Panel 

• Lindsey Wicks, Senior Technical Manager, Tax Policy, ICAEW 
• Stephen Relf, Technical Manager, Tax, ICAEW 
• Angela Clegg, Technical Manager, Business Tax, ICAEW 

Producer 

Ed Adams 

Transcript

Lindsey Wicks: Hello and welcome to The Tax Track, the podcast series from ICAEW where we explore the latest developments in the world of tax and what they mean for our members and tax professionals alike. In this episode, we’ll be looking at the concept of associated companies…

Angela Clegg: Companies are associated where one company controls another, or they are under common control.

LW: …and how this affects a variety of areas including corporation tax, national insurance payments and more.

Stephen Relf: I think we need to make sure that we all understand the rules, or if not at least have an awareness of where they could apply.

LW: I’m Lindsey Wicks, Senior Technical Manager for Tax Policy at ICAEW. I’m joined this month by two colleagues who enjoy talking all things tax: Stephen Relf, Technical Manager, Tax, and Angela Clegg, Technical Manager, Business Tax. Welcome to you both. It’s just over a year since the concept of associated companies returned for corporation tax, so we thought it’s a good time to look at possible issues, particularly around family relationships.

We’ll start by talking about how this affects corporation tax, but also look at the impacts for other areas of business tax. Angela, what changes were made to corporation tax rates from 1 April 2023?

AC: Prior to April 2023, for a good number of years, we had just one corporation tax rate. Post April 2023, the government brought back a slightly progressive corporation tax system whereby the largest companies are paying it 25% and some of the smaller companies will pay it 19%. That will leave a body of those companies with profits between £50,000 and £250,000, and they’ll pay at a rate somewhere between 19% and 25%. That will be done using quite complicated fraction and marginal relief, and hopefully everyone’s software should do that for them. But the companies will end up at an effective rate of tax of somewhere between 19% and 25%.

SR: When this measure was first announced at the 2021 budget, the government estimated that some 70% of companies would still pay tax at 19%, 20% would be in that marginal band, and 10% would pay tax at 25%. So, I think one of the conclusions we can draw from that is although many companies will know at the outset of a period at what rate they will pay corporation tax, 19% or 25%, that does still leave quite a lot of companies who are going to have to pay close attention to those profit thresholds.

LW: And alongside having two rates of corporation tax, the 51% group company test was replaced by associated companies. Remind me, why do we need to think about associated companies?

AC: The thresholds that I spoke about, the £250,000 and the £50,000, which dictate what rate you pay at, are actually divided relative to the amount of associated companies you have. So, if a company has one associate, there’ll be two companies in that associated group. They will share those thresholds and so will pay at 25% if their profit’s over £125,000. And similarly, the £50,000 lower threshold will be divided, so they will pay at 19% if they had £25,000 profits chargeable to corporation tax.

LW: We’ve got an article explaining all of this in the show notes. Let’s move on. What’s the definition of an associated company?

AC: In the legislation, it talks about how companies are associated where one company controls another or they are under common control. Common control would be, you know, Angela owns A Ltd, Angela also owns B Ltd. So A and B Ltd are both controlled by me, therefore they are under common control. Now, when we’re looking at control, it is quite a wide definition. We have to look at case law, it does turn some degree on the facts, but we’re looking at the shareholder participate level control, votes at a general meeting, we’re not really looking at board-level control or administrative control. The legislation is quite helpful, it does talk about having the greater part of votes, share capital, income assets on a winding up. It is helpful there, and some of those are quite complicated. You have to be careful, particularly with assets on a winding up because it can capture certain situations, for example, a loan creditor, so they do need thinking about. But the one we typically see, particularly with family businesses, owner-managed businesses, is shares, and you see a subsidiary is a good example – a 51% subsidiary would be associated with its parent company.

LW: What other factors do we need to think about with associated companies?

AC: There are a few unusual rules which can trip people up. You only need to be associated for one day in the period and you’re classed as associated, the duration doesn’t matter at all. You must include non-resident companies, they can still be associated, the rules are entirely the same, even if you’re resident offshore. And dormant companies you can exclude, so while you might have the greater part of the share capital, you might be associated, if nothing’s happened in that company you don’t need to count them as an associate.

LW: But what do we need to think about for family relationships?

AC: Family relationships are very important because when we consider whether we control a company for the purposes of associated companies, you have to add in the rights of their associates. One of the key ones there is relatives. A good example is two brothers own a company, one might have 70%, the other might have 30%. But even the person that has 30%, together they control the company, so you add in the rights of relatives as well. Relatives doesn’t have the definition that we might think of. It’s not your aunties and your cousins, and it’s not every relative you’ve ever known, it’s more of a linear family tree. We’re looking parents, grandparents, children, grandchildren, and we do go out to the side one, so we look at siblings as well. You can ignore your client’s aunties and cousins, but you do need to get to know everybody else, because when we’re looking at whether your client controls a company or particular situation, you have to think about what the rights of their relatives are.

We did also have quite a new test. Just before these rules were removed the government brought in another test called substantial commercial interdependence. A good example might be a husband owns 100% of a taxi company, his wife owns 100% of an interior design company. Now husband and wife, associated spouses, are associates. So, we think, well, do we need to bring in the company that the husband controls or the wife controls? Are they associated? If there’s no substantial commercial interdependence, then we don’t need to, they are not associated, if the only similarity between them is that husband and wife own them. With a taxi company and interior design company, we’d likely think there’s probably not going to be much commercial interdependence. But, for example, if the husband’s company was bathroom design or something like that, and they were referring work to each other, we might have an issue and they might be associated.

LW: Stephen, we’d normally talk about one of your tax cases at this point, but I know we haven’t had any on these rules. So, we’re going to talk through some HMRC examples instead.

SR: Yes, that’s right. So, as you say, ideally, I’d bring in a few tax cases now, but unfortunately there aren’t any. As Angela mentioned, these rules had been in place before. They were only in place for a limited period, just a couple of years, so there wasn’t really enough time to test them. But also, at the time they were in, that gap between the main rate and the small profits rate was narrowing quite significantly, to the point that in financial year 2014, I think the main rate was 21%, the small profits rate 20%. So, actually, when they were in place for much of that time, the tax at stake wasn’t that significant.

LW: HMRC does have some examples in its manuals of where it thinks that the rules bite. Angela, do you want to talk about financial interdependence?

AC: These are quite difficult because they’re relatively untested rules, very subjective, and do turn on the facts. The guidance talks about how there will be financial interdependence, where one gives financial support to the other, or they each have a financial interest in the other. We might look at, you know, a dad owns a company, Dad Ltd, and his son wants to set up his own company – Son Ltd, for argument’s sake. Son Ltd needs to get a bank loan to start up the business and dad, in his personal capacity, provides a personal guarantee on that bank loan that’s provided to the company Son Ltd. Now, on the face of it that shouldn’t be financial interdependence, because dad has given that in his personal capacity as a father, not through his business. If, for example, the loan was made directly from Dad Ltd to Son Ltd between the two companies, that could give rise to financial interdependence. Similarly, if dad guaranteed the loan and used the assets of his company as security, that could potentially give rise to financial interdependence.

The manuals also do talk about renting part of a property, could that give rise? If you rent part of your business from a company of your associate, providing that market value rent, that won’t do, so that’s another example that’s in there.

LW: Stephen, what examples are there of economic interdependence?

SR: There are some factors which indicate that companies could be economically interdependent. These include that they have the same economic goals, that the activities of one company would benefit another, or possibly that they have common customers. HMRC, again quite helpfully, gives a range of examples, and these do include a range of businesses, from an internet business to a public house to a shoe shop. But there’s one particularly interesting one that I’ve picked out, which relates to a roofing business. So, we have a father, Tom, who carries on a roofing supply business. His eldest son, Eddie, has a roofing company, and his youngest son, Mark, has a scaffolding business. Now, Eddie’s company sources all its materials from Tom’s roofing supply business, and it also uses Mark’s scaffolding business for its larger jobs. So HMRC concludes that these companies are all economically interdependent because their activities are of mutual benefit, and they have common customers.

LW: I looked at organisational interdependence. That is where you have common management, common employees, common premises or common equipment. And the example that jumped out at me was one that you see quite a lot these days. So, Mr and Mrs Bond each run their separate companies from their family home, which is owned by Mrs Bond. Mr Bond’s company can’t afford to buy or rent other accommodation to trade from. They share the family home and the family’s domestic phone line for business calls and internet, but they don’t have any other financial or economic links. And even though Mr Bond’s company couldn’t survive organisationally or financially without the use of the family home, HMRC does conclude that there’s no organisational interdependence between the two companies. I thought that was quite a helpful one.

SR: That is quite good to know, actually. I think you make a good point, as well, about how things have changed since these rules were last in place. Because as you said, people are more likely now to work at home than they were previously. So, it is good that HMRC has addressed that point.

LW: If you need any more information or help on associated companies, then we do have a tax guide and there’ll be a link to that in the show notes. Stephen, we see the same or very similar rules that apply to other business taxes as well. Can you give some examples, please?

SR: Yeah, this concept of associated companies and similar concepts do crop up quite a lot in tax. Focusing just on corporation tax for the moment, we have the rates of corporation tax, and associated companies there largely trouble smaller companies. But it’s also relevant for larger companies and groups when it comes to the quarterly instalment payments. And then more widely, we have it in employment taxes for the employment allowance for national insurance contributions. We have it to some degree in VAT, where there’s provisions to stop a business being separated. And, as we’ll come on to, we have a similar concept with the annual investment allowance, which is a very popular form of capital allowance.

LW: So, these are all really things where we’ve got some form of threshold that we’re testing against. But should we start off with the large and very large companies for quarterly instalment payments?

SR: Yes, the general rule for a company to pay corporation tax is that the due date is nine months and one day after the end of the accounting period. But if you’re a large company, you pay tax earlier than that, and you do it in instalments. Also, if you’re very large, you pay even earlier. So, a large company has its profits of between £1.5m and £20m, and a very large company profits in excess of £20m. And as you said, Lindsey, we would need to adjust to those profit thresholds for the number of associated companies. We do that for accounting periods beginning on or after 1 April 2023. Before that, we reduced those thresholds by a reference to the number of 51% group companies. A key thing to bear in mind here, as Angela’s run through, is that the associated company rules can apply quite widely. It’s very possible that a company could have more associated companies now than it did have related to 51% companies earlier. So that could mean that it’s now brought within the quarterly instalment regime when it wasn’t previously, or that it’s no longer large, it’s now very large. And in both cases it would have to pay to corporation tax earlier. It’s important to make sure you understand that because a mistake could be expensive. We’re dealing with large companies and groups, so we’re also dealing with large tax liabilities. And we do have quite a high interest rate on underpayments at the moment, that’s at 6.25%.

LW: Yeah, that’s high at the moment, isn’t it? And then let’s go for smaller employers and their national insurance.

SR: Yeah, so this is the employment allowance. An employer can claim up to a £5,000 reduction in their national insurance bill each year. But where there is a connected company, then only one company can claim. It’s a common misconception that you would split the employment allowance, but actually, you don’t – only one company can claim it. Also, there’s an exclusion from the employment allowance where the company’s national insurance bill exceeds £100,000, and again, in looking at that limit, you also have to bring in the national insurance bill of a connected company. Where there is a connected company, it is more likely that you will not be able to claim the employment allowance.

LW: We’ve also got rules for VAT as well, haven’t we?

SR: We have, yeah. There are provisions which apply to counter the artificial separation of a business where there is the avoidance of VAT. This is different legislation, clearly, because it’s VAT, not corporation tax, but the language is incredibly familiar from what we’ve discussed already, so you’re looking at financial, economic and organisational links. But thankfully, the bar’s set a little bit higher here, because there has to be artificial separation, there has to be the avoidance of VAT.

LW: The one that I always remember from learning this when I was doing my tax exams was about the pub trade, where maybe the husband was running the wet trade and the wife was running the kitchen, and cases around that trying to artificially say that they were two separate businesses.

SR: Yeah, I think accountants are quite well up on the rules. Thankfully, these rules have been around for quite a while in VAT and people are quite familiar with them. I think accountants are always on the watch for a possible artificial separation.

LW: Then capital allowances and the £1m annual investment allowance – we’ve got similar rules there?

SR: Yes, similar, but also quite different in some respects, which is where the challenge is really. The annual investment allowance is a special type of capital allowance. It gives 100% tax relief in the first year when you require capital expenditure on plant or machinery, and it’s capped at £1m per year. But it is shared, so that cap is shared in some circumstances, and that includes where you have companies who are under common control and are related. To establish if companies are related, there are two tests. Do they share the same premises? If not, then do they carry on similar activities to a significant extent? The similar activities test is based on an industry classification system, which lists out 21 types of activity. For a company, for a period, it’s very possible that you’ll have to consider the associate company rules for the corporation tax rate or for the payment date, and also the related company rules for the annual investment allowance. Clearly, trying to keep two different sets of rules in mind is going to be challenging.

LW: And we’re not just thinking about different rules, we’re testing these things at different times?

SR: That’s right. So, if it’s not difficult enough to have different rules in mind, you’ve also got to remember that you’ve got to apply them at different points in the period. Just a quick example: for the corporation tax rate, if a company is associated for the whole of an accounting period, if they’re associated at any point during that period. Whereas for the employment allowance, if a company is connected with another company on the first day of the tax year, then they are connected for that tax year. So, you are looking at applying the rules at different points.

LW: We’ve got to think about all the different roles, apply them at different times. How do we get to the bottom of this with our clients? How do companies think about this?

SR: It’s absolutely a huge challenge, because as we’ve outlined, the rules are quite difficult, quite subjective – as Angela mentioned – and they do apply across lots of different taxes, and even within a tax in a number of different ways, as we’ve seen for corporation tax. It’s challenging enough just to know what your own client is up to without having to worry about what that client’s brother is up to on any given day in a period. My main point, I think, would be around education. We need to make sure that we all understand the rules, or if not at least have an awareness of where they could apply.

LW: It’s one of those ones where a checklist doesn’t necessarily help you. It might prompt you to have that conversation, but it is really about having a conversation.

SR: Yeah, exactly. Knowing which questions to ask as well, I think is the challenge, isn’t it? As you say, you can’t necessarily go in with a checklist or a list of pre-planned questions. You have to listen to your client and respond to the information they give you and ask the right questions then. So again, I think it all just comes back to understanding the rules, looking out for the potential opportunities when they could apply.

LW: We can remember these rules because we’ve been in tax for a little while now, but there’s been a few members come through in the meantime.

AC: I think that’s right. We’ve obviously been around a long time, as you say Lindsey. We will be familiar with these rules. We probably need to brush up on, particularly, the commercial entity dependence point, but for some younger members of the team, these might be completely new rules. They’ve never really had to consider the concept of associated companies. They’ll be used to just one rate of corporation tax and not seeing how these rules can influence differing rates of corporation tax.

LW: It’s a good point. For those members, in practice, you need to think about gaps in knowledge in your team, have people pass their exams in a time where they haven’t needed to learn about associated companies, and then we also all need to think about what issues might give rise to an associated company as well.

That’s it for this episode. Many thanks to Stephen and Angela for your contributions.

And thanks for listening. If you’ve missed anything, we’ve included some links for further reading in the show notes. If you found it useful, then don’t forget to subscribe so you never miss an episode. You can rate and share the podcast, too. We’ll be back next month with the next Tax Track. In the meantime, why not check out the sister podcasts from ICAEW? Insights provides business, finance and accountancy analysis, while each episode of In Focus offers a deep dive into a selected topic. There’s also the newly launched students’ podcast aimed at young professionals. If you’re not already a member of ICAEW’s Tax Faculty, remember that ICAEW members can join the Tax Faculty for no additional cost. Faculty members receive our monthly TAXline bulletin. In addition, anyone can subscribe to our weekly TAXwire bulletin containing the latest tax news from ICAEW. Thanks for listening.