Associated companies and the timing of plant purchases
Alpha Ltd and Beta Ltd are trading companies. Mr Shah owns 100% of Alpha and 100% of Beta. Alpha's profits for the year to 31 March 2025 are £180,000; Beta's are £40,000. Alpha is considering buying £150,000 of new plant in March 2025 rather than April 2025. Mr Shah also wants to bring his son into Beta as a 50% shareholder. The companies have no other associates. Alpha has no capital allowances pool brought forward and claims full expensing where available.
1. Calculate Alpha's corporation tax liability for the year to 31 March 2025 and explain the effect of Beta.
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Beta is an associated company because Mr Shah controls both companies. The £50,000–£250,000 limits are divided by the number of associated companies plus one, so Alpha's limits are £25,000–£125,000.
Alpha's profits of £180,000 exceed the £125,000 upper limit, so no marginal relief is due. CT = £180,000 × 25% = £45,000.
Without the association, Alpha would have marginal relief: £180,000 × 25% − (£250,000 − £180,000) × 3/200 = £45,000 − £1,050 = £43,950. The association therefore costs £1,050 of extra CT this year. If Beta's profits were much lower, the association would still apply because the test is control, not the level of profits.
2. Should Alpha buy the plant in March 2025 or April 2025? Support your answer with figures.
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Full expensing gives a 100% first-year allowance for new and unused plant, so the timing determines which accounting period gets the deduction.
March 2025 purchase: profits fall to £30,000. This is within the associated marginal band (£25,000–£125,000). CT = £30,000 × 25% − (£125,000 − £30,000) × 3/200 = £7,500 − £1,425 = £6,075. Compare with £45,000, a saving of £38,925.
April 2025 purchase: the year to 31 March 2025 is taxed at £45,000, and the £150,000 allowance is carried into the next period. If next year's profits are similar, the relief may be less valuable because the company may already be in the marginal band.
Buying in March 2025 is better on these figures, but check that the plant is 'new and unused', that it is not a car, and that the contract is unconditional before 31 March 2025.
3. Would giving the son 50% of Beta remove the association between Alpha and Beta?
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Not necessarily. Association depends on control. If Mr Shah and his son each hold 50%, neither may control Beta alone unless the articles give one a casting vote. But control can be exercised by persons acting together, and HMRC will look at shareholder agreements and family arrangements. A 50/50 split does not automatically break the association.
There is also a commercial risk: if Beta ceases to be associated, Alpha's limits revert to £50,000–£250,000 and its CT falls, but Beta's own limits may tighten if it becomes associated with another company. The restructuring should be documented and checked against the control tests before implementation.