Lambert Chapman LLP’s Lisa Potter is pleased that common sense is being applied to Associated Companies

At long last there is evidence that common sense is being applied to tax legislation set by the Government. In particular to the associated company rules for corporation tax purposes for separate companies owned individually by spouses.  Under the current regime by virtue of marriage, married couples or civil partnerships would be treated as associated for tax purposes if they individually held a majority shareholding in their own company, even if these businesses were in no way connected. 

For example, Husband owns 100% of a Dental Consultancy and Wife owns 100% of a Graphic Design company.  Under the old legislation their companies would be treated as associated even though commercially there was no connection between the two.  In this situation the £300,000 small company rate band for corporation tax would be divided between the two companies equally which could be detrimental if one business has high profits. Where profits exceed £150,000 for one business this puts that company’s profits over the £150,000 sum into marginal rate of corporation tax which is currently 29.75%. 

This has never made sense to me if the businesses have no connection whatsoever and it is a tax built very much on old style traditional thinking of what’s yours is mine suggesting that neither party in a marriage can make a decision without the other.  Not in my house I can assure you!

Good news is that this is proposed to change in April 2011 and about time too!  The new regulation looks at the commercial connection between the two companies and will consider the following:

Financial links

• financial support between the two companies 
• companies share a common financial link

Economic links

• companies seeking to realise the same economic benefits
• activities of one company benefit another
• companies supplying the same circle of companies

Organisational links

• common management
• common employees
• common premises
• common equipment

So it seems its one down and many to go in terms of common sense approaches to tax legislation but at least its started.

If you require any advice regarding the connected company please don't hesitate to contact me or one of the other partners of Lambert Chapman LLP

Date:5 July 2010

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