Associated companies rules - changes

The rules for establishing whether two or more companies are associated for corporation tax purposes has changed for accounting periods ending after 31 March 2011.

The new rules are actually more favourable than those that existed for accounting periods ending before 1 April 2011 and remove some of the inequitable situations that could arise under the old rules.

When two or more companies are associated, the effect is to divide the profit limits between the number of associated companies and, consequently leads to corporation tax becoming payable earlier at the marginal and main rates.

Old rules

Under the old rules, companies were 'associated' for corporation tax purposes if one controls the other or both are under common control of the same person.

When considering a 'person' for these purposes, one must also consider the 'associates' of the participator, ie:

  • parents, grandparents and remoter forebears;
  • children, grandchildren and remoter issue;
  • spouses and civil partners;
  • siblings.

So, for example:

Valentino and Francis Rossi are two brothers who are 100% shareholder/directors in V Ltd and F Ltd respectively. V Ltd operates a motorcycle shop and F Ltd runs a hairdressing salon. There is no commercial inter-dependence between the two companies.

Under the old rules, the two companies would be associated for corporation tax purposes.

However, Extra Statutory Concession C9 offers an element of relief where the rules may operate unfairly:

'The Revenue will, by concession, treat the definition of a relative (in TA 1988 s 417(4)) for the purpose of TA 1988 ss 13, 13AA as including only a husband or wife or child who is a minor. This part of the concession applies only in respect of companies where there is no substantial commercial interdependence between them.'

Therefore, in the above example, the two companies would, by concession, not be treated associated for corporation tax purposes.

Note, however, that if, in the above example, F Ltd was run by Valentino's wife, the two companies would be regarded as associated, even though there is no commercial interdependence between the two companies.

New rules

The new rules commit ESC C9 to the statute book, for accounting periods ending after 31 March 2011. However, the new legislation extends to all relatives, including husbands, wives, civil partners and minor children.

The new test is therefore a two part test:

1. Would the companies be associated under the old rules?

IF NO, the companies are not associated under the new rules; IF YES, the companies may be associated under the new rules (subject to 2 below);

2. Is there 'substantial commercial interdependence' between the companies?

IF NO, the companies are not associated; IF YES, the companies are associated.

Examples of commercial interdependence would include:

  • loans between companies and/or cross-guarantees
  • similar trading activities
  • shared workforce
  • doing essential work for each other
  • sharing contracts/clients
  • forming joint ventures
  • using each other’s plant/equipment
  • inter-company purchases.