Understanding Associated Company Rules & CIC’s
From 1 April 2023, there were 2 key changes affecting the amount and timing of tax payable by companies, including Community Interest Company’s (CIC), and we thought it would be useful to look at what this means for CIC’s.
Firstly, the main rate of corporation tax increased to 25%, and the ‘associated company’ rules were changed.
If your CIC directors are also directors/owners of other Limited Companies (or their associates are), then you will need to carefully look at the new associated company rules to see if they apply. If they do apply, this could significantly alter the tax payable by both the CIC and the other Limited Company.
The new rules are significantly more complex and wider reaching than previously.
Broadly, under the new Associated Company rules, a company is associated with another company if at any time within the preceding 12 months one company has ‘control’ of the other, or (and this is where a CIC may be caught) both are under the control of the same company, person or persons. You will also need to consider an individual’s associates (i.e. spouse/civil partner, business partner, and other lineal relatives and other associations).
For example, two companies could be associated even if the businesses are generally separate but are controlled by 2 individuals who are associated to each other e.g. if a husband runs a CIC and the wife has a totally separate trading Limited Company, these will be associated. However, there are various exemptions, including the substantial commercial independence exemption.
The Finance Act 2021 Schedule 1, paragraph 18 provides the following exemptions:
1. A company will not be treated as an associate of another if it is a passive holding company (broadly where a company only receives dividends from its subsidiaries and pays these to its shareholders, and the company receives no other income or expenses.)
2. Where businesses are owned by associates of that person (or persons), if the relationship between one or more companies is not one of substantial commercial interdependence, they will not be deemed as associated. The following factors should be taken into account in determining whether a relationship between two companies amounts to substantial commercial interdependence:
- Two companies are financially interdependent if one gives financial support (directly or indirectly) to the other, or each has a financial interest in the affairs of the same business.
- Two companies are economically interdependent if the companies seek to realise the same economic objective, the activities of one benefit the other, or the companies have common customers.
- Two companies are organisationally interdependent if (in particular) the businesses of the companies have or use common management, common employees, common premises or common equipment.
3. Fixed-rate preference shares held by a company are ignored in determining if one company is under the control of another if the company holding the shares is not a close company, takes no part in the management or conduct of the issuing company or of its business, and subscribed for the shares in the ordinary course of a business which includes the provision of finance.
4. A company is not under the control of another company if the only connection (past or present) between the two is that one company is a loan creditor of the other and either the creditor company is not a close company, or the creditor relationship arose in the ordinary course of the company’s business.
5. Where two companies are controlled by the same person by virtue of rights or powers held in trust by that person, those rights or powers are ignored in determining whether the two companies are associated.
The meaning of control is defined in sections 450 & 451 of the Corporation Taxes Act 2010: A person (P) is treated as having ‘control’ of a company (C) if P exercises, is able to exercise, or is entitled to acquire, direct or indirect control over C’s affairs.
As you can see, this is a very complex area, and every situation will be different.
It is important for directors of CIC’s and Limited Companies to review the Associated Company rules and to establish where associations exist, and if they fall into one of the exemptions or not. This is important as the correct tax rate will need to be applied to each of the companies that are associated, which will either be the small company rate of 19%, the normal rate of 25%, or the marginal rate depending on where the profits for each entity fall.
If you are unsure whether the Associated Company rules apply to you, please contact your accountant who will be able to help you assess your specific position, and any potential impact of the change on the amount of Corporation Tax your CIC will pay.