More tax for small companies
Small companies face a 1% rise in corporation tax on 1 April 2008 to 21%. This is the second of three increases announced in the 2007 Budget.
A company is taxed at the small companies’ rate as long as its profits for a 12-month period are not more than £300,000 and provided it has no associated companies. If there are associated companies, then the £300,000 limit is divided equally between them. Associated companies are broadly companies under common control.
Profits above this threshold could be taxed at a higher rate – 29.75% – from 1 April 2008. So it pays to minimise the number of associated companies. However, the wide definition of ‘associated’ can produce unexpected results. Any company controlled by your husband, wife or civil partner is associated with your company. Also associated are companies controlled by certain other relatives where commercial links exist between the companies.
The rules also extend to business partnerships. As a partner, your company will automatically be associated with all companies owned by your fellow partners, even if there is no commercial dependence between them. This can cause problems.
In a large partnership, there could be a lot of companies controlled by individual partners, leaving each company with a very small share of the £300,000 limit. It could also be difficult to obtain the information from other partners. One solution is for any companies to be owned by the business partner’s spouse or civil partner, but that can cause other difficulties.
Contact us if you would like advice about how the associated companies rule works and how best to structure your business.