A Simple Guide to Understanding Associated Companies

Since April 2023, understanding "Associated Companies" has become essential for businesses due to changes in corporation tax rules. This article clarifies what constitutes an associated company and helps you determine if your business qualifies as one.

Why it Matters

There are two key changes to corporation tax which took effect in April 20223:

1. Increased main corporation tax rate: The standard rate for corporation tax increased to 25%.
2. New "associated company" rules: These rules replaced the older system that relied on a 51% ownership threshold. Now, companies with more associated businesses may be subject to the higher corporation tax rate (25%) instead of the lower rate (19%). However, the 19% rate remains available for companies with low profits.

What are Associated Companies?

Two companies are considered associate if:

• One company controls the other: This can be direct control (owning a majority of shares) or indirect control (controlling a company that, in turn, controls the other).
• Both companies are under the same control: This means the same person(s) or group holds a controlling influence over both businesses.

Exceptions:

There are a few exceptions to the general rule:

Dormant Companies: Companies not actively trading are generally not considered associated.

Non-trading Holding Companies: A holding company that doesn't trade itself might be an exception (consult a tax advisor for confirmation).

Determining Control:

Control refers to the ability to influence a company's affairs. Here are some factors to consider when determining if someone or a group has control:

• Direct or indirect shareholding: This refers to ownership of shares in the company, either directly or through another company.
• Influence over company affairs: Associates such as: (spouse, parents, children, business partners, and trustees of certain settlements) may exert control if they have the power to make decisions affecting the company. It's important to note that only immediate family (spouse, parents, children) is considered in this context but not the extended family that is, aunts and uncles.

Companies are deemed associated if they are controlled by the same minimum combination of individuals. This means that the group of shareholders who have control over these companies must be identical.

Minimum Controlling Combination

The minimum controlling combination refers to a group of individuals who, together, have control over the company. This group must be such that if any one member were removed, the group would no longer have control.

How to Identify Associated Companies

Use this two-step approach:

Step 1: Control Test

Do you (or you and your associates) hold a majority of shares and voting rights in multiple companies?

If yes, consider the following for each potentially associated company:

Step 2: Substantial Commercial Interdependence Test (Optional)

This test applies only if control is unclear, for example, when shareholding is nearly equal between parties. It assesses significant connections in three areas:

Financial: Does one company financially support the other or share financial interests?
Economic: Do the companies have similar goals, benefit each other's activities, or share customers?
Organisational: Do they share employees, management, or resources (premises, equipment)?

Important Note:

Not all three areas in the Substantial Commercial Interdependence Test need to be connected for companies to be considered associated. For instance a strong financial link could be enough to establish an association even without economic or organisational ties.

The 10% Rule: HMRC guidance suggests a 10% threshold for financial indicators, but the overall picture determines association.

If you identify an associated company, inform your tax advisor.
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