Associated companies: At a glance - www.rossmartin.co.uk (2024)

What is an associated company? Why does it matter? Does it affect the rate of Corporation Tax payable?

This is a freeview 'At a glance' guide to what is an associated company.Subscribers, see here for your detailed version.

At a glance

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

A company is an associated company of another at any time when:

• One of the two has control of the other, or
• Both are under the control of the same person or persons.

Control is determinedaccording to any ofthe following tests:

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

It is quite possible, using different testsfor different persons to be in control of the same company. This canproduce someunexpected results for Corporation Tax.

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

• The direct rights ofan individual: these are therights of ownership personal to the individual.
• The indirectrights of an individual: these arerightsof the individual'sassociates 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 beneficiarywill be associated with a trustee or settlor ofa trust.

See

Exception: Substantial commercial interdependence

• 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 willbe treated as being associated are thecompaniesunder the direct control of the sameindividual 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 rightsofan individual'sassociates.

Why do you need to be able to identify your Associates?

• From 1 April 2023 the upper and lower limits for Corporation Taxare apportioned according to the number of companies who are Associated in an accounting period.
• There are limited exceptions for an associated company that is either dormant or a holding company.
  • See

A taxingexample:

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

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

Any twoout ofthe three shareholdersofPearl andPeachcompanycan controleach by virtue of votes in order to obtain a majority. If the companies are not substantially commercially interdependent then the irreducible group ofJim and Jane control both companies. Plum is in the sole control of Jim and so it is not associatedwith 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 Jill or Bill can each control Pearl and Peach byattributing 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 thatone person controls the two companies.It could be Jim, Jill, or Bill, 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 thatPlum has no associated companies but Pearl and Peach are associated with each other.

Useful guides on this topic

Close Companies: At a glance (freeview)
What is a close company? What is a participator? Why does it matter?If you are not sure, start here for a basic guide and signposts to more detailed guidance elsewhere on our site.

What is meant by control of company? What are the tests for control? When is a company deemed 'close' and who do you consider when you are working out who is controlling or Associated to your company?

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 companieschecklist;covering accounting periods ending on or after 1 April 2011.

Corporation Tax Associated companieschecklist (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:
Guidance on attribution,irreducible groups, andloan creditors.

Close companies: Associated company tests
Detailed guidancecovering the substantial interdependence tests.