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An associated company refers to a situation where two or more companies are connected in a way that allows one to influence or control the other. Here are the key points you need to know:

1. Definition: Two or more companies are considered associated when the same person or group of persons can control both, either personally or through their interests in other corporate shareholders.

2. Control Criteria:

• Direct Control: One company has control over the other.
• Mutual Control: Both companies are under the control of the same person or persons.
• Control Tests: Control can be determined based on factors like percentage share ownership, voting power, rights, and entitlement to assets during the winding up of the company.

  3. The indirect rights of an individual: these are rights of the individual’s associates attributed to them according to whether the substantial commercial interdependence test applies.

If there is evidence of substantial commercial independence, then a company can be classed as associated if it meets certain criteria which will be judged based on the degree of:

– Financial interdependence, in that one gives the other financial assistance, or both are financially interested in the affairs of the same business, i.e. intercompany loans.

–  Economic interdependence, in that they share the same economic goals, the activities of one benefit the other or they share common customers; and

–  Organisational interdependence, where they share employees, premises, management or equipment.

Why does this matter?

To prevent profitable companies from splitting into several smaller companies to take advantage of the lower tax rates of 19%, HMRC has special rules which apply where a company has one or more associated companies.

These rules ensure that the limits for determining the rate of tax will be divided equally between all the associated companies. Therefore, if a company is associated with four other companies, the limits will be divided by five (four plus the company itself) to determine the rate applicable.

Example
D Ltd has taxable total profits (TTP) of £180,000 for the year to 31 March 2024. It has four associated companies. The thresholds must be divided by five (i.e. 4 + 1 for itself) to determine the rate, as follows:

D Ltd’s profits are therefore taxable at the main rate.

Are there any exemptions?

Inactive companies (i.e. companies that have not carried on any trade or business throughout the accounting period) are specifically excluded from the definition of an associated company. This includes dormant companies, and holding companies that receive no income other than dividends which are paid out to the shareholders provided they own no assets other than shares in its 51% subsidiaries.

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