This week we have heard of two different cases where a company's previous advisers have failed to notice that UK companies have foreign associated companies. We flag this up.
New rules for determining whether companies are associated for tax were introduced in April 2011. We provide a lot of guidance on this topic - subsequently we have had few enquiries on this topic. Now two cases in two days!
- It could be that some advisers now assume that that the rules provide a blanket exemption from the associated company rules where there is no substantial commercial interdependence between two companies. This is not correct.
- In both the cases we've seen the companies were controlled by the same individuals and so the two are associated: they are under common control.
- It goes further: not only are they under common control but the chances are a company which was thought to be non-resident is actually UK resident for corporation tax purposes.
This problems we have just seen have arisen where non-UK domiciled individuals have set up companies offshore to hold their foreign property interests. As the foreign companies are engaged in trading or investment activities they 'active' and should be counted in the UK's associated company tests. The individuals then come and live and work permanently in UK and their advisers may not it seems, be fully aware of their full business interests and so the offshore company gets missed. It is only when the client changes adviser or comes and asks about estate planning or potential capital gains on a property that the full facts come to light.
The tax consequences failing to notice whether you have an associated company or a UK resident company may be diverse:
- there may be an amount of extra corporation tax to pay if it transpires that one or both companies should have been taxed at marginal rates, however this is likely to be quite a large amount of tax if the problem has existed for any number of years.
- there is will be a tax geared penalty if you have failed to complete the number of associates box on form CT600. It is very difficult to argue that you did not know the rules when the box is so obvious.
- there may be a number of issues with regard to participators and their benefits and expenses when any two companies are linked, particularly where one is also providing holiday accommodation for the director.
- the offshore company may in fact be UK resident for UK tax purposes being invariably controlled and managed from the UK. In many cases, where this issue is not identified there will be no evidence to prove that the company was not controlled from the UK and it will be assessed as being UK resident.
The potential problems of failing to notice where there is an associated company may cause problems for UK income and capital taxes including estate planning.
Checklists
Guidance
Associated companies: from April 2011
Phone for advice