HMRC Tightens Corporation Tax rules for associated companies

13th August 2025

Corporation Tax rules

Businesses with associated companies are hearing from HMRC with regards to Corporation Tax payments. Some organisations have not declared their associated companies when claiming marginal tax relief, and may therefore have been filing their tax returns incorrectly and underpaying tax.

Associated companies and marginal rates

HMRC defines an associated company as one that is under the control of another company or person(s). The rule holds regardless of where the associated company is resident for tax purposes.

Under current rules, Corporation Tax has two rates. The main rate is 25% and chargeable on annual taxable profits of £250,000 or more. The ‘small profit’ rate is 19%, chargeable on profits of under £50,000.

Companies that make a profit of between £50,000 and £250,000 are able to claim marginal relief. Depending on their profit, they may be required to pay Corporation Tax of anywhere between 20% and 24%.

Why is it necessary to declare associated companies?

When claiming marginal relief, associated companies should be correctly declared so that the right amount of Corporation Tax is paid. The upper and lower limits of marginal relief are reduced for organisations with associated companies. One company and its associated company, for example, will have half the standard thresholds each: £25,000 to £125,000. One company with two associated companies will have a third of the normal threshold each: £16,666 and £83,333.

Not knowing the tax rules makes it easy to claim the incorrect amount of marginal relief. Let’s take an example.

Company A makes a taxable profit of £45,000 each year. Its associated company makes a taxable profit of £30,000. If they weren’t associated, each would qualify for a Corporation Tax rate of 19%, because both make less than £50,000 profit. However, because they’re associated the marginal relief threshold falls to £25,000 for each. They would therefore need to pay a less generous rate of Corporation Tax.

What to do if you receive a letter

If you receive a letter from HMRC about how your companies have claimed marginal relief, you will need to do at least two of the following:

Check company tax returns for both the company and associated companies for the accounting period that includes 1 April 2023, as well as all subsequent returns.
Amend any returns where the incorrect rate of marginal relief has been claimed if it’s less than 12 months since the statutory filing date.
Make a voluntary disclosure to HMRC for any returns with a statutory filing date of over 12 months earlier.
Email HMRC if you believe the returns to be correct, explaining why there’s no need to declare any associated companies. If an associated company has not been trading during a specific period, for example, it may not be necessary to declare it.

Receive expert advice

Not taking action could mean HMRC opens a compliance check. If you have received one of these letters and require assistance, or you’re uncertain about whether one or more of your companies are associated, contact a reputable accountant today.