Associated company rules: a welcome simplification

Even readers with relatively short memories will recall a time when the difference between the main rate of Corporation Tax and the “Small Companies’ Rate” (nowadays called the “Small Profits Rate”) was as much as 10%.

Such a large disparity gave rise to a temptation to fragment a business into a number of smaller companies; a temptation countered by the “associated company” rules.  These provided that the profit levels at which the reduced tax rates applied were (broadly) determined by the number of worldwide companies under common control.

Originally, the rules required you to take into account shareholdings of family members and business partners; but in 2011 they were relaxed so as to include such shareholdings only where there is “substantial commercial interdependence” between the two entities: that’s tax-speak for companies that are in some sense in bed with each other.

Next year (from 1 April 2015) the main rate of Corporation Tax reduces to 20% and the separate “Small Profits Rate” disappears.  The “associated company” rules will thereupon become largely redundant.  We say “largely” rather than “completely” because anti-fragmentation rules will still be relevant in determining whether a company is big enough to pay tax under the quarterly instalments regime and for a few other esoteric areas such as the patent box and the capital allowances rules for long-life assets.  But even for the purposes for which “associated companies” remain relevant the rules will be simplified.  Instead of worrying about “substantial commercial interdependence” and common control by family members and so on the new test will simply take into account members of the same group of companies.

A small simplification, no doubt: but a welcome one.  We could do with more of the same.

David Whiscombe


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