Alternative to associated companies

You may have good commercial reasons for running different parts of your business through separate companies, but this may lead to higher tax bills. Why is this and how can you avoid it?


More than one trade It is not unusual to find more than one business using the same premises. The owners may have started one trade successfully and then branched out into others placing each new trade into a new, separate company with its own identity. This may seem a perfectly logical business structure but it could cost the businesses extra tax.


Associated Tax For corporation tax purposes a company is connected with another company if both are controlled by the same owners. These are called associated companies. A company may make taxable profits of up to £300,000 in a year and be taxed on them at the Small Companies Rate (SPR) of 20%. Thereafter, the higher rate of 27.5% is used. However, where two or more companies are associated, the SPR band is split equally between them.


Example Two associated companies A Ltd and B Ltd have taxable profits of  £250,000 and £50,000 respectively for the same year. Overall their profits amount to £300,000 which would be taxed at 20% if they were not associated to produce a tax bill of £60,000. But because the SPR is split equally between them, A is taxed at 20% on its first £150,000 profits (£300,000/2) - £30,000 - but at 27.5% on the remaining £100,000 - £27,500 to produce a tax bill of £57,500. As B's profits are only £50,000 they are taxed at 20% - £10,000. This produces a total tax bill of £67,500 for A and B Ltd. How can this increased tax burden be avoided?


Profit Sharing Running the companies separately produces an increase in their joint tax bill of £7,500. Shifting profits may help to resolve this. B Ltd could charge A Ltd for services it provides eg supplying staff or accommodation. But the services provided must justify the amount of any such charge as B can only charge for services it actually provides. This may limit profit shifting opportunities.


TaxTip A and B Ltd could merge and operate each business through just one company and thus take full advantage of the lower 20% rate. Their businesses would be carried out in separate divisions within the same company.


They can retain their respective trading names as far as their customers and suppliers are concerned although they would need to make changes to the company stationery. Click here  to see what needs to appear on company stationery.


They can even prepare separate accounts so that directors and shareholders can see how each is performing.


Divisional caveat  However, there other considerations than tax to take into account. If one division is in danger of failing , its creditors can look for payment from the company as a whole not just from the division owing them the money,