Companies become associated, in essence, when they are under the control of people who are associated. This control may be more illusory than real, as what happens is that the degree of the control which the associates have separately is added together to ascertain the degree of control they would have if they acted in concert and the ‘combined’ level of control is deemed to apply. So, for instance, three associates who owned ten per cent, 20 per cent and 22 per cent of the voting shares of a company would be deemed to control it as together they control 52 per cent.
There exists a complex series of rules which determine whether companies are ‘associated’ for CT purposes. Where they are, the practical effect is that the ‘small company’ threshold for profits is reduced, so that a company with associates may end up paying a higher rate of CT. These rules are very widely drafted and can apply in some surprising cases.
• your spouse or civil partner, but not where the marriage or civil partnership has been legally dissolved;
• parents, grandparents and remoter forebears;
• children, grandchildren, great-grandchildren and so on;
• siblings, including half-brothers and -sisters, but not including step-brothers and -sisters;
• a person with whom you are in partnership;
• trustees (if you or any of your relatives, alive or dead, was the settlor of the trust); and
• the beneficiaries, remaindermen and trustees of a trust in which you have an interest.
One practical effect of these rules is that if you decide to start a series of companies to do different things, you must be very careful indeed. In many cases, especially if it is likely that losses might be incurred by one or more business companies, a group structure might be preferable. Also, if you are joining a partnership and you and any of your partners have outside business interests, it may be worth checking that you do not inadvertently create an unwelcome tax position for a company in which you hold shares.
An extra-statutory concession exists which can disapply the associate company rules in cases in which there is ‘no substantial commercial trading interdependence’.