Associated Company rules
Small companies benefit from paying a lower rate of corporation tax on profits upto £300k so there is a danger that a wily director could set up a number of companies under his control to make the maximum benefit from this tax band. For this reason the associated company rules were introduced to block this loopholeby dividing the tax band down by the number of companies controlled by the same person. So if you had 3 companies they would each only get £100k at the lower corporation tax which would be fine if each had profits of £90k, but not if one had £300k profits and the other two only £10k. It would be better to release control of the smaller companies to maximise the benefit of the low tax rate.
What about handing control to close family members? This has also been blocked and is actually of more concern as often family members run completely independent companies, but they will still be caught by these rules. There is a concession where there is no substantial commercial interdependence the rules can be released. Family members include husbands and wives, brothers, sisters, parents and children so beware of this danger. Business partners are also included within this definition.
There is pressure for change in these rules as more and more people set up in business, but it is unlikely that there will be a great change. The cost of the transition to the main corporation tax rate will diminish over the next few years as the rate reduces down from 28% to 24% as forecast in the last budget.
This area is involved and every situation is different. While the basic principles have been covered there are other aspects such as loan creditors and terms on winding up which may also affect the control of the company. This article may not apply to your specific circumstance so please seek professional advice before taking any steps based on the information shown. If you would like advice in this or other areas feel free to call. Alastair Wood, AW Accounting – Accountants who “speak your language”