds are divided by two.
It is important to note that non-UK resident companies are included in the calculation of the number of associated companies, but dormant and some ‘passive’ investment companies are excluded.
As a result of the reduction to the rate thresholds, associated companies could see a significant increase in the amount of Corporation Tax due.
A further consequence of the associated company rules is that the taxable profit thresholds which determine the dates on which a company is due to pay its corporation tax may change.
Large companies with taxable profits exceeding £1.5m, and very large companies with taxable profits exceeding £20m, will see these thresholds divided by the number of associated companies meaning the profit level at which a company needs to pay its Corporation Tax by quarterly instalments can be greatly reduced.
The rules to determine associate company status are complex.
