11 March 2021

Connected companies and tiered corporate tax rates

The return of the small companies’ regime

Our corporation tax system had become relatively straight-forward – all companies, regardless of size, pay the same rate of corporation tax.  Therefore, where there are multiple, related companies (i.e. connected via a group structure or by common control/ownership) essentially all of the companies pay the same rate of tax. But no more!  Following the announcement in the Budget, from 2023 we are returning to a tiered system of corporation tax rates, with the profitability of each ‘connected’ company directly impacting upon the rate of corporation tax of the other connected companies.  Companies with profits of £50,000 will pay tax at 19%.  Companies with profits in excess of £250,000 will pay tax at 25%, and there will be a sliding scale of rates in between.  The bandings are divisible by the number of connected companies.  Why is that an issue?  Firstly, companies will need to keep track of (and advisers will need to be aware of) all ‘connected’ companies.  This increases the administrative burden for both.  Secondly, there is significantly more sensitivity around the profitability of each entity, transactions between connected companies, and therefore where those profits are taxed and at what rate.

What does this look like?

Take, as a simple example, two connected companies: A and B.  A and B do sometimes transact with each other but typically only at cost plus a small margin.  Company A makes a profit of £30,000.  Company B makes a profit of £10,000. On the face of it, both are under the £50,000 threshold and pay tax at 19% rate in 2023.  However, under the new regime, the £50,000 threshold is divided by the number of connected companies (here there are two) making the threshold £25,000.  So now Company A is over the threshold and pays a higher rate of tax, Company B is below the threshold and remains at 19% tax. In between the £50,000 and £250,000 profit thresholds again there will be a sliding scale of rates of tax.  What that means in practice is that profits falling in to the £50,000 - £250,000 range are actually taxed at a rate in excess of 25%, so the marginal cost of falling into that tax bracket can be disproportionately high.

What does this mean in practice?

Essentially, connected companies that transact with each other will need to re-examine their trading terms and charging structures which, in turn, requires more planning.  Advisers will need to carefully monitor structures of connected companies for changes in numbers and to ensure that tax rates are optimised. Again, more planning. The money to pay for the Coronavirus support has to come from somewhere.  But I suspect that even those not so long in the tooth as myself will recall with dread the small companies regime and the issues that it created.  Fortunately it is still a couple of years off, which is a long time in politics and in tax.  Every cloud ….! If you have any questions or concerns about what this may mean for you, get in touch with us.