Associated company rules & HRMC’s Corporation Tax clampdown

HMRC has been sending out two different letters to companies that may have filled in their Corporation Tax returns incorrectly. The companies it is targeting are those that have associated companies, but haven’t declared them when claiming marginal relief. HMRC says that these firms may need to pay more Corporation Tax.

What is marginal relief for Corporation Tax?

Under current rules, there are two main rates of Corporation Tax. Firstly, there’s a main rate of 25%. This is chargeable on annual taxable profits of £250,000 or more. Secondly, there’s a ‘small profit rate’ of 19%. This is payable on profits under £50,000.

If a company makes a taxable profit between £50,000 and £250,000, it can claim something called marginal relief. Depending on the level of profit, the company effectively pays Corporation Tax at 20%, 21%, 22%, 23% or 24%.

If you’d like to find out more, we’ve published a blog post, What is marginal relief on Corporation Tax?

What are associated companies, and why do they matter?

There are special Corporation Tax rules for associated companies.

HMRC defines an associated company as follows:

“A company is an associated company of another company if one has control of the other, or both are under the control of the same person or persons.”

This rule holds, no matter where the associated company is tax resident.

It’s important to correctly declare any associated companies when claiming marginal relief. This is because the upper and lower limits of marginal relief are reduced when claiming marginal relief. If you have one company and one associated company, the limits are £25,000 and £125,000 for each (i.e half the normal amount). Similarly, if you have one company and two associated companies, the thresholds are £83,333 and £16,666 for each (a third of the normal amount).

If you don’t know the rules relating to associated companies, it’s easy to incorrectly claim marginal relief. Say you control two companies. One makes £40,000 in profit. The other makes £30,000 in profit. If they weren’t associated, each would qualify for the 19% Corporation Tax rate because they each have under £50,000 in profit. But because they are associated, each would have to earn a profit of under £25,000 to qualify for the 19% rate. Neither of them do, so they are entitled to a less generous rate of marginal relief.

You can read about associated company rules in more detail here.

What are the HMRC letters about associated companies?

HMRC is sending out two, slightly different letters to companies that it believes haven’t declared associated companies when claiming marginal relief.

You can read each letter in full on the Chartered Institute of Taxation website. Both letters ask the recipient to do four things within 30 days of receipt. These are:

1. Check all company tax returns for the accounting period that includes 1st April 2023, plus all subsequent returns.
2. Amend any incorrect return if it’s less that 12 months since the statutory filing date.
3. Make a voluntary disclosure to HMRC if an incorrect return’s statutory filing date was more than 12 months earlier.
4. In cases where the recipient believes the returns to be correct, they need to email HMRC to explain why they don’t need to declare any associated companies.

What’s the difference between the two letters?

The two letters are largely identical. However, one version has an extra section entitled ‘What happens next?’ This says that, if the recipient doesn’t take action within 30 days, HMRC will make a decision on the information it already has and may also open a compliance check.

What should I do next?

If you have received one of these letters and you’re not certain about whether your other companies are associated, talk to your THP account manager. They will be able to advise you. Sometimes, associated companies won’t affect the marginal rate you can claim. For example, if an associated company doesn’t trade during an accounting period, it is disregarded.

It’s best to take action as soon as possible if you’re received a letter from HMRC. Compliance checks can be costly and result in larger penalties than voluntary disclosures. Don’t risk it!