HMRC targets undisclosed associated companies in Corporation Tax review

HM Revenue & Customs (HMRC) is using data and intelligence to target companies it believes may not be paying the correct rate of Corporation Tax due to undisclosed associated companies. If you’re one of the businesses that has received a letter from HMRC urging you to check you’ve paid the right amount of tax, it’s important you don’t ignore it.

What is an Associated Company?

A company is associated with another company if one controls the other, or if both are under the control of the same person or persons. Control can arise through things like ownership of shares, voting rights or rights to company assets as well as the ability to influence company decisions. Companies can also be connected through some relationships – like family members.

The rules can be more complex than many business owners realise. It is not simply a case of whether one company owns another. Companies operated by the same individual, family group or business partners may also be associated in certain circumstances.

Why is HMRC taking action?

Since 1 April 2023, Corporation Tax rates have depended on a company's level of taxable profits.

Companies with profits of up to £50,000 generally pay the small profits rate of 19%, while companies with profits over £250,000 pay the main rate of 25%. Businesses with profits between these thresholds may qualify for Marginal Relief, resulting in an effective tax rate somewhere between 19% and 25%.

However, these profit thresholds do not always apply in full. Where a company has associated companies, the £50,000 and £250,000 limits must be divided by the total number of associated companies. This means that businesses with multiple associated companies can reach the higher Corporation Tax rates at much lower profit levels than they might expect.

As a result, a company with profits that would otherwise qualify for the 19% rate may instead fall into the Marginal Relief or 25% Corporation Tax regime.

The recent letters suggest HMRC is using information already available to it to identify potentially linked companies and compare this against Corporation Tax returns submitted since April 2023.

Have you underpaid Corporation Tax?

Where HMRC believes associated companies have not been disclosed correctly, it may conclude that the company has benefited from higher profit thresholds than it was entitled to. This could result in an underpayment of Corporation Tax.

The letters ask businesses to review their Corporation Tax returns, amend any errors where possible, or make a voluntary disclosure if additional tax is due.

What you need to do now

If you have received one of these letters, or if you operate more than one company, now is a good time to review your position. This is even more important if you own or control more than one company or if any are owned by family members that may be relevant under the control rules.

You should also check if any associated companies have been correctly reported on Corporation Tax returns since 1 April 2023 and if Marginal Relief has been calculated using the correct thresholds.

Given HMRC's apparent focus on this area, business owners should make sure they understand the associated company rules and seek professional advice where necessary and avoid penalties later on.

For more help or advice, contact Monahans to see how we can help.

Stephanie Hurst