The ‘associated company’ rules are changing in Finance Act 2011. The rules are essentially an anti-avoidance measure, to prevent the creation of multiple, closely controlled companies to split a wider economic whole and take advantage of the small companies’ corporation tax rate. That rate reduced to 20% from 1 April 2011, but the main rate reduced to 26% from the same date and is gradually reducing to 23%. Whilst the associated company rules therefore assume less importance than in previous years, they remain a significant issue for many business owners.
New rules are expected to be introduced on how in the case of a close company you work out the number of its associates for tax purposes in calculating whether the small companies’ rate of tax applies.
Currently the associated company tests start by asking you work out which person (or group of persons) controls a company according to:
- Share ownership.
- Voting power.
- Any rights conferred in the Memorandum and Articles, or other rights.
- Attributable rights – of associates, of nominees, or beneficial entitlement.
- Entitlement to assets on winding up, with and without loan creditors.
The second step (which is going to be subject to change) is that in working out who controls a company you will look at the rights of the individual plus you will attribute to each individual the rights of his associates.
Your associates normally include:
- Blood relatives.
- Partner (subject to existing rules on interdependence).
- Settlements and will trust associates.
- Trustees are associates where the individual, or any living or dead relative is or was the settlor.
- Trustees are associates where the individual is interested in a settlement, as beneficiary or remainder man.
- Attributed company associates. One can also be attributed rights by reason of control of another company.
The proposed new rules correct this problem; there will no longer be any requirement to attribute the rights of associates if two companies are not “substantially interdependent”.
Substantial commercial interdependence is defined in regulations by considering the following:
Financial interdependence where:
- one company gives financial support one to another, or
- one company has a financial interest in the other.
Economic interdependence where:
- the companies have common customers; or
- the activities of one benefits the other; or
- they seek to realise the same economic objective.
Organisational interdependence where the companies share the same:
- management; or
- employees; or
- premises; or
So if companies are substantially commercially interdependent you must attribute the rights of associates, if they are not, no further attribution will be necessary.
By way of example it means that a husband and a wife could each control their own company and each company will no longer be associated. Practically speaking, this might be easier said than done, but each case will need to be considered (and continually monitored) according to its own circumstances.
Associated companies restrict the thresholds at which the lower and marginal rates of corporation tax apply to the individual companies. The threshold at which the annual allowance is available for capital expenditure on plant and machinery is also compromised where companies are associated.
The associated company rules will broadly continue to apply where companies are under common ‘control’, as defined. A participator’s own rights and powers are always taken into account for those purposes. In addition, an individual may still control one company through his shareholding, and control another company (even if all the shares are owned by (say) his wife) by making a loan which entitles him to the greater part of his wife’s company assets on a winding up. Companies can still be associated in such circumstances. Group companies will also generally be associated.
With the new legislation, HM Revenue and Customs are likely to take a closer interest in business structures to ensure that those companies that are associated are taxed accordingly.