We explains the corporation tax liabilities for husband and wife with different shares of ownership in associated companies
- Are the following companies associated for corporation tax purposes? The shareholding in each company is set out as follows. Mr & Mrs Bassi are husband and wife.
Doaba Ltd
Mr Bassi – 50% of shares and voting rights
Mrs Bassi – 50% of shares and voting rights
Malwa Ltd
Mr Bassi – 100% shares and voting rights
Other companies
Malwa Ltd owns 80% of L Ltd.
L Ltd owns 60% of A Ltd and 45% of B Ltd
A Ltd has been dormant for two years
- A company is an associated company of another where one has control of the other, or both are under the control of the same person or persons as per section 18E, Corporation Tax Act 2010 (CTA 2010).
Control is defined by s450 and s451 and is much wider than simply shareholding. This is set out in HMRC guidance CTM60210. Therefore, it is necessary to check whether there are other means of control.
As Mr Bassi and Mrs Bassi equally own 50% of Doaba Ltd and Mr Bassi owns 100% of Malwa Ltd, both companies are not under the control of any one person based on shareholding alone.
The rights of associates are attributed to a person if there is ‘substantial commercial interdependence’ (SCI) between companies.
If there is substantial commercial interdependence (SCI) between Doaba Ltd and Malwa Ltd, Mrs Bassi’s shareholding rights will be attributed to Mr Bassi, which means that Mr Bassi controls both companies and the companies would be associated.
No information has been provided to consider this test.
As Malwa Ltd owns more than a 50% shareholding in L Ltd and A Ltd, both companies are under the control of Malwa Ltd which is in turn controlled by Mr Bassi. However, A Ltd is a dormant company and is therefore ignored for this purpose – s18E(3).
The holding in B Ltd is less than 50% and is not under the control of Malwa Ltd or Mr Bassi.
Therefore, by shareholding alone, Mr Bassi controls Malwa Ltd and L Ltd and may also control Malwa Ltd if SCI exists.
Introduction
The associated companies rules:
- applied in relation to periods before 1 April 2015, i.e. for financial years 2014 and earlier.
- are reintroduced for periods beginning on or after 1 April 2023, i.e. for financial year 2023 and later years as a consequence of the reintroduction of the standard small profits rateof corporation tax (¶704-100); and
- were repealed in the intervening period as a consequence of the alignment of the main and small profits rates of corporation tax for that period (but see the related 51% group companiesanti-fragmentation rules (¶704-800) which applied for certain other purposes in that period);
Basic rule
Subject to exclusions for companies that do not carry on a trade or a business, and for passive holding companies (below), the basic rule is that a company is an associated company of another at any time when (CTA 2010, s. 18E(4)):
- one of the two has controlof the other; or
- both are under common control.
If a company is another’s associated company at any time in an accounting period, it is that company’s associated company in that accounting period (CTA 2010, s. 18E(1)). This rule applies to associated companies even if they are associated for different parts of the accounting period (CTA 2010, s. 18E(2)).
Example
- At 1 January 2024, a group comprises company A and its three wholly-owned subsidiaries B, C and D.
- On 10 January 2024, company D is sold.
- On 12 December 2024, company A subscribes for all the issued share capital of company E which commences trading on that date.
- All group companies prepare accounts to 31 December.
Although company A does not have more than 3 subsidiary companies at any point in the accounting period ending 31 December 2024, it has four associated companies for that period: companies B, C, D and E.
The upper limit and lower limit for that accounting period must therefore be divided by five.
Had the sale of company D been completed before 1 January 2024, and had company E been incorporated after 31 December 2024, it would have had only two associated companies for the accounting period, i.e. companies B and C.
Meaning of control
Control takes its meaning, subject to modifications, from the close company rules at CTA 2010, s. 450 (CTA 2010, s. 18E(5)). These rules are discussed at ¶779-060 and the modifications are summarised briefly as follows:
(1)For the purposes of attributing rights and duties to a person under CTA 2010, s. 451(4) and (5), that person is treated as having no associates if the relationship between the two companies is not one of substantial commercial interdependence (CTA 2010, s. 18G(2)). The Corporation Tax Act 2010 (Factors Determining Substantial Commercial Interdependence) Regulations 2022 (SI 2022/1203) apply, with effect from 1 April 2023, for the purposes of determining whether a relationship is one of substantial commercial interdependence.
(2)In determining whether a company is under the control of another, fixed-rate preference shares (within the meaning of CTA 2010, s. 18H(2)) are ignored if the company holding them is not a close company; takes no part in the management or conduct of the issuing company (or its business); and subscribed for the shares in the ordinary course of a business (including the provision of finance) (CTA 2010, s. 18H(2));
(3)A company (A) is not under the control of another company (B) if (CTA 2010, s. 18I(1)):
(a)B is a loan creditor (see CTA 2010, s. 453) of A;
(b)there is no other past or present connection between A and B (this includes any dealings between them); and
(c)either B is not a close company, or B’s relationship to A as a loan creditor arose in the ordinary course of B’s business.
(4)If two companies (A and B) are controlled by the same person who is a loan creditor of each of them then, in determining whether A and B are associated with each other, rights which the loan creditor has as a loan creditor of A or B are ignored if (CTA 2010, s. 18I(3)):
(a)there is no other past or present connection between A and B (including any dealings between them); and
(b)either the loan creditor is not a close company, or the loan creditor’s relationship to each of A and B as a loan creditor arose in the ordinary course of the loan creditor’s business.
(5)In determining whether companies A and B are associated with each other, rights and powers held in trust, and by virtue of which a person controls A and B, are ignored if there is no other connection (past or present) between A and
B (this includes any dealings between them) (CTA 2010, s. 18I(3)).
Associated company exclusions: no trade or business
A company is not treated as an associate of another in an accounting period if (CTA 2010, s. 18E(3)):
(1)it has not carried on a trade or business at any time in the accounting period, or
(2)it was an associated company for part only of the accounting period and has not carried on a trade or business at any time in that part of the accounting period.
HMRC guidance is that item (b) does not normally extend to situations where one company acquires another company and hives up the other company’s trade on the same day. HMRC consider that company B must have carried on its trade after it was acquired by company A and before the trade was hived up, even if only for a few minutes, therefore company B will be associated with company A for that accounting period (CTM 03592).
Associated company exclusions: passive holding company
A company is not treated as an associate of another in an accounting period if:
(1)it carries on a business of making investments in the accounting period;
(2)it carries on no trade throughout the accounting period;
(3)it has one or more 51% subsidiaries throughout the accounting period; and
(4)it is a passive company throughout the accounting period.
For this purpose, company B is a 51% subsidiary of company A if company A has beneficial ownership, either directly or indirectly, of more than 50% of company B’s ordinary share capital (CTA 2010, s. 1154(2) and (6)).
Meaning of passive company
A company is a passive company throughout an accounting period if all the following requirements are met (CTA 2010, s. 18F(3)):
(1)it has no assets in the period other than shares in its 51% subsidiaries; dividends meeting conditions (3) and (4) below; assets representing such dividends; or the right to receive such dividends;
(2)it has received no income in that period other than dividends.
(3)the redistribution condition is met in relation to any dividends received.
(4)any dividends received are exempt distributions of a qualifying kind.
(5)no chargeable gains accrue to it in that period.
(6)no expenses of management of the business are referable to the period; and
(7)no qualifying charitable donations are deductible from the company’s total profits for the period.
Former HMRC guidance (former CTM03592) confirms that if a company fails to satisfy any of the above conditions, it does not always follow that it is an associated company, e.g. it may be that it is not an associated company by virtue of the exclusion described above for companies not carrying on a trade or business.
Meaning of redistribution condition
The redistribution condition is that (CTA 2010, s. 18F(4)):
(1)the company pays dividends to one or more of its shareholders in the accounting period; and
(2)the total amount of dividends paid is at least equal to the company’s dividend income in that period.
Meaning of exempt distributions of a qualifying kind
A distribution is an exempt distribution of a qualifying kind if:
(a)it is a distribution for corporation tax purposes because (and only because) it falls within CTA 2010, s. 1000(1), paras. A, B, G or H (¶743-300); and
(b)it is exempt under the company distributions rules (¶745-300).
Non-resident associated companies
A company is not excluded from the count of associated companies on the grounds that it is not resident in the UK. In Jansen Nielsen Pilkes Ltd v Tomlinson (HMIT) (2004) Sp C 405, a special commissioner held that the inclusion of non-resident associated companies in the computation of a company’s eligibility for (what was then) small companies’ relief from corporation tax was neither a restriction on the (then applicable) EU right to freedom of establishment nor discriminatory under European Community principles – art. 43 EC in particular (¶103-940).
Difficulties in determining the number of associated companies
The extent of the evidence required to substantiate a claim to marginal relief was considered in Seascope Insurance Services Ltd [2011] TC 01664. For the periods in question, the taxpayer was the 100% subsidiary of Seascope Holdings Limited (Holdings) which was in turn the 67.59% subsidiary of Gulfstream Investments Limited (Gulfstream). The taxpayer claimed marginal relief for those periods on the basis that it had two associated companies; Holdings and Gulfstream. HMRC requested information from the taxpayer concerning the ultimate ownership of Gulfstream. Although some information was provided, it was not sufficient to put the matter beyond doubt; for HMRC, there remained a possibility that the taxpayer had more associated companies. HMRC denied the claim to marginal relief on this basis and the taxpayer appealed to the Tribunal. The First-tier Tribunal found in favour of the taxpayer.
The case turned on two issues:
(1)the level of evidence required to support a claim for tax relief; and
(2)whether the same level of evidence applied to all taxpayers (HMRC argued that a higher burden of proof applied in this case as Gulfstream was resident in Liberia).
On the first issue, the Tribunal found that the test to be met by the taxpayer was ‘to satisfy HMRC, and ultimately this Tribunal, that on the balance of probabilities its claims for the relief were correctly made’. In this case, HMRC came close to asking the taxpayer ‘to prove a negative’ and this appeared to be ‘asking for proof beyond reasonable doubt’. It would appear that HMRC’s enquiries crossed the line once they ‘moved into issues of association which appeared to be purely theoretical rather than having any apparent underlying factual justification’. With regard to the second point, it was not acceptable to impose a higher burden of proof on the taxpayer because of the residence status of its ultimate parent company; to do otherwise would raise issues of ‘tax discrimination’.
Associated companies (from 1 April 2023)
Rationale for ‘associated companies’ rule
A special rule is designed to prevent a company splitting or fragmenting its business activities between several companies to benefit from the lower small profits rate.
If the company is ‘associated’ with one or more other companies at any time in the relevant CTAP (from 1 April 2023 onwards), CTA 2010, s. 18D(3) provides that the current marginal relief/small profits rate upper and lower limits are
calculated as follows:
|
Upper limit = |
£250,000 | |
| 1 + N | ||
| Lower limit = | £50,000 | |
| 1 + N |
Where N is the number of associated companies (note – associated non-resident companies are also counted for these purposes).
This rule often reduces the benefit of the small profits rate quite significantly. It should be noted that each company has the same apportioned limit – a company cannot surrender any excess lower rate profit capacity to its associated companies.
Example – Apportioning upper/lower limits between associated companies
Mr Hamilton owns 100% of the shares in Crocus Ltd, 75% of the shares in EA Bowles Ltd and 51% of the shares in Vanguard Inc (a US resident company). All companies make up accounts to 31 March each year.
Crocus Ltd would be ‘associated’ with EA Bowles Ltd and Vanguard Inc. Its upper and lower limits for the year ended 31 March 2024 would be:
|
Lower limit |
£50,000 | = £16,667 |
| 3 | ||
| Upper limit | £250,000 | = £83,333 |
| 3 |
The same limits would apply for EA Bowles Ltd.
Determining whether an associated company is included
For the purpose of calculating the rate at which the company pays corporation tax, every company that was associated at any time during the relevant accounting period must be included (CTA 2010, s. 18E). Therefore, being associated for a few days in the relevant CTAP will count. However, companies that have been dormant (i.e. have not carried on a trade or business) throughout the CTAP are excluded (CTA 2010, s. 18E). HMRC is likely to argue that any gainful use of assets represents a ‘business’.
Since the post-31 March 2023 definition of an ‘associated company’ is virtually identical to the one prevailing under the pre-April 2015 regime, the previous case law remains relevant. A number of cases places place limitations on the concept of a ‘carrying on a business’. Therefore, where a company only receives bank deposit interest during a CTAP, this is unlikely to constitute the carrying-on of an investment business and should not therefore be counted as an associated company (Jowett (HMIT) v O’Neill and Brennan Construction Ltd [1998] BTC 133).
A similar conclusion was reached in Salaried Persons Postal Loans Ltd v R & C Commrs (2005) Sp C 504, albeit in different circumstances, which was subsequently upheld by the High Court at [2006] BTC 423, as one based on fact. In this case, the company had vacated its old ‘trading’ premises in 1966 which were then let-out on a tenant repairing lease. The company moved to new (leased) premises from where it continued to trade until November 2005, when the trade ceased. After that date, the company’s only source of income was the rent received twice a year on its old premises. The Special Commissioner held on these fairly unusual facts, that the company did not carry on a business after it ceased trading. The main persuasive points cited for this decision included the fact that the ‘old’ premises were originally purchased for trading purposes (rather than for investment); the same tenant had occupied the premises for over 30 years; the lease was a tenant’s repairing lease; very little activity was required by the company (rent reviews took place automatically since they were calculated by reference to an agreed formula); and the rental property only represented a very small part of the company’s total assets which it had built up from its earlier trading activities (the main asset being an interest-free loan to a fellow group company).
The Special Commissioner in John M Harris (Design Partnership) v Lee (HMIT) (1997) Sp C 130 determined that a company, which only held property for the use of a controlling director and his family, did not carry on a trade or business.
This was simply the mere acquisition and holding of property.
On the other hand, in Land Management Ltd v Fox (HMIT) (2002) Sp C 306, a company that let property made and held investments, advanced an interest bearing loan to a connected company, as well as placing funds on deposit at the bank, was held (not unreasonably!) to be carrying on a business.
A special rule in CTA 2010, s. 18F(2) treats a non-trading holding company as dormant provided it is ‘passive’. Section 26(2) provides that the holding company will be treated as passive in a CTAP if:
- it has no assets in the period, other than shares in its 51% subsidiaries;
- receives no income in the period except dividends;
- it has no chargeable gains, management expenses or deductible qualifying charitable donations; and
- any dividend income received by it is redistributed to its shareholders.
It will be appreciated that this is a fairly restrictive definition and the majority of holding companies will find it difficult to meet every requirement.
In some cases, it may be possible to argue on the facts that a holding company has not carried on any business activity. However, HMRC have been known to argue that, if a holding company pays bank charges or filing fees, it will be treated as an associated company.
Degree of proof required to establish the number of associated companies
Where there are complex shareholding relationships, HMRC are likely to require the claimant company to provide solid evidence about the number of associated companies.
The degree of evidence required in such cases was examined in the case of Seascope Insurance Services Ltd [2011] TC 01664. In this case, the Seascope Insurance Services Limited (Seascope) was 67.59% owned by Gulfstream Investments Limited (Gulfstream), a Liberian resident company, which was clearly an associated company. Seascope confirmed that it did not control any other companies and neither did Gulfstream. However, HMRC were not satisfied since it was possible that the controlling shareholders of Gulfstream might control one or more other companies, which would also have to be counted as ‘associated’. Seascope was unable to obtain that information but requested that HMRC accepted that there were no other associated companies.
HMRC refused and insisted that the company proved, beyond all reasonable doubt, that no other associated companies existed. The company disagreed, indicating that it only needed to establish, on the balance of probabilities that no other associate companies existed. Somewhat surprisingly, the tribunal concluded that, even though it was theoretically possible that other associated companies could have existed, Seascope had done enough. Many would argue that this was a fortunate decision for Seascope since the ultimate shareholders of Gulfstream should have been prepared to provide the necessary evidence.
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