An associated company is a term used to describe the relationship between two or more companies that are interconnected in a manner that allows one to influence or exert control over the other. Here’s a breakdown of the key aspects:
- Definition:
When the same individual or group of individuals can control two or more companies, either directly or through their interests in other corporate shareholders, those companies are considered associated. - Control Criteria:
– Direct Control*: Occurs when one company has direct influence over another.
– Mutual Control*: Both companies are controlled by the same individual(s).
– Control Tests*: Control can be assessed based on factors such as percentage share ownership, voting power, and entitlement to assets during liquidation.
- Indirect Rights of an Individual:
These rights are attributed to individuals based on the application of the substantial commercial interdependence test. If significant commercial interdependence exists, companies can be classified as associated based on criteria such as financial, economic, and organizational interdependence.
Significance
Associated companies have implications, particularly in tax matters. To prevent the exploitation of lower tax rates by splitting profitable companies into smaller entities, HMRC has implemented special rules for companies with associated entities.
These rules ensure that tax rate thresholds are evenly divided among associated companies. For instance, if a company is associated with four others, the tax rate thresholds are divided by five (four associated companies plus the original company).
Example
Let’s consider D Ltd, with taxable total profits (TTP) of £180,000 for the year ending March 31, 2024, and four associated companies. The tax thresholds are divided by five to determine the applicable rate:
– Small profits rate: £0 – £50,000 (TTP ÷ 5: £0 – £10,000)
– Main rate: Over £250,000 (TTP ÷ 5: Over £50,000)
Therefore, D Ltd’s profits are taxed at the main rate.
Exemptions
Inactive companies, that have not conducted any trade or business throughout the accounting period, are exempt from the definition of associated companies. This includes dormant companies and also holding companies that solely receive dividends, provided they own no assets beyond shares in 51% subsidiaries.
