A new one-to-many campaign has been started by HMRC and will be running until the end of October. The campaign will target companies where HMRC believe there are undeclared associated companies which would increase the Corporation Tax liability.
Between 2015 and 2023 the UK had a single rate of Corporation Tax for most companies. However, from April 2023 the system reverted to a two-rate regime. For a single company with profits under £50,000, the small companies rate of 19% applies, and if profits exceed £250,000 the full rate of 25% applies. Where profits fall between these two figures, tax is calculated as 25% less “marginal relief” meaning the effective rate will be somewhere in between.
The complication arises where a company has “associated companies”. Broadly, two companies are associated with each other if one controls the other, or both are under the same control. This is therefore wider than simply other companies in a corporate group, because two independent companies with the same individual owner will also be associated.
Where there are associated companies, the profit limits are divided by the total number. For example, if a company has 3 other companies associated with it, the limits are divided by 4, becoming £12,500 and £62,500.
The rules are complicated, especially where there are groups of shareholders involved. Companies controlled by connected individuals (for example belonging to other family members or business partners) can also be included depending on the extent of any transactions between them.
HMRC are now writing to companies where they believe they have information about associated companies that have not been included in submitted tax returns. The letters they are sending are also helpfully naming the companies they believe are associated.
It is crucial that companies respond within 30 days of receiving one of these letters, because if they do not, a full compliance check is likely to be started, opening the possibility of a long, drawn-out enquiry process, with interest and penalties should any adjustments be required.
There are often reasons why an associated company may not need to be declared – for example if it is dormant.
Although the focus of HMRC in this campaign seems to be on incorrectly claimed marginal relief, associated companies is also relevant to the timing of tax payments. Companies with taxable profits of over £1.5 million may have to pay their Corporation Tax much earlier in quarterly instalments, but again where there are associated companies this threshold is divided down in the same way. Failure to correctly operate quarterly instalments results in late payment interest and potential negligence penalties.
If you receive one of these letters, it is crucial to speak to your advisor before responding due to the potential complexity of the rules and the need to act quickly and robustly to avoid the possibility of penalties.
James Geary is Corporate Tax Partner and would be happy to have a chat through how this campaign could impact your corporate tax position, please call 01242 776000 or email Tax@randall-payne.co.uk.
