The associated companies rules are a trap which have caught many people setting up businesses. In simple terms, where you have more than one “associated” company then the rate of tax for each will effectively increase.
The lower rate of corporation tax has a threshold of £300,000. If you have two associated companies the threshold for each is reduced to £150,000. If you have three, then the threshold reduces to £100,000 for each. The same will apply to the upper threshold (£1.5m).
The case below shows how this rule can apply in quite unexpected ways.
Executive Benefit Services (UK) Limited v HMRC [2010] UKFTT 550 (TC).
The taxpayer company and its associated company had completely distinct businesses. However, a shareholder of one was found to control both companies since he had become a loan creditor of the associated company for purely commercial reasons. Essentially by virtue of lending the other company money (combines with a minority shareholding) he became entitled to the “greater part” of the company’s assets “available for distribution to participators”.
The First-tier Tribunal held that the associated company test applied irrespective of any tax avoidance motive in structuring a company’s financing and shareholdings.
Conclusion
This is a good reminder of some of the mischief which can be caused by the associated companies rules.
The facts here are clear that there was no tax avoidance motive, in fact the shareholder in question was clearly trying to help out his son (who was the owner of the second company). The loan was interest-free with no fixed repayment date and with no other entitlements, such as voting control or a share of a distribution of profits in the event of a winding-up. Despite all this, the tribunal held that the companies were associated and reduced the rate of tax for both companies accordingly.
This case is going to be of particular interest in these times when (as happened here) lenders are holding back the flow of credit and children are turning to the bank of Mum and Dad. When Mum and Dad are themselves in business, they need to look very carefully at the position of both companies.
For more information please contact James Odds or Shimon Shaw on 01923 20 20 20.