HMRC Associated Companies: Errors in Corporation Tax Marginal Relief Claims

HMRC has launched a one-to-many letter campaign aimed at companies that may have miscalculated corporation tax marginal relief on their returns.

The letters are being sent through to October 2025 and are specifically directed at businesses where HMRC believes HMRC Associated Companies may not have been correctly declared. This can lead to incorrect marginal relief claims and underpaid corporation tax.

Why HMRC Associated Companies rules matter

From 1 April 2023, the UK moved back to a tiered system of corporation tax rates:

• 19% for companies with taxable profits up to £50,000, known as the small profits rate
• 25% for companies with taxable profits over £250,000, known as the main rate
• Profits between £50,000 and £250,000 are taxed at 25%, reduced by marginal relief

However, these limits are reduced proportionately if a company has associated companies. This is where the HMRC Associated Companies rules become especially important.

For example, if your company has one associated company, the thresholds are halved to £25,000 for the lower limit and £125,000 for the upper limit. This means that companies with group structures, subsidiaries, or commonly controlled entities could be paying the wrong rate of corporation tax if HMRC Associated Companies are not properly identified and declared.

What counts as HMRC Associated Companies?

A company is considered an associated company if:

• One controls the other, or
• Both are under the control of the same person, or persons

“Control” is defined broadly, which can make the rules tricky in practice, particularly for businesses with dormant companies, overseas entities, or complex ownership structures.

The HMRC Associated Companies rules do not only apply to obvious trading subsidiaries. In some cases, dormant, inactive, overseas, or commonly owned entities may also need to be considered, depending on the facts and control position.

What HMRC expects you to do

If you receive one of these letters, you must respond within 30 days of the date of the letter, even if you believe your tax return is correct. HMRC asks businesses to:

1. Amend the return, if still within the 12-month amendment window
2. Make a voluntary disclosure, if it is too late to amend the return
3. Confirm no changes are needed, explaining why the return is correct

Failure to respond is likely to result in a formal HMRC compliance check, which can be both lengthy and costly.

HMRC Associated Companies: key risks and considerations

• Tight deadlines: The 30-day window means quick action is essential
• Dormant or inactive companies: These may still be considered associated, depending on control
• Multiple entities: Complex structures often fall into the associated companies trap
• Other taxes: The same associated companies concept can also affect other reliefs, such as the employment allowance for National Insurance
• Cross-border structures: Overseas companies may need to be reviewed carefully, especially where management, control, or economic substance is unclear

Where businesses operate across borders, it is also important to consider broader corporate residency and substance issues. Tax authorities may look beyond incorporation and assess where key management and commercial decisions are actually made. The HMRC Associated Companies position should therefore be reviewed alongside the wider structure, governance, and operational reality of the business.

Our view

HMRC’s current campaign makes clear that associated company disclosures are not a box-ticking exercise. A miscount can move you from small-profits or marginal relief straight to the main rate, with interest and penalties. Even if you believe your return is correct, you should undertake a fast, documented review before replying to HMRC.

If you’ve received an HMRC letter, don’t ignore it:

At WellTax, a UK/UAE boutique accountancy and tax advisory firm, we start with a quick assessment call to confirm ownership and control, UK and overseas entities, accounting periods, and any in-year changes. We then build an evidence pack and control map, including cap tables, PSC registers, board and shareholder rights, joint ventures, and connected persons, to determine the correct HMRC Associated Companies count month by month.

On that basis, we re-compute the corporation tax position, applying marginal relief where due, quantify any under- or over-payment, and model potential interest and penalties. We draft the reply to HMRC within the deadline, attach schedules and workings, and, where necessary, amend the CT600 and computations.

From there, we deal with HMRC on your behalf to minimise exposure wherever the rules allow, including using quality of disclosure and prompted versus unprompted considerations, and can agree a Time to Pay arrangement if cash flow is tight.

Finally, we put in place forward fixes, a simple associated-company register, quarterly governance checks, and a year-end sign-off, so the issue does not recur.

If you haven’t received a letter but own multiple HMRC Associated Companies:

We would run a preventive review now, build a group and control map, confirm the monthly HMRC Associated Companies count, align CT600 disclosures, and implement a light-touch checklist so finance can certify the position each year.

This avoids surprises and supports any future HMRC enquiry.

Key takeaway

Don’t leave this to chance. Contact WellTax: if we were your advisors already, we would have planned this with you in advance; if you’ve just received a letter, we will assess your position, run the calculations immediately to prevent avoidable interest, and deal with HMRC for you, aiming to minimise the overall tax burden and penalties wherever the law allows.

If you would like a clearer understanding of how the HMRC Associated Companies rules work in practice, we recommend reading our detailed explanation here: Associated Companies in the UK: A Case Study.