Some creative business owners get a little carried away each time they have a new business idea and decide to form a new limited company for every venture. Whilst not always a bad thing to keep each business independent, it can have some potential tax pitfalls to navigate. Understanding the rules around associated companies and VAT segregation is crucial to ensuring your businesses remain tax-efficient and compliant with HMRC rules. Here's what you need to know.
In the context of tax, associated companies are those that are connected through common ownership or control. For instance, if one person or group of people owns or controls more than 50% of the shares, voting rights or assets in each company, those companies are considered associated.
Why does this matter? The key tax implication for associated companies is how they affect your Corporation Tax. When companies are associated, HMRC treats them as part of the same group for certain tax calculations.
For example, if your companies are associated, the Corporation Tax rate thresholds for each company are divided by the total number of associated companies. So, if you have more than one company making profits, this could push you into a higher tax band more quickly, or mean you miss out on lower tax bands completely.
Here's a quick example.
A company will pay tax at:
- 19% on profits up to £50,000;
- 25% on profits over £250,000; and
- a variable rate on profits between the two.
If you control 2 companies, those bands are shared equally between the companies so each will only get £25,000 taxed at 19%. If one of those companies doesn't make any profit then that completely wastes that lower tax band. The profitable company will also start paying tax at 25% from profits over £125,000, rather than £250,000. Not good news.
A common trap when running multiple companies is trying to separate them artificially to avoid VAT registration. The VAT threshold for the 2025/26 tax year is £90,000. If your combined taxable turnover across all businesses exceeds this threshold, you’ll need to register all of them for VAT.
It might seem tempting to split your business into several companies to stay under the VAT threshold for each one, but HMRC watches for artificial segregation. If HMRC believes you’re splitting your business activities solely to avoid VAT registration, they can treat all your companies as a single entity for VAT purposes. This could result in mandatory VAT registration across all your businesses, including penalties for non-compliance.
For example, if you and your spouse run two agencies from the same premises, using shared infrastructure and IT subscriptions but only one of your companies is registered for VAT, HMRC may view this as an attempt to dodge VAT and force the other to register too.
If your companies are associated, you need to be aware of how the Employment Allowance works. The Employment Allowance is a scheme that allows businesses to reduce their National Insurance (NI) contributions.
However, Employment Allowance can only be claimed by one company within a group of associated companies. If you have multiple associated companies, only one of them can claim the allowance. This means that if you're running several companies with employees, you need to choose which company will benefit from the allowance, and the others will not be eligible.
This is important to consider when planning your company structures, as missing out on this allowance can increase the cost of hiring employees. It’s a good idea to review which company is best positioned to claim the allowance, ensuring you’re maximising the available savings.
Using multiple companies can be an effective way to separate risks, streamline operations, and manage different revenue streams in your creative business. However, it’s essential to be mindful of how associated companies affect your tax position, particularly with Corporation Tax, VAT registration, and Employment Allowance. It’s easy to assume that multiple businesses will function independently for tax purposes, but the reality is that associated companies are linked in the eyes of HMRC, and there are rules in place to ensure this doesn’t lead to unintended tax issues.
Always ensure that your business structure is well planned, especially when it comes to VAT thresholds and Employment Allowance eligibility, and consult a tax adviser if you're unsure about how to properly structure your businesses to maximise tax efficiency.