Finance Bill 2011: Associated Companies Rules For The Small Profits Rate Of Corporation Tax

Author:Mr Tim Lyford, Trudi Amy, Rajesh Sharma, Richard Mannion, Rebecca Combes, Claire Perrett, Mike Lea and Chris Lallemand
Profession:Smith & Williamson


Finance Bill 2011amends s27 of CTA2010 so that where there is no substantial commercial interdependence between two companies, they will only be under common control for the purposes of the small profits rate by assessing control under CTA10 s451 ignoring the interests of any associate of a person or company (i.e. ignoring attribution according to CTA10 s451(4) and s451(5). This has effect for accounting periods ending on or after 1 April 2011. However a company may elect that this new rule does not take effect in relation to an accounting period beginning before 1 April 2011, the election having to be made within one year of the end of that accounting period (i.e. a 12m deadline rather than a two year deadline).

The draft regulations issued on 31 March 2011 (and effective for accounting periods ending on or after 1 April 2011) set out the factors to be considered when determining whether there is substantial commercial interdependence. HMRCs draft guidance on how these regulations work in practice has also been issued.

As a reminder companies are associated if they are associated for any part of the accounting period (CTA10 s25); it is not sufficient to only consider the position at the year end. Thus the new rules will already apply to any company with a 12 month accounting period commencing on or after 1 April 2010, unless an election to disapply them is made. Companies that could be disadvantaged by the new rules could include those which are associated through the interests of partners, but where there are no tax planning arrangements, and where the companies would be regarded as being substantially commercially interdependent.

Existing rules - accounting periods ending on or before 31 March 2011

By way of reminder, companies are associated if they are under the common control of a person (or persons together). The thresholds for small profit rate of corporation tax (£300,000 and £1,500,000) are reduced where there are associated companies, resulting in less profit being taxed at the small profits rate and more at the marginal and main rates. The test for whether companies are associated is based on the rules governing 'control' of a company set out in s450 of the Corporation Tax Act 2010.

To determine a person's control, you have to attribute the rights of their associates to them. 'Associates' include relatives (spouse/civil partner, parents and remoter forebear, children and remoter issue, siblings) and certain...

To continue reading