How Associated Companies Affect Corporation Tax from Your Trading Company

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

In this blog we break down exactly what associated companies are, how they can affect your Corporation Tax, and the strategies to manage your tax liabilities effectively.

• Associated Companies are companies which are linked through ownership, control or common shareholders. 

• The number of associated companies reduces the small profits threshold for Corporation Tax. 

• By understanding the rules, you may be able to help plan your corporate structure efficiently and effectively.  

• Any misunderstanding of the association rules may lead to unexpected tax liabilities. 

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

• A company that is associated with another if 50% or more of its voting shares are owned by the same person(s) or their associates. 

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

• For Corporation Tax purposes the rules apply to trading companies, including 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. 

In the UK Corporation Tax has a small profits rate that applies to companies who 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 1 + the number of associated companies. 

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

• By understanding the association rules it’ll help you plan profit allocation amongst your companies to ensure you’re optimising your tax efficiency. 

Association can significantly impact your tax if 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 rules surrounding associated companies and how they may affect you, this enables you to plan appropriately for future Corporation Tax liabilities and set aside the right level of tax.  

Please feel free to reach out to your Client Director if at all unsure if the rules affect you and to ensure you remain compliant, avoiding any potential penalties. 

Whilst the rules surrounding Associated Companies may seem complex, they are essential for managing Corporation Tax effectively and compliantly with HMRC.  

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