How Associated Companies Impact Corporation Tax for Your Trading Company

When running multiple trading companies, it’s important that you understand the concept of ‘associated companies’. HMRC uses the rules set out for associated companies to determine the small profits rate of Corporation Tax, so this ultimately means that the more companies you have, the lower the threshold will be before your tax rate increases. 

This blog looks at what associated companies are, how they affect your Corporation Tax, and the approved HMRC strategies to manage your tax liabilities effectively. 

• An Associated Company is one which is linked through ownership, control or common stakeholders. 

• The number of Associated Companies reduces the small profits threshold for Corporation Tax. 

• By understanding the rules fully, you’re able to help plan your corporate structure efficiently and effectively. 

• Any misunderstandings of the association rules could lead to unexpected tax liabilities. 

HMRC’s definition of Associated Companies is that they’re connected by control or ownership. 

• A company that is associated with another is 50% or more of its voting shares are owned by the person or persons, or their associates. 

• Control can also include the ability to influence decisions, appoint directors, or have common ownership through a parent company. 

• For Corporation Tax purposes, the rules apply to trading companies, which also includes small profits relief. 

In addition to ownership, companies may be treated as connected where there is substantial commercial interdependence, including: 

• Financial interdependence – such as inter-company loans, guarantees, or reliance on shared financing. 

• Economic interdependence – where companies share customers, operate in the same market, or rely on each other for supplies or services. 

• Organisational interdependence – where companies share premises, staff, management, systems, or branding. 

Corporation Tax in the UK has a small profits rate which applies to companies that have profits that fall under a certain threshold. 

• For 2024/25, the small profits rate applies to profits up to £50,000, but this threshold will be reduced if you have associated companies. 

• The threshold is divided by one plus the number of associated companies. 

• Companies which have profits above the threshold will pay the main Corporation Tax rate of 25%. 

• By understanding the association rules, you’ll be able to plan profit allocation amongst your companies to optimise your tax efficiency. 

Association can have a significant impact on your tax is you own multiple companies: 

• Single owner, two companies: The threshold of £50,000 ÷ 2 = £25,000 small profits limit per company.  

• Three associated companies: The threshold of £50,000 ÷ 3 = £16,667 small profits limit per company.  

• Parent and subsidiary: A parent company may be associated with all its subsidiaries, meaning that all their thresholds will be affected.  

By understanding the Associated Companies rules and how they may affect you, you’re able to plan appropriately for future Corporation Tax liabilities and set aside the correct level of tax.  

Your Client Director is always here to answer any questions you may have regarding the rules, how they may affect you and how you can stay compliant, to avoid any penalties. 

Whilst the Associated Companies rules may seem complex, it’s important to understand what they are and how they manage Corporation Tax effectively and compliantly with HMRC. 

Your Client Director is always on hand to provide their expert advice and support, and to always help you remain compliant with HMRC’s rules.