Q&A: associated companies and corporation tax

Croner-i VIP Tax Team

In this week’s Q&A, Croner-i VIP Tax Team adviser Manpreet Sahota explains the corporation tax liabilities for husband and wife with different shares of ownership in associated companies.

Q. Are the following companies associated for corporation tax purposes? The shareholding in each company is set out as follows. Mr & Mrs Bassi are husband and wife.

Doaba Ltd

Mr Bassi – 50% of shares and voting rights

Mrs Bassi – 50% of shares and voting rights

Malwa Ltd

Mr Bassi – 100% shares and voting rights

Other companies

Malwa Ltd owns 80% of L Ltd.

L Ltd owns 60% of A Ltd and 45% of B Ltd

A Ltd has been dormant for two years

A. A company is an associated company of another where one has control of the other, or both are under the control of the same person or persons as per section 18E, Corporation Tax Act 2010 (CTA 2010).

Control is defined by s450 and s451 and is much wider than simply shareholding. This is set out in HMRC guidance CTM60210.  Therefore, it is necesary to check whether there are other means of control.

As Mr Bassi and Mrs Bassi equally own 50% of Doaba Ltd and Mr Bassi owns 100% of Malwa Ltd, both companies are not under the control of any one person based on shareholding alone.

The rights of associates are attributed to a person if there is ‘substantial commercial interdependence’ (SCI) between companies.

If there is substantial commercial interdependence (SCI) between Doaba Ltd and Malwa Ltd, Mrs Bassi’s shareholding rights will be attributed to Mr Bassi, which means that Mr Bassi controls both companies and the companies would be associated. No information has been provided to consider this test.   

As Malwa Ltd owns more than a 50% shareholding in L Ltd and A Ltd, both companies are under the control of Malwa Ltd which is in turn controlled by Mr Bassi. However, A Ltd is a dormant company and is therefore ignored for this purpose – s18E(3).

The holding in B Ltd is less than 50% and is not under the control of Malwa Ltd or Mr Bassi.

Therefore, by shareholding alone, Mr Bassi controls Malwa Ltd and L Ltd and may also control Malwa Ltd if SCI exists.

For more information see Croner-i Direct Tax In-Depth guidance at 704-700 and Practical Corporate Tax Rayney from 30-200 onwards.