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.

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.