If you are an owner and/or director of a limited company, you may have noticed your accountant asking more questions regarding your other business interests. This is due to some changes in corporate tax legislation.
In this blog we aim to set out the new rules and why they are important.
What are “Associated Companies”?
A company is “associated” with another company if one of the two has control of the other, or both are under the control of the same person or group of people.
For example, if Mrs Smith owns 100% of A Limited and 100% of B Limited, these companies are associated for tax purposes.
We will delve deeper into the complexities later on.
What does control mean?
In most cases we are looking at a shareholding of 51% or more including voting rights and rights on winding up. If you have a complex share structure or shares are owned by family members it is definitely worth getting in touch with us to make sure we identify the correct associated companies.
What impact does the number of Associated Companies have?
There are two impacts:
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The rate at which you pay corporation tax
We now have two rates of corporation tax (plus a marginal rate), depending on the level of taxable profit a company makes. There is a small company rate, a main rate, and a marginal rate:
| Rate | Taxable profit band | Effective % tax |
| Small profit rate | £0 – £50,000 | 19% |
| Marginal rate | £50,001 – £250,000 | 26.5% |
| Main rate | > £250,000 | 25% |
These taxable profit bands are divided by the number of associated companies. Meaning, the more companies you have that are associated for tax purposes, the quicker you will move into the marginal and higher rate band.
So, in our example of Mrs Smith above, If A Limited made a taxable profit of £30,000 it would pay 19% tax on £25,000 (£50,000 / 2 associated companies), and 26.5% tax on £5,000.
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Paying corporation tax by instalments
Most small owner managed businesses do not need to worry about paying corporation tax by instalments. The taxable profit limit at which you need to do this is £1.5m. However, this limit is also divided by the number of associated companies, and it can quickly come down as illustrated by the table below:
| Number of Associated companies | Limit |
| No other companies | £1,500,000 |
| 1 (divide by 2) | £750,000 |
| 2 (divide by 3) | £500,000 |
| 3 (divide by 4) | £375,000 |
| 4 (divide by 5) | £300,000 |
| 5 (divide by 6) | £250,000 |
The complex bit
It all sounds fairly straight forward so far, however there are situation that make it more difficult to determine which companies count as being associated and which can be ignored. Below are some of the most common examples we have come across:
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Companies within a group
Normally group situations are straight forward, however where there are large or complex structures it can be difficult to first see which companies are associated. In this example we consider which companies are associated with Lemons Limited:
The answer is 3 other associated companies, Grapes Limited, Oranges Limited and Fruit Limited. Both investment companies are not associated as they do not have control.
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Where no individual has control
In the example above, none of the individuals have control of Lemons Limited as their shareholdings are all less than 50%. David owns 2%, John owns 49% and Amanda also owns 49%.
In this situation we need to look at the minimum controlling combination (MCC). This is the smallest combination of shareholders that we can put together to create control. In the example above the MCC’s are as follows:
| MCC | Percentage holding |
| John & Amanda | 98% |
| John & David | 51% |
| Amanda & David | 51% |
We then need to consider whether these combinations of shareholders, control any other company, as these companies will be associated.
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Where shareholders are close family
In the examples we have looked at so far, we have assumed that the shareholders are independent of each other. However, where there is ‘substantial commercial interdependence’ between two companies, we also need to consider whether the shareholders of either company are connected or ‘associated’.
Individuals are associated if they are
- Parents
- Siblings
- Spouses or civil partners
- Children
- Also includes partners in a partnerships and trustees.
What is substantial commercial interdependence (SCI)
The term ‘substantial’ is not defined. HMRC consider that both the degree of interdependence and the period during which it exists during a particular chargeable accounting period should be taken into account. HMRC manual CTM03770 implies that a 10% test should be used in relation to the specified indicators but the overall ‘picture’ should be assessed rather than looking at these indicators in isolation.
There are three indicators that two companies may be SCI. You only need to demonstrate one, not all three, to be caught:
- Financial interdependence– This reflects the extent to which one company gives financial support (directly or indirectly) to another.
- Economically interdependent– Two companies would be ‘economically interdependent’ if (in particular) they seek to realise the same economic objective, the activities of one benefit the other, or they have common customers.
- Organisational interdependence– This will be the case where the businesses of the companies have common management/employees, common premises, or common equipment.
If two companies have SCI, individual shareholders that are associate are treated as one shareholder for the purposes of determining whether the companies are associated.
What you need to do
If you are still with me, well done! It’s a bit of a techy subject. Here are the main things you need to make sure you do, going forward:
- Have a record of all the companies within your group and the percentage shareholdings
- Make sure you understand your share structure in relation to voting rights and rights on winding up
- Maintain a record of any relationships between shareholders
- Ask shareholders about any other shares they hold
Any questions please feel free to email your normal manager at Myers Clark. If you are not yet a client here’s how we work