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Technical Briefings

17 March 2011

Associated Companies - Marginal Small Companies Relief

Determining whether two or more companies are associated for tax purposes sounds like a simple matter - but is it? Getting the answer wrong can have expensive consequences and recently published guidance from HM Revenue & Customs on this topic is welcomed.

Why is the number of associated companies so important?

The Small Company Rate of Corporation Tax applies where profits are less than £300,000, the Marginal Small Company rate applies on profits between £300,000 and £1,500,000 and the Full Company Rate applies where profits exceed £1,500,000.

These amounts are reduced where the company concerned has associated companies, so for example, if a company has four associated companies the limits would be reduced to £60,000 and £300,000 for each company.

That sounds straightforward enough but the problem often lies in determining just how many associated companies are involved and getting this wrong can lead to incorrect returns and underpayments of tax.

A simple and more consistent penalty system for tax has been introduced but penalties will not be charged on underpaid tax where HM Revenue & Customs (HMRC) are satisfied that reasonable care has been taken. As part of their wider approach to improving tax compliance HMRC have developed a number of "Toolkits" providing guidance on commonly occurring errors and their views as to how tax law should be applied. The purpose of the Toolkits is to help both taxpayers and their agents ensure that reasonable care has been taken, bearing in mind of course that appointing an agent does not absolve a person from responsibility for their tax affairs.

The Marginal Small Companies Toolkit is effective for financial years commencing on or after 1st April 2009 for Company Tax Returns and has three key elements:-

a checklist to help determine areas of error and identify key risks from HMRC point of view;

explanatory notes identifying underlying risks of error, how to mitigate these risks and an outline of the tax treatment

cross references to more detailed guidance.

When considering whether Marginal Small Companies Relief may be available it is important that the question of the number of associated companies is fully considered and the perceived risk areas fall broadly into three categories:-

1. Record keeping -

who are the participators

what are their shareholdings
are they connected with one another
do they have interests in other companies
have new companies been incorporated or
have existing companies started to trade

2. Incomplete information -

control of a company can be established other than by simply considering shareholdings

3. Applying the correct rules -

companies outside the UK are taken into account when determining the number of associated companies for Marginal Small Companies Relief purposes

Where the Small Company Rate or Marginal Small Company Rate of Corporation Tax is being claimed the Toolkit indicates that, as a minimum, the following checks should be made:-

have the notes to the company accounts been checked to see if there are any associated companies such as trading subsidiaries or parent companies

are there any non-UK companies associated with the company

are there any other companies associated with the company

do the shareholders or participators control another company by themselves or with others

have all attribution of rights and powers been considered. This can be particularly important for family run enterprises

is the company controlled other than by shares such as through loans or rights in a winding up

have all minimum controlling combinations been considered in establishing control of a company. A company having four shareholders have 25% each could be controlled by any three of them whereas a company with two 50% shareholders could be controlled by one of them if he has a casting vote or loans owing to him by the company

consider Extra Statutory Concession C9. This concerns the attribution of rights of relatives and economic, financial and organisational interdependence of companies

is the company a close investment - holding company

are companies dormant for SCR/MSCR purposes. A company might not have a trade but it could still have a business

have the correct rates of tax been applied. Where an accounting period straddles the end of the financial year there may be different rates of tax applicable

The position is clearly not as straightforward as it otherwise might appear and while the production of the Toolkit is welcomed it also makes it clear that this is an area under close scrutiny by HMRC. Remember that reasonable care must be taken at all times and use of the Toolkit will be a means of demonstrating that attention has been paid to this notoriously tricky area of tax law.

For further information please contact any office of Wilkins Kennedy.