Introduction »

Associated companies?

The issue of associated companies is an old chestnut but HMRC still continue to make money in this area, purely because the rules are widely drawn. If companies are associated, they have to share the corporation tax limits between them and this can push some or all of the companies into higher rates of taxation.

Potentially, all worldwide companies which are commonly controlled are associated. In particular, this includes any companies owned by spouses, lineal descendants, lineal ancestors, brothers and sisters. Control means any form of direct or indirect control and many people know that they have to consider rights held by shares or votes.

What is not so commonly understood is that loan creditors can also be a form of control, for example, who is entitled to the majority of assets in a winding up? A recent case illustrates the potential issue.

Company 1 was controlled by the father of the family. Company 2 had been set up as a property development company but could not get finance from the banks. The father owned some shares but did not own Company 2 outright. However, he personally lent a large amount of money to Company 2, meaning he would be entitled to the majority of assets in a winding up due to the loan balance and so the two companies were classed as associated.

This loan creditor point can apply to both personal lending and inter-company debt, so care must be taken when looking for finance.

The major problem is spotting other companies controlled by other family members in the first place, so if you think we might not be aware of any of your family members’ business interests, please do let us know. None of us like unpleasant surprises!

Introduction »