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Associated Companies and Corporation Tax

Companies pay Corporation Tax on their profits, and the rate of tax varies according to the level of those profits. Currently, the rates are:


Rate of CT

0 – 300,000


300,001 – 1,500,000


Over 1,500,000

30% (on all profits)

These rates only apply if the company concerned has no “associated companies” during the accounting period in question.

Where a company has an “associated company”, then the various bands for the different rates of CT are halved for each company – so, for example, the 20% rate only applies to the first £150,000 of profit for each company.

If there are two “associated companies”, then the bands are divided by three (so the 20% rate only applies to the first £100,000 of profit for each company) and so on for each additional “associated company”.

What is an “Associated Company”?

Two companies will be “associated” if:

One company controls the other, or
Both are controlled by the same person or persons

The commonest test for “control” is the voting power of a shareholder. In a simple case, where each of the company’s shares carries one vote, any person or persons who own more than 50% of the shares will “control” the company. There are more sophisticated tests involving rights to the income or capital of the company that need to be considered as well, but the usual test for control is owning the majority of the shares in the company. For example:

Company A owns all the shares in Company B – these two companies are “associated” because A “controls” B.

Mr A owns 51% of the shares in Company C, and 52% of the shares in Company D – these two companies are “associated” because Mr A “controls” them both.

Attributing other person’s rights to a participator

This is where it gets complicated – when deciding if a person has “control” of a company, you do not just look at the shares he owns personally. You also have to include any shares owned by his “associates”.

In this context, an “associate” means:

A husband or wife (or civil partner)
A child “or remoter issue” (e.g., a grandchild)
A parent “or remoter forebear” (e.g., a grandparent)
A brother or sister
A business partner
In certain cases, the trustees of a trust

So, for example, if Mr A owns 100% of Company X and his brother, Mr B, owns 100% of company Y, those two companies are “associated”.

Unexpected Associations

These rules are very broad and can produce unexpected results:

Mr B’s wife has her own company which Mr B is not involved in. Mr B goes into partnership with Mr C. Unbeknown to Mr B, Mr C owns a company (not connected with the partnership business – in fact it exists to own Mr C’s Spanish holiday cottage). Mrs B’s company is now “associated” with Mr C’s company.

Escape Routes

There are two ways to avoid two companies being treated as associated even if they fail the “control” tests described above:

Extra Statutory Concession C9

This concession allows you to ignore shares owned by relatives (except for spouses or children under 18) when checking for “control” provided there is no “substantial commercial interdependence” between the two companies concerned.

Whether or not there is “substantial commercial interdependence” between two companies is determined by looking at such things as:

The administration of the companies –

Who Are The Directors?
Do they share premises, staff, or plant and machinery?
Do they use the same suppliers, and if so, do they have joint purchasing arrangements?
Do they co-operate on joint projects?
Are there any loans or guarantees between the two companies?

No trade or business

If a company that is associated with another company has not “carried on any trade or business” at any time during the accounting period concerned, then it can be ignored for the purpose of calculating the number of associated companies.

Some companies are “dormant” – that is, they simply exist but have no income or assets – and such companies would be ignored. In any other case, it can become a matter of contention with HMRC as to whether a company is “carrying on a business”. In some tax cases, companies have successfully argued that merely receiving rent from a property owned by the company or receiving bank deposit interest is not a “business”, but beware – these cases were very much decided on their particular facts and HMRC would look very closely at any claim that such a company was not carrying on a business.

The one clear case is a holding company which does nothing except hold shares in other companies which it controls, and which has no income except for dividends from those companies which it in turn distributes in full to its shareholders – under Statement of Practice 5/94, HMRC have agreed that such a company may be ignored.

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