A Ltd is holding company of a group, substantially made up of trading subsidiaries. The company is owned 100% by the Smith family: Brian Smith with 30% Distributions from subsidiaries are made to A Ltd which has small expenses, namely accountancy fees, Companies House filing fees and bank fees. B Ltd as a trading company owned 100% by A Ltd In addition to the Group above, Brian and Miranda have shareholdings in two other trading companies: E Ltd with Brian owning 40% and Miranda owning 20% Which companies are associated from 1 April 2023?
Deborah Smith with 30%
Miranda Smith with 25%
Luke Smith with 15%
C Ltd as a trading company owned 100% by A Ltd
D Ltd a property company owned 100% by A Ltd owning commercial premises occupied by B and C Ltd as well as a portfolio of rental properties let out commercially
F Ltd with Brian owning 10% and Miranda owning 80%
A. All companies other than F Ltd are definitely associated – F Ltd may be associated.
Statutory references are to CTA 2010 unless otherwise stated.
Companies are broadly associated if one is controlled by the other or both are controlled by the same person or persons but excluding companies which have not carried on a business, s18E.
Control for s18E purposes is defined at s450 and s451 and summarised by HMRC at CTM60220. Control means control over a company’s affairs and includes – but is not limited to:
1. the greater part of share capital or issued share capital
2. the greater part of the voting power
3. the greater part of distributions of company income (ignoring loan creditors)
4. the greater part of assets in the event of winding up
These tests are not mutually exclusive, a company can be under the control of different persons by way of share capital, voting power, loans etc.
For the purposes of this illustration, I am only concentrating on control via shareholding, but the other control tests should not be ignored, and so further information will need to be obtained – unless shareholding alone makes all companies connected.
The trading group comprising of A, B, C and D Ltd are associated companies as each of B, C and D are under the control of A, s18E (4) by reason of shareholding.
At first glance, none of the Smith family individually have control over the trading group and E Ltd or F Ltd. However, See CTM03941 for HMRC’s explanation of the need for a minimum controlling combination to establish whether a company is controlled by the same person or persons.
Brian and Miranda Smith control both A Ltd and E Ltd and are such a minimum controlling combination as no one person controls either company.
F Ltd is not associated by shareholding as Miranda already has control of that company on her own. However, as noted above, the control tests are not mutually exclusive so that if A Ltd or its subsidiaries had loaned significant sums to F Ltd, A Ltd or the subsidiary may control F Ltd.
A holding company, or any company whose business is of holding shares in other companies, would not qualify under s18E(3) and so they have their own rule in s18F which is a list of conditions each of which must be met. See CTM03592. What appears to be a useful, practical application is however so tightly drawn that it is difficult to see how such conditions could be satisfied particularly as all companies have expenses of management such as accountancy fees and Companies House filing fees and so would fail this test. Without further clarification from HMRC, such exclusion is arguably outside the reach of all companies and so A Ltd remains an associated company.
The next step is to consider whether there is “substantial commercial interdependence” (SCI) so that the interests of “associates” are brought into account when considering control per s18G.
Associates are defined by and will include most family members but is much wider. See CTM03949 and CTM60150.
SCI is defined by NICA 2014, Schedule 1, paragraph 3 by virtue of SI 2022/1203. There are three different SCI tests and any one or combination of them can mean that there is SCI and so the interests of associates will be taken into account which here would mean that F Ltd could also be an associated company. Whether SCI exists here is not possible to tell as more information would be required coupled with their subjective interpretation. See CTM03950 which provides links to examples on each of the SCI tests.
The associated company rules inserted by FA 2021, Schedule 1 as CTA 2010, Part 3A are substantially a reintroduction of rules previously applicable up to 31 March 2015 and so contain many of the same difficulties and complications of interpretation. The above is an expanded version of a Helpline query received but still doesn’t cover in detail all of the issues involved. I would recommend reading previous TQOTWs here and here along with Croner-i’s Direct Tax Reporter at 704-700 on associated companies for further commentary and examples.
