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The existence of associated companies means that the corporation tax limits of £1.5m and £300,000 are divided equally among all of the associated companies. It is these revised limits that are used in any marginal relief calculation.
CTA 2010, s 24
Companies are associated with each other if one company controls another company, or two companies are controlled by the same person or persons.
CTA 2010, s 25(4)
The definition of person in the Taxes Acts is very wide. It includes, for instance, a company, an individual or individuals, trustees of a trust, or partners in a partnership. For instance if ICI plc has two subsidiaries, both of them ‘controlled by’ ICI, all three companies are associated.
The definition of 'control' is as for the close company rules, with modifications. The definitions are modified for the purpose of the associated company definition as follows:
• there are differences in the definition of 'associates' for the purpose of attribution of associates' rights and powers to a person. The rules, which were amended in Finance Act 2011, are discussed in more detail below.Overseas companies are included. Although only UK companies are subject to corporation tax, existence of worldwide subsidiaries or holding companies will dilute the upper and lower limits.
Dormant companies are excluded. A dormant company is basically one that is not doing anything. In Jowett v O’Neill v Brennan Construction Ltd, a company simply holding funds in a bank deposit account and receiving interest income, was not an active company and counted as dormant for associated company purposes. Prior to this decision, the Revenue believed that a company was only dormant if it had no income. From this decision, the company is dormant provided it has no activity.
Jowett v O’Neill v Brennan Construction Ltd [1998] STC 482
Sub-subsidiaries, ie where one company controls another, which in turn controls another, are also included as associated companies. The definition is a very wide one.
Companies are associated for a whole chargeable accounting period if they are associated at any point in time during the accounting period. Therefore, companies that join or leave the group during the year are included, even though they are only associated for part of the period.
CTA 2010, s 25(2)
A holding company will be treated as dormant provided that all of the following apply:
• it has no assets other than shares in 51% subsidiariesCTA 2010, s 26
In determining whether the control test is satisfied, the legislation provides that any rights or powers which a nominee of a person possesses on his behalf, or may be required to exercise on his direction or behalf, are attributed to him.
When determining whether companies are associated, the holdings of an individual must be added to holdings of his ‘associates’.
CTA 2010, s 448
The rules regarding the attribution of rights held by a person's associates were changed by Finance Act 2011 and so the precise definition differs depending on whether the accounting period ends before, or on or after, 1 April 2011. Associates include the individual and his 'relatives', and certain business partners with whom the individual is trading in partnership. The definition does not extend to individuals who are directors in the same company.
Relatives are defined as the individual’s spouse or civil partner, plus also his brothers and sisters, children and remoter issue, ie grandchildren etc, parents and remoter forbear, ie grandparents etc. More favourable treatment was offered in ESC C9 where companies were associated because of relatives, other than spouses or minor children.
Rights and powers of trustees are also apportioned where the settlor is the individual or an associate of that individual.
The precise rules are explained below for both pre and post FA 2011 .
In summary, for accounting periods ending on or after 1 April 2011, rights and powers of associates are only attributed based on the new 'substantial commercial interdependence' test, which applies to all forms of associates (as defined above).
By way of background, following consultation the rules regarding the attribution of rights held by a person's associate were changed with effect for accounting periods ending on or after 1 April 2011. See for some more background to the changes.
CTA 2010, s 27
The amendment gives statutory treatment to former ESC C9, the contents of which are summarised below, which limits the attribution of rights to a person of his ‘associates’ to situations where there is ‘substantial commercial interdependence’ between two companies. Unlike ESC C9, the amended legislation does not exclude relationships between individuals and their spouses or minor children even though they are 'relatives'. This is good news for example for spouses who own companies which are treated as associated under the current rules even though there is no other link between the companies.
As well as giving statutory treatment to ESC C9 (with the extension to spouses etc. noted above), the amendments to the rules also change the position in respect of business partners. Under the pre 1 April 2011 rules, which are discussed further below, since 1 April 2008 rights or powers held by business partners were only attributed where ‘tax planning arrangements’ existed. The new ‘substantial commercial interdependence’ test replaces these rules.
CTA 2010, s 451(3)
Secondary legislation prescribes the factors which determine whether there is ‘substantial commercial interdependence’ for this purpose. This has effect for accounting periods ending on or after 1 April 2011. The as originally published by the Treasury was accompanied by draft HMRC guidance which has now been included at CTM03750–CTM03800.
SI 2011/1784
According to the secondary legislation, factors taken into account in determining ‘substantial commercial interdependence’ between two companies are:
• financial interdependence (in particular, where one company gives direct or indirect financial support to the other, or two companies together have a financial interest in another business)HMRC guidance states that ‘the practical application of the rules will vary depending on the facts of each particular case’.
CTM03750
Previously, guidance on the definition of 'substantial commercial interdependence' was in ESC C9 - this is discussed further below.
For more background on the amended rules, see also:
Simplification review: the associated company rules as they apply to the small profits rate of corporation tax – a summary of consultation responses and Pete Miller's response in his article 'Changing Tack' in Taxation magazine, 2 September 2010.
It may be worth noting that in its interim report into simplification of small business taxation, the Office of Tax Simplification proposes that the Government should review whether there should be a single corporation tax rate (, p 32). This would mean that the associated company rules would become obsolete in relation to the small profits’ rate and marginal relief. For a summary of the report see Office of Tax Simplification (‘OTS’) - Interim report: Small business tax review.
As mentioned above, for accounting periods ended before 1 April 2011 (and since 1 April 2008) a business partner was only treated as an associate where 'tax planning arrangements' existed. 'Arrangements' are widely defined to include any agreement, understanding, scheme, transaction or series of transactions which involve the participator (eg shareholder) and the partner(s) which secure a 'relevant tax advantage'. For these purposes, the definition of relevant tax advantage is based on the reduction of the company’s corporation tax liability by operation of the small profits' rate or marginal relief.
For periods ended before 1 April 2011, ESC C9 offered a more favourable treatment for companies which would be treated as associates even though they are in effect completely independent from one another. Under ESC C9, rights of a person's relatives were only attributed to him where there was 'substantial commercial interdependence' between the two relevant companies. Under ESC C9, this treatment was not available in respect of a person's spouses / civil partners and minor children - this position is amended by Finance Act 2011 as discussed above.
HMRC indicated previously that the meaning of 'substantial commercial interdependence' was the reliance by two companies on one another. This is not necessarily a financial test and can relate to factors that cannot be measured numerically. It is the overall picture that must be considered and not each factor in isolation.
The following list is not exhaustive but the following factors may be relevant:
• shared directors or administration
HMRC guidance states that whether or not two companies are under the control of the same person is obvious once the control tests have been applied to both companies. However, in determining whether two companies are under the control of the same persons, HMRC establish which group or groups of persons control each company. They only regard the two companies as under the control of the same persons if:
CTM60240
• a group which controls one company is identical to a group which controls the other, andThey take the term 'minimum controlling combination' to mean a group of persons which has control of the company but which would not have control of it if any one of the persons were excluded from the group.
They give the example at CTM60250 of three unconnected persons, A, B and C, each holding one third of the shares in a company. In this situation there are three minimum controlling combinations; A and B together, B and C together, and A and C together. A's control is held by any two together, the addition of another person to the controlling combination is superfluous and HMRC would not also need to contend that A, B and C together control the company.
HMRC also give the following example at CTM03730:
There are a total of 150 issued shares in Company CB. 50 each are held by Mr A, Mr B and Mr C.
Company AA has a total of 200 shares, 50 each held by Mr A, Mr B, Mr C and Mr D. Mr A, Mr B, Mr C and Mr D are not associates.
Company CB is controlled by any two together, ie:
| Mr A | and | Mr B |
| Mr B | and | Mr C |
| Mr C | and | Mr A |
Company AA is controlled by any three together, ie:
| Mr A | Mr B | Mr C |
| Mr B | Mr C | Mr D |
| Mr C | Mr D | Mr A |
| Mr D | Mr A | Mr B |
As there is no group of persons controlling Company CB which is identical with a group of persons controlling Company AA, HMRC do not regard the two companies as associated. However if Mr A and Mr B’s shares together entitled them to the greater part of the voting power in Company AA, then there would be an identical group controlling both companies (albeit by a separate test in CTA 2010, s 450(5) ) and therefore HMRC would regard the two companies as associated.
In other words, two companies are not treated as being controlled by the same group of persons if, in relation to one of the companies, some of them have control without the rest who are nevertheless necessary in order to make up the controlling group in relation to the other company.
HMRC’s 'Marginal Small Companies’ Relief: Toolkit for Managing Risk ' may be useful. It offers guidance on the areas which HMRC sees as prone to error. It has not yet been updated for the changes to the rules in Finance Act 2011 . The toolkit does state that it is for use with 2010–11 company tax returns and you should not rely on it for chargeable accounting periods beyond then.
See Kevin Slevin's article 'Pass the Spanner' in Taxation magazine, 15 July 2010 for further discussion of the toolkit and how it should be used.
See also HMRC's Marginal Rate Relief Calculator .