How to navigate associated company rules to reduce corporation tax

How to navigate associated company rules to reduce corporation tax

Array

According to the latest corporation tax law as of April 2023, companies that earn over £250,000 in profits within a tax year will have to pay a higher tax rate of 25%.

The rate will remain at 19% for companies with less than £50,000 in profits, and for those earning between £50,000 and £250,000, the tax rate will be 25% with a tapered relief applied to lower the actual payment.

This change in corporate tax rate can potentially make things harder for smaller companies, especially in terms of the extra bureaucracy and formality involved.

In particular, the rules regarding upper and lower brackets to classify corporation tax can become even more complex when it comes to associated company rules.

If you’re in a similar boat and would like to know more about the associated company rules and what needs to be done to reduce corporation tax, this blog post is for you. We share everything there’s to know about this matter.

What are associate companies?

Two companies are regarded as associate companies if, at any point in time during the last 12 months, one has exercised control over the other (in terms of voting power, access to share capital, rights over company income etc) or if both have been under the control of the same company or person.

This is fairly common in shareholder ownership structures. Owing to the changes to corporation tax, however, the associated company rules could have a negative impact on the tax that each associate company pays.

Essentially, the lower and upper limits of corporation tax (£50,000 and £250,000 respectively) will now be proportionally brought down based on the number of associated companies any individual business has.

So if a company has three associated companies, for instance, the limits for each will become £12,500 and £62,500. The available benefits/tax allowances will also be split among each associate company.

The trouble arises because these associated company rules, effectively, bring down the profit allowance at which corporation tax stays at 19%, and reduce the level at which 25% tax is guaranteed to come in without any access to marginal relief.

This can be concerning for smaller businesses, especially those that are likely to be involved in associate connections as they grow, and in fact can end up increasing the tax amount that they have to pay in a 12-month period.

Best ways to reduce corporation tax bill

If the associated company rules apply to you, here are some of the best ways to reduce your corporation tax bill.

1. Pensions

This is one of the easiest corporate tax reduction strategies. Any contributions to director and staff pension schemes are largely tax-free.

Pension contributions can be made to use up a director’s annual pension contribution allowance plus unused allowances from earlier years. Companies can also use pension contributions to enable a pension scheme that gathers funds for the acquisition of commercial property.

2. R&D tax relief

If your company engages in projects that are building appreciable improvements in science or technology, there are considerable tax savings you can avail of.

“Appreciable improvements” are typically defined as developing bespoke software, improving a manufacturing process, creating a new product, or improving an existing one.

You can obtain tax relief by reducing taxable profits or creating/increasing tax losses, and then sacrifice them to HMRC in return for cash repayment. For an SME engaging in R&D, you could save an extra £21,000 in tax for £100,000 of qualifying costs.

3. Capital allowances

These give you tax relief on the depreciation of company assets and equipment. In particular, the Annual Investment Allowance gives you full tax relief of up to £one million on assets and equipment, during the year of acquisition.

As far as possible, plan out your present and future capital expenditure to maximise your capital allowance claims. You can ask an accountant to help you out, especially when it comes to more complex areas like acquiring or upgrading property.

4. Patent box tax relief

If your company makes income from patented products or processes, you could be eligible to reduce corporation tax liability to only 10%.

5. Optimised group/company structure

Growing businesses often end up creating multiple stand-alone companies for each of their activities. To avoid the trouble that might kick in from associated company rules, get information about how to set up the most tax-efficient structure.

Examples include a group structure with a holding company that owns multiple subsidiaries, or shareholders directly holding individual companies.

6. Additional capital expenditure relief

In addition to your Annual Investment Allowance, companies can claim a deduction of 100% of the cost of assets like plant and machinery. Plus, assets classed as “special rate assets” will get a 50% claim in the year of the expenditure.

In this case, be sure to examine the rules around these and make a note of the exceptions so that you place your claims correctly. For instance, cars are typically excluded, but for zero-emission cars, you can still claim 100% relief.

Fret not – our expert accountants can help you in optimising the use of Annual Investment Allowance for special rate assets as well as these first-year allowances for other eligible expenditures.

Final words

While the associated company rules can lead to complexities for SMEs, there are clearly ways to optimise your tax payments by using these corporate tax reduction strategies.

As always, consult 3E’S Accountants about any exceptions to these rules or any special circumstances you can apply for.

Dishant

Author

Dishant
Dishant Desai, an ACCA-qualified Partner and Director of Operations at 3E’S, brings a wealth of experience from 14+ years in UK accounting. He likes to write about innovative tax strategies and cloud accounting solutions to optimize individual and business financial health.
X

Subscribe to our blogs

Enjoy our carefully-picked accountancy blogs, company news and industry updates every month.

    We won’t spam - promise!

    By completing this form, 3E’S Accountants will use your contact details to send you information from our latest blogs we feel will be of interest to you.