The latest on the associated company provisions

The basic rule is that companies are associated if they are both controlled by the same person: If you own 51% or more of Company A, you control Company A. If you own 51% or more of Company B, you control Company B. The two companies are controlled by the same person and are therefore associated. Each company can only have £150,000 of profits taxed at 20%. However, if you own 51% or more of Company A but only, say, 49% of Company B you do not control Company B and the two companies are therefore NOT associated and the potentially adverse tax treatment does not apply. When evaluating whether companies are associated, dormant companies do not count, nor do non trading holding companies. Foreign companies are included, however. Family Members and Business Partners As well as other companies that you control yourself, the law also states that you have to take account of companies controlled by your 'associates', including your: • Spouse or civil partner • Close relatives (parents, brothers and sisters, children, etc.) • Business partners On the face of it this means that if your sister in South Africa starts a company and doesn't even tell you, you could end up paying an extra £7,500 a year in extra corporation tax. Fortunately, sanity prevails to some extent and HM Revenue and Customs does not treat companies controlled by any other individual as associated unless there is 'substantial commercial interdependence' between their companies and yours. Substantial commercial interdependence may exist, for example, if the companies share staff, premises and equipment, co operate on projects or have substantial dealings with each other. Exception for Unmarried Couples Lots of couples are not legally married but raise children, start businesses and buy property together. However, unmarried couples are not recognised by the tax system (with one or two exceptions, eg tax credits). In many cases this is a drawback but it is a big advantage when it comes to running multiple companies. An unmarried couple can each set up their own company and can benefit from up to £600,000 of profits taxed at 20%, even if there is substantial commercial interdependence between the two companies. (Note that if an unmarried couple have a separate partnership business they would also be business partners and the associated company rules would apply.) Companies with Identical Shareholdings If you form two or more companies with the same shareholdings they will continue to be associated, even if there is not substantial commercial interdependence between them. Example Sarah and her husband John each own 50% of Company A. They also each own 50% of Company B. There is no commercial connection between the two companies but they are associated companies because they are controlled by the same persons. However, if Sarah transfers 1% or more of Company A to John and John transfers 1% or more of company B to Sarah they will each control one of the companies - the companies will no longer be controlled by the same people and will not be associated. Tax Planning Pointers - Associated Companies • If neither your existing company, nor your new venture, is likely to make profits over £150,000, you may not have to worry about setting up a second company. • If setting up a new company will result in a higher tax bill, consider running your new business venture out of the same company or as a sole trader or partnership. • Limited liability for the new venture can be preserved without affecting your existing company's corporation tax bill by using a limited liability partnership (LLP). • Where a new venture may initially make a loss, it can still be 'ring-fenced' in a separate company without losing loss relief if the new company is owned by your existing company.

About the Author

The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA). He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author. Google+