Companies may have claimed marginal relief in error

As reported by ICAEW

HMRC is writing to companies that may have failed to include the correct number of associated companies in their corporation tax return and as a result claimed marginal relief in error.

On 1 April 2023, the main rate of corporation tax increased to 25% and a small profits rate of corporation tax of 19% was introduced for companies with profits of up to £50,000. However, marginal relief may be claimed where the company’s profits are between £50,000 and £250,000, giving an effective rate of corporation tax rate of between 19% and 25%.  

The lower and upper thresholds of £50,000 and £250,000 are reduced proportionately where the company has associated companies. For example, where there is one associated company the thresholds are reduced to £25,000 and £125,000.  

A company is associated with another where one controls the other or both are under common control. However, the broad definition of “control” means that the rules can be difficult to apply in some circumstances. ICAEW has published additional guidance on this in TAXguide 02/23.  

HMRC is writing to companies that it suspects may have failed to declare the correct number of associated companies in their tax return and consequently claimed marginal relief in error. In the letter, HMRC asks the company to check the position and take one of the following actions within 30 days from the date of the letter: 

• where a return contains an error and is in time to amend, the company should amend the return;

• where a return contains an error and it is too late to amend the return, the company should make a voluntary disclosure to HMRC; or

• where the company believes that its returns are correct, the company should inform HMRC using the contact details in the letter.  

  
  

In most cases, the time limit for amending a corporation tax return is 12 months from the deadline for submitting the return to HMRC. For example, a company that prepared accounts to 31 December 2023 had until 31 December 2024 to submit the return and can amend the return up to 31 December 2025.  

The letter explains the steps HMRC will take and how to request extra support from HMRC. If the company has an agent, a copy of the letter will be sent to the agent.  

HMRC will send one of two letters to the company to trial the impact of using different approaches.   

Similar rules to those for associated companies are relevant in other areas of tax, including the national insurance employment allowance.