After lengthy discussions between HMRC and the accountancy profession it has been agreed that s. 35 FA 2008 will apply to corporation tax periods after 1 April 2008. For periods before 1 April the law as it previously stood should apply.
A company is an ‘associated company’ of another for this purpose if one of the two has ‘control’ of the other or both are under the control of the same person or persons. ‘Control’ is defined in ICTA 1988, s. 416:
“The ability to exercise or to acquire control, whether direct or indirect, over the company’s affairs. It includes the possession of, or right to acquire:
(a) the greater part of the share capital or issued share capital; or
(b) the greater part of the voting power; or
(c) so much of the issued share capital as would give the right to receive the greater part of the company’s income, were all that income distributed; or
(d) rights to the greater part of the company’s assets in a distribution on a winding-up or in any other circumstances.
The definition of ‘control’ will be amended to ensure that the rights or powers held by business partners will be attributed only when ‘relevant tax planning arrangements have at any time had effect in respect of the taxpayer company’.
‘Relevant tax planning arrangements’ will be defined as arrangements which involve the shareholder or director and the partner and secure a tax advantage by virtue of greater relief under section 13 of ICTA 1988.
The legislative change is:
FA 2008 part 2, s. 35 Small companies’ relief: associated companies
(1) Section 13 of ICTA (small companies’ relief) is amended as follows.
(2) In the second sentence of subsection (4) (meaning of “control” for purposes of definition of “associated company”), insert at the end “except that, in the application of subsection (6) of that section in relation to the company (“the taxpayer company”) and another company or companies for the purposes of this section, the references to an associate of a person (“P”) include a partner of the person only if the condition in subsection (4A) below is met.”
(3) After that subsection insert:
“(4A) The condition referred to in subsection (4) above is that relevant tax planning arrangements have at any time had effect in relation to the taxpayer company (whether in connection with its formation or otherwise).
(4B) In subsection (4A) above “relevant tax planning arrangements” means arrangements which:
(a) involve P and the partner, and
(b) secure a relevant tax advantage.
(4C) In subsection (4B) above - “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable), other than any guarantee, security or charge given to or taken by a bank, and “relevant tax advantage” means a reduction of the taxpayer company’s liability to corporation tax by virtue of an increase in relief under this section.”
(4) The amendments made by this section are treated as having come into force on 1 April 2008.