Consultation re Associated Companies rules for CT purposes
HMRC together with HM Treasury (HMT) have published a joint consultation document on possible relaxation of the associated company rules in connection with the small companies’ rate of corporation tax. This follows an earlier review which identified these rules as a priority for reform as, in some circumstances, they effectively result in small companies paying the main rate of corporation tax when this is not strictly appropriate.
Where a company is deemed to be associated with other companies the thresholds for paying corporation tax are reduced accordingly. Currentlycompanies pay the small companies rate (SCR), currently 21% when their taxable profits are less than£300,000. The main corporation tax rate of 28% applies to profits over £1.5million with marginal relief for companies whose profits are between these amounts. However where there are two associated companies, the upper and lower limits are reduced by half to £150,000 and £750,000 respectively.
The rationale for the associated companies rules has always been to treat companies under common control as ‘associated’ however there are certain aspects of the rules which do not properly test ‘control’. This results in some smaller companies being subject to higher tax rates that do not always reflect the underlying economic and commercial realities.
HMRC together with HMT are proposing the introduction of a new fragmentation test which would help identify companies that form an economic whole and thus whose profits should be considered collectively in establishing the rate of corporation tax that applies to them.