From 1 April 2023, the UK introduced new Corporation Tax (CT) rates, which vary depending on a company’s profits:

• Main rate: 25% for profits over £250,000
• Small company rate: 19% for profits up to £50,000
• Marginal relief: For profits between £50,000 and £250,000, a tapering relief applies at 3/200th of profits over the lower limit

Why It Can Be Complicated

Calculating the correct CT rate can be tricky when a business:

• Operates multiple companies with different profit levels
• Has associated companies, which share commercial or financial links
• Needs to apportion the small and main rate limits across associated companies

In practice, this means the limits for marginal relief are split between associated companies, which can lead to unexpected CT liabilities.

What Are Associated Companies?

A company is considered associated if it:

• Is under common control with another company
• Is controlled by another company directly

Control can be exercised through:

• Share capital
• Voting rights
• Income or capital distributions
• Joint control with other people or companies

Commercial Interdependence

Companies may also be linked through commercial or financial interdependence, such as:

• Providing financial support to each other
• Sharing common management or employees
• Operating with the same customers, premises, or equipment
• Pursuing the same economic objectives

Even if one company is small and another is large, these links may affect how CT rates and marginal relief apply.

Passive Holding Companies

A Passive Holding Company (PHC) is treated differently under CT rules. Typically, a PHC:

• Owns no assets other than at least 51% subsidiaries
• Receives no income other than dividends
• Pays out all distributions to its shareholders
• Has no chargeable gains, management expenses, or qualifying charitable donations (QCDs)

PHCs are usually excluded from some CT calculations, but careful consideration is required if the holding company is associated with other active companies.

Other Points to Consider

Included:

• Foreign companies
• Companies associated for part of the accounting period

Excluded:

• Dormant companies
• Passive holding companies (in certain calculations)

Special cases, such as close investment holding companies or foreign companies holding property or trading through a permanent establishment, may still be counted as associated companies.

Key Takeaways

Understanding CT rates, associated companies, and passive holding companies is crucial for:

• Accurate tax planning
• Avoiding unexpected CT liabilities
• Ensuring compliance with HMRC rules

When multiple companies are linked through ownership, control, or commercial activity, the main and small CT rates, marginal relief, and exemptions for PHCs must be applied carefully across the group.