Associated companies and Marginal Relief have been a recent focus for HM Revenue & Customs (HMRC), highlighted by a letter campaign that has been running since last summer. The letters are aimed at companies which have claimed Marginal Relief but may not have declared all of their associated companies on their tax return.
The issue is that determining whether companies are ‘associated’ can be more complicated than it first appears. It is possible for a Director to be unaware that another company is an associated company for Corporation Tax purposes.
This means an associated company could inadvertently go undeclared, potentially resulting in additional Corporation Tax becoming due. Understanding the rules and identifying associated companies correctly can help avoid unexpected tax liabilities further down the line.
What is an associated company?
There are a number of factors to consider, but HMRC guidance states that a company is an associated company if:
- One company controls the other; or
- Both companies are controlled by the same person or persons.
So ‘control’ is a key factor. The rules around control can be more complicated where several people are involved. For example, the same group of people must have control of both companies, and each person in that group must be essential to that control.
There are also rules covering situations where control may be attributed through other people, including certain family members, as well as specific rules concerning the commercial relationship between companies.
Simply looking at whether two companies are part of the same group may not be enough to determine whether they are associated for Corporation Tax purposes.
Further details on associated companies and determining control can be found below.
How does Marginal Relief work?
The main rate of Corporation Tax is 25%, while companies with profits of £50,000 or less generally pay Corporation Tax at the small profits rate of 19%.
Marginal Relief reduces the impact of moving from the 19% small profits rate to the 25% main rate, with companies paying an effective Corporation Tax rate somewhere between the two.
However, the thresholds at which Marginal Relief applies are reduced where a company has associated companies.
The £50,000 and £250,000 limits are divided by the total number of associated companies plus the company itself. For example, if a company has three associated companies, the limits are divided by four. This reduces the thresholds to £12,500 for the lower limit and £62,500 for the upper.
This is why failing to identify an associated company could result in Marginal Relief being calculated incorrectly and, consequently, too little Corporation Tax being paid.
On a side point, identifying the number of associated companies is also vital to enable you to determine if your company needs to pay Corporation Tax by instalments. Further information is available here.
Have you received a letter from HMRC?
HMRC have been sending letters where its records indicate that associated companies may not have been declared when Marginal Relief was claimed.
If you receive a letter, HMRC says you should:
- Check all Company Tax Returns for accounting periods that includes 1 April 2023 onwards;
- Correct any errors if within 12 months since the statutory filing date; and
- Make a disclosure to HMRC if over 12 months from the statutory filing date.
If you believe your returns are correct, you should tell HMRC why. HMRC warns that if you do not respond, it may take further action, including opening a compliance check.
It is therefore important not to assume that the letter means an error has definitely been made. Instead, it is an opportunity to review your position and make sure the number of associated companies reported on your returns is correct.
How M+A Partners can help
The rules surrounding associated companies and Marginal Relief can be complex, particularly where ownership or control is shared between individuals or across more than one company.
If you have received a letter from HMRC or would like to review whether your company has any associated companies and whether this has been correctly reflected in your tax return, please get in touch with your usual M+A Partners’ adviser or me using the details below.