From 1 April 2023, the new rules around associate companies were introduced which will have a direct impact on the rate of Corporation Tax that would be applicable. It is therefore important that the new associate rules are considered carefully.
The main rules around associate companies are when two companies are:
1. Under common control, or
2. One company has control of the other company.
(s18E CTA 2010)
Considering John’s position, he would have two companies under common control, his wholly owned company and the company with his business partner as John has a shareholding in excess of 50%. It should be remembered that shareholding is only one means of control – see CTM60210 for further examples.
It should be noted that under s18E (3) CTA 2010, a company can be excluded as an associated company if it is not carrying on a trade. However, the important wording within the legislation is “at any time in the accounting period”. Therefore, as the trade only ceased on 1 May 2023, it would have been trading at some point during the year ending 31 August 2023, which would still include it as an associate company.
At face value, it would appear that John would have two associate companies for the year ending 31 August 2023. However, when we are considering John’s ‘control’, s18G CTA 2010 also includes John’s associates. Under s448 CTA 2010, John’s associates would include:
– Spouses & Civil Partners
– Blood Relatives
– Trustees or Settlors of trust beneficiaries
Therefore, John’s daughters Sarah and Emma and their companies would also have to be considered within these new rules.
Johns company would have 4 associate companies unless you can show that his daughter’s companies are not substantially interdependent on John or his company. HMRC’s commentary on this can be found at CTM03950. But the main factors that are considered when determining substantial commercial interdependence are: Financial (CTM03785), Economic (CTM03790) and Organisational (CTM03795). Each of those HMRC manuals include detailed examples, which can give a much clearer picture of what could be caught within these.
If we firstly look at Sarah and her company, they are potentially caught by the organisation interdependence due to trading from the same premises. But it is important to take into account that there is no definition of substantial for these tests. Based on HMRC’s commentary within CTM03950, the degree and period of the interdependence would need to be considered. In addition, the fact that Sarah’s company is not charged a rent could go to show that it is dependent on Johns company for use of the premises and therefore it is much more likely that this would be caught as an associated company.
Moving on to Emma’s company, the loan that John made would fall within the financial interdependence and therefore until the loan is repaid, this would provide an indirect financial support between John’s company and Emma’s and therefore could be considered to be associated. As previously mentioned, you would need to consider if this was substantial or not, but that is very subjective.
Each case will depend on its own specific circumstances and therefore a much more detailed review of the links between all these companies would have to be undertaken to be able to prove there was not substantial interdependence. Without further evidence to prove this, these companies would be deemed associated providing John’s company with a total of 4 associated companies.
For periods that staddle the 1st April 2023, being the date that the Small Profits Rate commences, see the earlier TQOTW “CT Straddling Periods”.
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