Month: April 2025

Associated Companies

A simple guide with scenarios encountered by SME practitioners.

Why is it important?

a. Corporation Tax rate

Limits of standard rate (25%) and small profits rate (19%) are divided by number of associated companies plus one.

Example 1: How limits are calculated.
Suppose A Ltd and B Ltd are associates. As A Ltd has one associated company B Ltd, limit will be divided by 1+1 = 2; and reduce from £250k (25%) to £125k and £50k (19%) to £25k.

Corporation tax limits are for 12 months, thus where the accounting period is six months with one associated company, limits will be divided by four.

b. Deadline for Corporation tax (CT) payment

`Large` companies i.e. companies whose annual profits exceed £1.5m, must pay CT by quarterly installments. £1.5m threshold is divided by number of associated companies.1

Who are associates?

Two companies are associates when one is controlled by another or both companies are controlled by the same person or persons.

Example 2: One company owned by another.
A Ltd owns 100% share capital of B Ltd. A Ltd and B Ltd are associates.

Example 3: Subsidiaries
A Ltd owns 50.5% of B Ltd. A Ltd also owns 100% of C Ltd. All three companies are associates.

Example 4: Two different companies fully owned by same person.
Both A Ltd and B Ltd are 100% owned by Mr A. A Ltd and B Ltd are associates.

Example 5: Two different companies 50% owned by same person.
Mr A owns 50% shares of A Ltd and B Ltd. A Ltd and B Ltd are not associates. As the condition is that Mr A has to own more than 50% shares to have control.

Example 6: Two people owning more than 50% shares in two different companies. (Usually husband wife companies). Both A Ltd and B Ltd are owned by Mr A and Mrs B 50% each. A Ltd and B Ltd are associates. Mr A and Mrs B need not be relatives. Even if they are friends A Ltd and B Ltd are associates.

Example 7: Concept of smallest irreducible number
A Ltd owned 50% each by Mr A and Mr B. B Ltd owned 1/3rd each by Mr A, B and C. Smallest irreducible number to control A Ltd is A + B. In B Ltd it is A+B, A+C or B+C. As A+B is common in both companies, they are associated companies.

Example 8: Directorship
A Ltd is 100% owned by Mr A; there are two directors in A Ltd, Mr A and Mr B. B Ltd is 50% each owned by A and B; and both A and B are directors in B Ltd. A Ltd and B Ltd are not associates as Control is at the participator or general meeting level, not at the administrative or board level.

Companies owned by relatives?

They will only be counted as associates if there is substantial commercial interdependence among them.

Example 9: Different businesses

A Ltd is 100% owned by husband Mr A operating an accounting business. B Ltd is 100% owned by wife Mrs B operating an architectural business. If no substantial commercial interdependence, they are not associates.

Inclusions:

  • Overseas companies
  • Company associated even for 1 day in the accounting period.

Example 10: Associates acquired or disposed during the year.
A Ltd accounting period runs from 1st April 2024 to 31st March 2025. A Ltd had one 100% subsidiary, B Ltd, which he disposed on 30th June 2024 and a new 100% subsidiary, C Ltd, was incorporated on 1st March 2025. In this case both subsidiaries will be counted.

Exclusion

  • Dormant companies – usually passive holding companies.

    Example 11: Dormant company
    A Ltd’s year end is 31s Jan 2025. B Ltd,100% subsidiary of A Ltd, is incorporated on 29th Jan 2025. B Ltd commences trading on 15th Feb 2025. B Ltd will not be counted as an associate for A Ltd the year ended 31st Jan 2025 as B Ltd was associate only for part of the accounting period and was dormant in that part.3


Practitioner’s points:

  • Take care when shortening accounting period of companies as it reduces their limits as well.
  • Date of ceasing and commencing trading will become important; as 1 day trade can reduce limits by half.
  • Ownership percentages become more important.
  • Group profits can be shifted via intra-group sales and management charges.4

Notes:

  1. CTM92520
  2. 14.12.5 Tax Planning : Taxation of Small businesses by Malcolm James.

Further readings:

  1. TAX guide 02/23: Associated companies | ICAEW
  2. Associated companies and corporation tax | ACCA Global
  3. AAT FAQs
  4. Taxation of Small businesses by Malcolm James

Annual PAYE process

Year end payroll tasks in simple terms.

In simple terms – annual PAYE process for most employers.

-Send final FPS: this is a check box in the PAYE software which needs to be ticked confirming that it’s the final FPS of the year.

– Issue P60: once step 1 has been completed, we need to issue P60 to all employees employed as at 6th April. Some software send P60s to all employees even those who left. So ensure to exclude the leavers when sending P60s. Also save a copy in your records.

– Submit P11d forms to HMRC and ask employer to pay Class 1A National Insurance. Employee also needs a copy for their self assessment tax return.

– Update Software: all PAYE software must be updated once the tax year ended. Usually the software will prompt you automatically to update it once you logging. Alternatively, visit software provider’s website for instructions.

– Update tax code for the new year: please use HMRC guide P9X for this.

– Update staff salary with National Minimum wage. Adjust director’s salaries where required. Be aware National Minimum wage increases not from 1st April but from first pay reference period starting after 1st April. See ACAS link.

-Review eligibility for Employment Allowance in the new tax year. Also check for connected businesses.

-Review Pay/RTI dates ; sometimes software does not carry it forward correctly.

Bonus points:

1 – Before every payment run employers need to download tax notices from HMRC website. HMRC has made a very good free software – HMRC Desktop Viewer.  Most software will have an inbuilt facility to download PAYE notices.

2 – We are using MoneySoft payroll for our payroll. We find it easy to use and value for money.

3 – HMRC version of this guide.

4 – Payrolling of benefits delayed by one year to April 2027.