From 1 April 2011
New rules are expected to be introduced on how in the case of a close company you work out the number of its associates for tax purposes in calculating whether the small companies' rate of tax applies.

The new rules should apply for accounting periods ending on or after 1 April 2011. The matter is currently subject to consultation.

Currently the associated company tests start by asking you work out which person (or group of persons) controls a company according to:

  • Share ownership.
  • Voting power.
  • Any rights conferred in the Memorandum and Articles, or other rights.
  • Attributable rights – of associates, of nominees, or beneficial entitlement.
  • Entitlement to assets on winding up, with and without loan creditors.

The second step (which is going to be subject to change) is that in working out who controls a company you will look at the rights of the individual plus you will attribute to each individual the rights of his associates. This can give unexpected and illogical results, see Close companies: associated company tests

Your associates normally include:

  • Blood relatives.
  • Partner (subject to existing rules on interdependence).
  • Settlements and will trust associates.
  • Trustees are associates where the individual, or any living or dead relative is or was the settlor.
  • Trustees are associates where the individual is interested in a settlement, as beneficiary or remainder man.
  • Attributed company associates. One can also be attributed rights by reason of control of another company.

These are of course subject to ESC C9.

The proposed new rules correct this problem; there will no longer be any requirement to attribute the rights of associates if two companies are not "substantially interdependent".

Substantial commercial interdependence is defined in regulations by considering the following:

Financial interdependence where:

  • one company gives financial support one to another, or
  • one company has a financial interest in the other.

Economic interdependence where:

  • the companies have common customers; or
  • the activities of one benefits the other; or
  • they seek to realise the same economic objective.

Organisational interdependence where the companies share the same:

  • management; or
  • employees; or
  • premises; or
  • equipment.

So if companies are substantially commercially interdependent you must attribute the rights of associates, if they are not, no further attribution will be necessary.

By way of example it means that a husband and a wife could each control their own company and each company will no longer be associated. Practically speaking, this might be easier said than done, but each case will need to be considered (and continually monitored) according to its own circumstances.

We will be updating our assocated companies checklist after the 2011 Budget.

External links: Associated companies consultation