If you own a private limited company and its taxable profits do not exceed £300,000 you will pay corporation tax at the small companies rate of 20% from 1 April 2011. Profits in excess of £300,000 up to £1.5m will be taxed at a marginal rate of 27.5% and over £1.5m at the main rate of corporation tax, 26%.
If you have control of other companies, or are associated with other companies, these limits are reduced. The effect on the amount of tax you pay can be significant. Basically if your company is associated with say three other companies the small company marginal relief lower ceiling would reduce from £300,000 to just £75,000; and the other limits reduced in proportion.
As you would expect, the rules that define association are complex and from 1 April 2011 they have changed. The purpose of the new rules is to take the existence of other companies into account for the purposes of the small profits rate only where there is a substantive relationship between the relevant companies. However where there is an association by ‘accident’ the companies will not necessarily be associated. For example, a husband and a wife could each control their own company, and each company will no longer be associated. This is the good news!
For the first time legislation also considers the association of companies where there is substantial commercial interdependence; financially, economically or organisationally. This is the bad news!
To benefit from the new rules an election must be submitted, so this is not a process to be left to chance. Make sure that you consider the effects of the changes and avoid any future, unpleasant tax surprises.
John Elliott, Tax Partner