Companies that may have miscalculated their corporation tax marginal relief, likely due to ignoring associated companies, may receive a letter from HMRC as part of a new campaign.
Associated companies
Directors will be aware that the first £50,000 of their company’s profit benefits from a corporation tax rate of 19%, compared to the main rate of 25% applicable once profits hit £250,000.
This means that marginal relief eases the transition from the 19% rate to the main rate.
Directors may not appreciate, however, that the £50,000 and £250,000 limits are shared across associated companies. For example, if a company has two associated companies (i.e. the limits are divided by the 3 companies that are associated with each other), marginal relief will apply on profits between £16,667 and £83,333.
What counts as ‘associated’?
Essentially, companies are associated if one is under the control of the other, or if both are under common control. It doesn’t matter whether a company is associated for part of an accounting period, or where a company is resident. However, dormant companies are not treated as associated.
The associated company rules can be quite complex, and, in some circumstances, a company owned by a spouse, civil partner, parent, child or sibling can be treated as an associated company.
One-to-many letters
Any company receiving a letter only has 30 days in which to respond to HMRC, and, if necessary, make any amendment. HMRC could, of course, be mistaken, such as where an alleged associated company is, in fact, dormant.
What a director should definitely not do is ignore a letter. If HMRC were to follow up with a formal compliance check, the process would likely be time-consuming and costly.
Tax Planning
If a company’s corporation tax is higher than it would otherwise be as a result of having associated companies, the overall company structure needs to be reviewed. For example, two companies under common control might have profits of £49,000 and £1,000 respectively. The total corporation tax bill could be reduced by £1,800 if the two companies were combined into one company.
HMRC’s guidance on marginal relief can be found here.
Contact us
Please contact us to find out how the above applies in your circumstances and how we can help you.
Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.
