Currently, small companies pay corporation tax (SPR) at the rate of 21% (20% from 01 April 2011) on their profits compared to the main corporation tax rate of 28%. SPR applies to companies where the annual profit does not exceed £300,000. Where the profits exceed this level but do not exceed £1.5 million then the main rate of corporation tax is charged and a ‘marginal relief’ is given. In order that enterprising businessmen didn’t break up their large businesses in to smaller units and claim small profits rate HMRC introduced what is called ‘associated’ companies rules. Where two or more companies are ‘associated’ these profit thresholds are reduced accordingly. For e.g. where there are two associated companies the lower limit will be £150,000 (£300,000/2) and the upper limit £750,000 (£1,500,000/2) so that each associated company’s tax rate is reflective of the wider economic unit it belongs to. Whether or not two companies are ‘associated’ depends on common ‘control’ as set out in section 450 of the Corporation Tax Act 2010.
Two companies are associated where the same person directly or through associates controls them. But the taxman has extended the definition of associated companies to include companies controlled by the spouse, civil partners, parents, grandparents, children, grandchildren, brothers, sisters, half siblings, business partners and even personal representatives etc etc. Given the complexity this has created, HMRC now proposes to simply the rules governing associated companies from 1 April 2011 in that ‘attribution’ of rights held by ‘associates’ of participators only applies where there is ‘substantial commercial interdependence’ between the two or more companies concerned and not where an “association” is an accident of circumstance, including circumstance of family relationships that do not extend into business.
The new rules apply only to the attribution of rights held by associates of participators. Rights held by the participators themselves are always taken into account, whether or not there is substantial commercial interdependence between the companies concerned. As the per the draft legislation substantial commercial interdependence will depend on the degree of financial, economic or organisational interdependence between the companies concerned.
Two companies shall be financially interdependent if (in particular) one gives financial support (directly or indirectly) to the other, or each has a financial interest in the affairs of the same business.
Two companies are economically interdependent if (in particular) the companies seek to realise the same economic objective or the activities of one benefit the other or the companies have common customers
Two companies are organisationally interdependent if (in particular) the businesses of the companies have or use common management, common employees, common premises, or common equipment.
Companies subject to SPR are well advised to seek professional tax advice for technical clarity.
