What is the definition of associated companies in relation to UK tax rules?

Associated companies are two or more companies that have a certain level of ‘control’ or ownership relationship with each other. Two companies are associated if one company has control over the other or both companies are under the control of the same person or persons.

The term "control" generally refers to owning at least 51% of the ordinary share capital or voting power. However, the rules also have a broader definition of control. For example, companies that are not in the same group can still be considered associated. This means that the number of associated companies a company has may not necessarily be the same as the number of companies in its group, due to exclusions for dormant and passive entities.

In certain situations, determining whether two companies are associated requires assessing whether there is substantial commercial interdependence between them, rather than relying solely on mechanical tests.

What are the UK tax rules for associated companies?

The UK tax regulations for associated companies aim to prevent tax avoidance and ensure that related companies are treated correctly for tax purposes.

Here are some key considerations for these regulations:

**Group Treatment**

Associated companies can form a group for tax purposes if one company has control over the other. This can provide benefits such as accessing tax reliefs and simplifications like group relief, group loss relief, and group capital gains relief.

**Transfer Pricing**

When associated companies engage in transactions with each other, the transactions must be conducted on an arms length basis. This means that the prices and terms should be comparable to what would be agreed upon between independent parties. The aim is to prevent the manipulation of profits between associated companies to reduce tax liabilities.

**Thin Capitalization**

The thin capitalization rules limit the amount of interest expense that can be deducted for tax purposes if a company has excessive debt owed to an associated company. These rules prevent the excessive deduction of interest that could artificially reduce taxable profits.

**Controlled Foreign Companies (CFC) Rules**

The CFC rules target the diversion of UK profits to low-tax jurisdictions through controlled foreign subsidiaries. If a UK company controls a foreign company, certain types of income arising in that foreign company may be subject to UK tax.

**Transfer of Assets**

Special rules apply to the transfer of assets between associated companies, known as transfer pricing rules. These rules ensure that the transfer is valued appropriately for tax purposes to prevent artificial tax advantages.

Changes since 1st April 2023 as a result of increase in corporation tax in the UK

From 1 April 2023, the main rate of corporation tax increased to 25 percent for profits over £250,000. Companies with profits of £51,000 to £250,000 will pay 26.5 percent, and companies with profits below £50,000, will continue to pay 19 percent.

Where a company has a number of ‘associated companies’, however, these new corporation tax thresholds for applying the main rate are reduced. If a company has one or more ‘associated companies’ then the thresholds for determining the applicable tax rate and any marginal relief are divided by the total number of associated companies.

In December 2022, HM Revenue and Customs (HMRC) published new guidance to help companies understand and apply these rules. They also introduced an online marginal relief calculator to assist companies in determining their corporation tax liability rate.

It is important to note that tax laws can be complex and subject to change. Therefore, it is advisable to consult with a qualified tax professional or refer to the latest legislation and guidance from HMRC for specific and up-to-date information regarding associated company tax rules in the UK.