PLEASE NOTE THAT SOME OF THE INFORMATION IN THIS ARTICLE HAS CHANGED FOLLOWING THE 2008 BUDGET

is your company associated?

Over the last two years, it has become clear that HMRC are making efforts to classify more companies as associated with others. The effect of this is that the relevant company tax limits, such as the £300,000 small companies limit, are proportionately reduced by the number of associated companies. This can mean that companies are dragged into higher rates of corporation tax.

For example, William Ltd makes profits of £100,000. The corporation tax rate on these profits would be 20%, a bill of £20,000. If William Ltd had three associated companies, the small companies profit limit available to William Ltd is £75,000 (£300,000/4). This would increase William Ltd’s tax bill to £23,125. If the owners of William Ltd had not realised that there were associated companies, HMRC would look to collect the additional tax for the last six years if applicable, an additional bill of say £18,000, plus interest and a possible penalty. If the other three companies had the same problem, this would create an additional bill of over £70,000!

What makes a company associated?

The importance of associated companies is clear. A company is associated with another company if one of them has control of the other or if both are under the control of the same company or person(s). Companies which are controlled by the same individual or group of individuals are thus included, as well as those controlled by a parent company.

Control is very widely defined and covers all forms of direct or indirect control but, in particular, shares, votes and rights in a winding up (including loans) should be considered.

When you are deciding who controls a company, the rights which a person possesses (or is entitled to acquire) must be taken into account, as well as the rights of certain others which may be attributed to that person. These ‘certain others’ include:

a person’s spouse or civil partner, parents and remoter forebears, children and remoter issue, brothers and sisters
a person’s business partners
the rights of certain trustees of a settlement.

So, for example, if Bob and his wife each own a company, these would be associated for tax purposes even though these businesses were not related.

Other things to bear in mind include:

a company is counted even if it is an associated company for only part of an accounting period
worldwide associated companies are included
a company which has not carried on a trade or business at any time during that accounting period can be ignored.

The rules are complex and wide-ranging, so please talk to us if you have any concerns.