Running multiple companies might make commercial sense, but for corporation tax, HMRC may effectively treat them as connected for tax purposes. In July, this spotlight focuses on the potential tax implications for associated companies, and how to protect your position. Below are some key highlights, but you can read the whole spotlight report here.
Companies are considered associated if one is under the control of another, or both are under the control of the same person(s). In these cases, corporation tax bands are split between each of these associated companies. As such, this can result in small companies quickly exceeding the ‘small profits rate band’.
When companies are run by associates (e.g. family members) ‘Substantial Commercial Interdependence’ tests are employed to determine if these companies are associated. This investigates points of financial, economic or organizational interdependence, and a company can be deemed associated on the basis of strong links in one of these. This is normally identified on inter-company loans, common employees and shared customers.
Before the next tax period, it is important to review all possible connected companies, including those believed to be dormant or passive. For companies with shared premises, vehicles, staff etc, put agreements in place, or separate these as much as possible, particularly with family or spousal companies.
Associated companies can rapidly reduce the corporation tax thresholds, especially for small businesses. Taking time to review your structure now can help avoid unexpected tax costs and ensure you are operating as efficiently as possible.
