Associated Company Changes

Newsletter issue - January 2011.

Companies controlled by the same people plus their relatives are counted as 'associated' for corporation tax purposes. The upper profits limit for the small profits rate of corporation tax is divided by the number of associated companies. A company with no associates currently pays 21% tax on profits up to £300,000, but a company with one associate pays tax at 21% on profits up to £150,000, and 29.75% on profits above that up to £750,000. This tax rule is supposed to discourage large companies from splitting into smaller ones to take advantage of the lower tax rate, but it catches many smaller companies.

For periods ending before 1 April 2011 where spouses or civil partners own separate companies, those companies are automatically associated companies, even if there is no commercial relationship between them. For periods ending on or after 1 April 2011 the companies controlled by relatives are not associated companies unless there is substantial commercial interdependence between those companies. This change could lower a small company tax bill by up to £13,125!

Substantial commercial interdependence includes situations where one company is financially dependent on the other, where they have common customers or they share the same management, employees, premises or equipment. The commercial links between the companies must be significant before the companies will be treated as associated. Please discuss with us any commercial relationships between your company and companies controlled by your relatives.