Reducing the tax bill for associated companies

First, a definition of an associated company for general corporate tax purposes:

A company is an ‘associated company’ of another company if one of the two has control of the other, or both are under the control of the same person or persons

This definition is found here.

For the sake of simplicity let’s take “control” to mean control over the affairs of the company through voting power although there are many different tests of control.

There are many commercial and legal reasons why people may wish to own and run more than one limited company. For example, the operations of one business venture might be very different to that of another venture – therefore both ventures are set up independently to limit the liability of one venture going bust!

However, the tax consequences of operating two or more associated companies must be considered along with the various tax planning tools you can use to reduce potential bills.

The main point explored here is that of the higher rate thresholds for associated companies. Limited companies pay two rates of tax depending upon their profits and any profits above £300,000 are taxed at a higher amount than the standard small companies’ rate of company tax.

The problem for associated companies? For every associated company this threshold is reduced. So, for two associated companies, the threshold is reduced to £150,000 (£300,000 / 2).

So if company A has profits of £160,000 and company B has profits of £20,000 than company A is going to incur a larger tax bill than the small companies rate of 20%.

How do we combat this?

1. Where possible charge company A for inter company services to company B (rent, general administrative duties etc) – these must be genuine services and to avoid any contest from HMRC should be set at commercial rates.
2. Where charging for inter company services is not possible a loan agreement could be made between the two companies with company B lending money to company A and charging it a commercial rate of interest. This effectively reduces the profit of company A and increased the profit of company B meaning less profit is charged at a higher rate. Note again that the rate of interest should roughly match that charged by the average high street lender to avoid any contest from the taxman.

So, by finding ways to reduce the profit of the higher rated company and put these into the lower rated company it is possible to reduce the corporation tax bill of the companies overall – so long as the rates are not inflated!