At a glance: what is an associated company?

From 1 April 2015 to 1 April 2023 (proposed end), a small profits rate of Corporation Tax is abolished and a flat rate of Corporation Tax applies. This guide is therefore only relevant for companies with an accounting period that straddles or ends before 1 April 2015 or after 1 April 2023.

A summary of the current rules

A company is associated with another company at a particular time if, at that time or at any other time within the preceding 12 months:

  • One company has control of the other.
  • Both companies are under the control of the same person or group of persons.

Thus, two companies are associated when the same person or group of persons can control both, either personally, or via their interests in other corporate shareholders.

Control is determined according to any of the following tests:

  • Percentage share ownership.
  • Voting power.
  • Any rights.
  • Entitlement to assets on winding up (loan creditors).

It is quite possible, using different tests for different persons to be in control of the same company. This can produce some unexpected results for Corporation Tax.

The original rules for determining whether companies are associated were amended from 1 April 2011.

In deciding whether two or more companies are associated, control is determined by considering :

  • The direct rights of an individual. These are the rights of ownership personal to the individual.
  • The indirect rights of an individual. These are rights of the individual's associates attributed to them according to whether the substantial commercial interdependence test applies.

An individual's associates include:

  • Spouses (and civil partners), but not if divorced.
  • Blood relatives.
  • An individual beneficiary will be associated with a trustee or settlor of a trust.

Substantial commercial interdependence (for accounting periods ending on or after 1 April 2011)

  • Where the relationship between two companies is not one of substantial commercial interdependence it is not necessary to attribute the indirect rights of an individual's associates in order to determine control. 
  • Where there is no substantial commercial interdependence the only companies that will be treated as being associated are the companies under the direct control of the same individual or group of individuals. 

Where there is substantial commercial interdependence between any two companies, the control tests go back to the default rule. It is then necessary to determine control by also attributing the rights of an individual's associates.

A taxing example:

Take three companies, Pearl Limited, Peach Limited and Plum Limited

  Pearl Ltd Peach Ltd Plum Ltd
Shareholder % % %
Jim 25 25 80
Jim's mother 30    
Jim's father   35  
John 45 40 20

For any accounting period ending after 1 April 2011, are any companies associated?

Any two out of the three shareholders of Pearl and Peach company can control it by virtue of votes in order to obtain a majority. So, if the companies are not substantially commercially interdependent then the irreducible group of Jim and John control both companies. Plum is in the sole control of Jim and so it is not associated with the others. 

If the companies are substantially commercially interdependent then it is necessary to consider indirect control and start attributing the rights of anyone's associates. This means that either Jim or his mother or father can each control Pearl and Peach by attributing direct and indirect rights, so Jim will own his 25% plus his mother's 30% of Pearl Ltd, making 55%. He will directly own his 25% and indirectly his father's 35% of Peach Ltd making 60%. The result is that one person controls the two companies. It could be Jim, his mother, or his father, as we also find that Jim also controls Plum this produces the greatest number of associated companies. 

If Plum is not substantially commercially interdependent on Pearl or Peach, but Pearl and Peach are substantially commercially interdependent on each other, then there is no requirement to consider indirect control when it comes to Plum. This means that Plum has no associated companies but Pearl and Peach are associated with each other.

Useful guides on this topic

Associated Companies
What is an associated company? What are the tax effects of having an associate? How to the attribution tests work to determine control? What do we learn from cases?

Checklists

Corporation Tax Associated companies checklist; covering accounting periods ending on or after 1 April 2011.

Corporation Tax Associated companies checklist (old); covering accounting periods ending up to 31 March 2011.

Related Tax Guides

For an overview, planning points and worked examples see the following guides:

Close companies basics: Definitions & control.
Attribution, irreducible groups and loans creditors.

Close companies: Associated company tests.
Detailed guidance covering the substantial interdependence tests.


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