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Associated companies: attributions

In deciding whether two companies are under common control and therefore associated for small companies' rate ("SCR") purposes* you attribute to a person the rights and powers of his or her associates. This note deals with two aspects of what you might call "associatedness".

The first relates to partners. Until April 2008 partners were associates for SCR purposes. Then some smart alec noticed that this made things a bit tricky for investors in film partnerships and other perfectly innocuous investment partnership vehicles since as a rule an investor didn't know the identity of his co-investor partners, let alone whether they controlled any companies. So FA 2008 changed the rule and said that for SCR purposes you don't treat your partners as associates except where (broadly) tax avoidance is concerned. We say "broadly" because the wording of the amended legislation was so opaque that - although the general intention was plain - it was never entirely clear (at least to us) precisely what arrangements fell foul of the new rule. However, Finance Bill 2011 changes the law again from April 2011. More of that later.

Meanwhile, the very wide definition of "associate" caused a second difficulty for SCR purposes. Under the law a person is associated with, inter alios, all his or her relatives: but since it was considered unsatisfactory that my company's tax rate should be affected by (for example) how many companies my estranged brother owns, an extra-statutory concession (ESC C9) provided for relatives other than spouse and minor children to be ignored unless there was "substantial commercial interdependence" between the companies concerned.

Finance Bill 2011 now attempts to deal with both problems by amending the law again. The new law has the merit of simplicity: for SCR purposes you ignore the rights and powers of associates altogether unless there is "substantial commercial interdependence" between the companies concerned. This is good news where husband and wife each separately control a company: in such a case ESC C9 did not prevent attribution but the law now does. It may be less good news for companies controlled by people who are in partnership with each other: attribution will now be made where there is substantial commercial interdependence and the presence or absence of a tax avoidance motive is no longer in point.

For more on this please contact help@bkltax.co.uk or call us on 0208 922 9222.

*Yes, we know that the statutory term is now "Small Profits Rate" and if that isn't change for the sake of change we don't know what is: but HMRC still use the former term in their published guidance and if it's good enough for them...