Associated Companies... how to know if you are?

[isleofthorns]

Reading about the tax rate changes coming in next year and read about HMRC bringing back the associated companies test. The info I've found isn't terribly clear.

I'm a little confused at the scope / interpretation of the rules.

I've got a 100% owned LTD co. My partner (not married, but cohabiting) is secretary and on the payroll of this company.

She also has a Ltd co (100% owned by her and in a completely different trade). Her business rents space from my Ltd co. (ie, same building)

Are these companies then associated?

Separately, we co-own 50/50 another company in a completely unrelated area. Is this joint company associated with either her / my 100% owned companies?

I've also got a 50% holding in a company with my brother (in which I am secretary). This company operates in a similar area to my own, and we do business with each other - I'm guessing this company will be associated with mine.

I hold minority shares (20-25%) in a couple of other companies with third parties, so I assume they will not be associated?

I can see why they're bringing back these rules, when you have banded tax rates, but it's just another unnecessary impediment / complication to business in my view

[Eric Mc]

What has your accountant advised?

CTM03570 - Corporation Tax: small profits relief: associated company - definition

A company is an ‘associated company’ of another company if one of the two has control of the other, or both are under the control of the same person or persons (CTA10/S25 (4). ‘Control’ for this purpose is defined as for close companies (CTA10/PART10, S450 and S451,see CTM60210).

A company may be an ‘associated company’ no matter where it is resident for tax purposes.

"Control" usually means majority shareholding i.e. more than 50% of the shares.

[DSLiverpool]

Interesting post, I have a sort of similar issue where I have one LTD to cover all my projects. However it’s approaching VAT qualification and I’ve asked my accountant can I spin up another Ltd company for the consulting and keep the existing for retail this staying below VAT rate for the main earner (the consulting) - just waiting on an answer.

[VEX]

Is this for VAT or CORP Tax?

I have two businesses trading and another two dormant.

One is an AV istall / support company and the other is a pure ecommerce AV retailer. Both hit the VAT threshold so thats covered.

Both have been making a loss over recent covid years/start up. But this could have an impact and may force me to close the loss.making one, loosing the govenment its bounceback loan repayments!

I'll ask my accountant and report back also.

V.

[isleofthorns]

Eric Mc said:

What has your accountant advised?

CTM03570 - Corporation Tax: small profits relief: associated company - definition

A company is an ‘associated company’ of another company if one of the two has control of the other, or both are under the control of the same person or persons (CTA10/S25 (4). ‘Control’ for this purpose is defined as for close companies (CTA10/PART10, S450 and S451,see CTM60210).

A company may be an ‘associated company’ no matter where it is resident for tax purposes.

"Control" usually means majority shareholding i.e. more than 50% of the shares.

This is what I mean by not clear... control 'usually' means more than 50%, but they also caveat that control can be associated in situations where a spouse or relative has shares, or where you share premises etc.

So, in my case, this could mean that our 50/50% venture may get drawn into this, even though it's completely unrelated. Or, likewise, that our individual companies may be considered associated simply because we are living together and share premises?

Is it down to my accountant to judge this?

[Eric Mc]

Nope - it’s down to you, as a director. You can ask your accountant for advice but you, as a director, are the one who decides whether the profit apportionment rules apply.
Based on what you have described. I would say they do.

[Alpinestars]

Your partner is not a relative or a “partner” of yours for these purposes. So your 100% company is not related to his/her 100% company.

Neither of you control the 50:50 - are you sure this is the case? Ie, a genuine deadlock company? If so, you both collectively control that company. However, you don’t both control your 100% company, you do. So those two companies are also not associated.

Your brother is your associate, so it’s a bit more complicated. His rights could be attributed to you, but given there’s no (substantial) commercial interdependence, the rights are not attributed. So your 100% company, and yours/his 50:50 company are also not connected. Assuming another deadlock company.

You have no associated companies.

Edited by Alpinestars on Monday 27th June 05:30

[MustangGT]

Alpinestars said:

Your partner is not a relative or a “partner” of yours for these purposes. So your 100% company is not related to his/her 100% company.

Neither of you control the 50:50 - are you sure this is the case? Ie, a genuine deadlock company? If so, you both collectively control that company. However, you don’t both control your 100% company, you do. So those two companies are also not associated.

Your brother is your associate, so it’s a bit more complicated. His rights could be attributed to you, but given there’s no (substantial) commercial interdependence, the rights are not attributed. So your 100% company, and yours/his 50:50 company are also not connected. Assuming another deadlock company.

You have no associated companies.

Edited by Alpinestars on Monday 27th June 05:30

I do not see how that can be correct. In my view the OP certainly has 2 associated companies being the one he owns 100% and the 50% one.

[Eric Mc]

"Control" was always determined by reference to share ownership. If someone "only" owned 50% of the shares, they didn't have control because they couldn't out-vote the other shareholders.

This was the criteria used by HMRC (and previously, the Inland Revenue) for determining "control" for "associated company" profit apportionment tax band purposes.

For quite a few years, the splitting of profits for tax band purposes was not needed. It's now returning.

In Company Law, the definition of "control" is now much more nuanced than a simple reference to share ownership. Anybody who exercises significant control over a company (irrespective of the shares they own) has to be declared to Companies House as a person of "Significant Overall Control".

Is HMRC using THIS definition for determining control or are they relying on simple share ownership?

[Alpinestars]

MustangGT said:

I do not see how that can be correct. In my view the OP certainly has 2 associated companies being the one he owns 100% and the 50% one.

That’s the law. If OP doesn’t control the 50% company, either directly or through attribution, it’s not an associated company.

[Alpinestars]

Eric Mc said:

"Control" was always determined by reference to share ownership. If someone "only" owned 50% of the shares, they didn't have control because they couldn't out-vote the other shareholders.

This was the criteria used by HMRC (and previously, the Inland Revenue) for determining "control" for "associated company" profit apportionment tax band purposes.

For quite a few years, the splitting of profits for tax band purposes was not needed. It's now returning.

In Company Law, the definition of "control" is now much more nuanced than a simple reference to share ownership. Anybody who exercises significant control over a company (irrespective of the shares they own) has to be declared to Companies House as a person of "Significant Overall Control".

Is HMRC using THIS definition for determining control or are they relying on simple share ownership?

Control for these purposes is the right to exercise control over a company’s affairs. Eg, remove or appoint directors.

In particular, control exists if either;
- a person own the majority of share capital,
- majority of the voting power,
- the majority of income on distribution,
- majority of assets on a winding up

Of a company.

[Eric Mc]

So, as the OP mentioned, it can be tricky sometimes ascertaining if a person is really in control or not.

A person might not appear in any official documentation on a company's records but might still be a person of significant control.

[isleofthorns]

Thanks all,,,

This was my initial point - it’s not a clear situation.

Ie, the company I share with my partner is 50-50 owned by shares, so perhaps not in my control absolutely, but (for example) I have a large positive directors loan account, providing much of the cash make up of rye business - so, perhaps with a wider interpretation of the rules, this would mean I do have effective control etc in the eyes of Hmrc, even if this Isn’t actually the case.

Also, as this is basically in place to stop those in control moving profits between companies to enjoy the lower rate, if you can demonstrate absolutely that this has not been done, would this also have an impact?

Ie - in the above case, I have 50% shares and am owed money by the company. This company and my company have no financial ties at all. If I declare they are not associated, but at a later date hmrc challenge this on the basis that my DLA gives me effective control, do I have a defence in that i have not benefited from any tax mitigation etc?

[Eric Mc]

Who have you declared to Companies House as the person with Significant Overall Control of the various companies?

[Alpinestars]

isleofthorns said:

Thanks all,,,

This was my initial point - it’s not a clear situation.

Ie, the company I share with my partner is 50-50 owned by shares, so perhaps not in my control absolutely, but (for example) I have a large positive directors loan account, providing much of the cash make up of rye business - so, perhaps with a wider interpretation of the rules, this would mean I do have effective control etc in the eyes of Hmrc, even if this Isn’t actually the case.

Also, as this is basically in place to stop those in control moving profits between companies to enjoy the lower rate, if you can demonstrate absolutely that this has not been done, would this also have an impact?

Ie - in the above case, I have 50% shares and am owed money by the company. This company and my company have no financial ties at all. If I declare they are not associated, but at a later date hmrc challenge this on the basis that my DLA gives me effective control, do I have a defence in that i have not benefited from any tax mitigation etc?

Look at the tests I outlined. That’s the law. Do you own the majority of shares, no, are you entitled to the majority of income, voting or assets on a winding up? If not, you’re unlikely to control the company. And if you and your partner have identical rights, that’s definitively not control by either of you.

[isleofthorns]

Eric Mc said:

Who have you declared to Companies House as the person with Significant Overall Control of the various companies?

Just checked and it's out of date! So, thanks, will sort out. It'll be myself and my partner

[isleofthorns]

Alpinestars said:

Look at the tests I outlined. That’s the law. Do you own the majority of shares, no, are you entitled to the majority of income, voting or assets on a winding up? If not, you’re unlikely to control the company. And if you and your partner have identical rights, that’s definitively not control by either of you.

I pulled this off the net... it doesn't relate to the company I hold with my partner, but could do for the one I have 50/50 with my brother, as we have customers in common with my own 100% company.

=

If a company is another’s associated company at any time in an accounting period, it is that company’s associated company for the whole accounting period - no apportionment applies.

If companies have substantial commercial interdependence then the rights of associates (generally):

(a)a spouse or civil partner,

(b)a parent or remoter forebear,

(c)a child or remoter issue, or

(d)a brother or sister

may be attributed such as to put companies under common control.

Example

A husband owns 100% of a company that hires out marquees. His wife owns 100% of a company that provides outdoor catering. If there is commercial interdependence between the two such as shared customers, marketing finances etc their companies will be classed as associated as the other spouses rights are attributed so they are both considered to control each company.

=

[Alpinestars]

MustangGT said:

I do not see how that can be correct. In my view the OP certainly has 2 associated companies being the one he owns 100% and the 50% one.

That’s the law. If OP doesn’t control the 50% company, either directly or through attribution, it’s not an associated company.

[Eric Mc]

As Alpinestars says, it's all about "control" - but the definition of control has got a bit woolly in recent years.

[Alpinestars]

isleofthorns said:

I pulled this off the net... it doesn't relate to the company I hold with my partner, but could do for the one I have 50/50 with my brother, as we have customers in common with my own 100% company.

=

If a company is another’s associated company at any time in an accounting period, it is that company’s associated company for the whole accounting period - no apportionment applies.

If companies have substantial commercial interdependence then the rights of associates (generally):

(a)a spouse or civil partner,

(b)a parent or remoter forebear,

(c)a child or remoter issue, or

(d)a brother or sister

may be attributed such as to put companies under common control.

Example

A husband owns 100% of a company that hires out marquees. His wife owns 100% of a company that provides outdoor catering. If there is commercial interdependence between the two such as shared customers, marketing finances etc their companies will be classed as associated as the other spouses rights are attributed so they are both considered to control each company.

=

Correct. But you said there was no interdependence. The interdependence has to be substantial.

If you want the law, it’s at

https://www.legislation.gov.uk/ukpga/2010/4/sectio...

18G deals with attribution - eg your brother.

Ss450/451 deal with control.

You seem hell bent on being associated, which I’m sure HMRC would be delighted about . But you’re not from the facts presented.