UK: Associated Companies Rules For The Small Profits Rate Of Corporation Tax

Last Updated: 14 June 2012
Article by Smith & Williamson


Finance Act 2011 amended s27 of CTA2010 so that where there is no substantial commercial interdependence between two companies, they will only be under common control for the purposes of the small profits rate by assessing control under CTA10 s451 ignoring the interests of any associate of a person or company (i.e. ignoring attribution according to CTA10 s451(4) and s451(5). This has effect for accounting periods ending on or after 1 April 2011. However a company could have elected that this new rule did not take effect in relation to an accounting period beginning before 1 April 2011, the election having to be made within one year of the end of that accounting period (i.e. a 12m deadline rather than a two year deadline).

SI 2011/784 issued on 20 July 2011 (and effective for accounting periods ending on or after 1 April 2011) set out the factors to be considered when determining whether there is substantial commercial interdependence.

HMRC's draft guidance on how these regulations work in practice has also been issued. As a reminder companies are associated if they are associated for any part of the accounting period (CTA10 s25); it is not sufficient to only consider the position at the year end. Thus the new rules will already apply to any company with a 12 month accounting period commencing on or after 1 April 2010, unless an election to disapply them is made. Companies that could be disadvantaged by the new rules could include those which are associated through the interests of partners, but where there are no tax planning arrangements, and where the companies would be regarded as being substantially commercially interdependent.

Accounting periods ending on or before 31 March 2011

By way of reminder, companies were associated if they were under the common control of a person (or persons together). The thresholds for small profit rate of corporation tax (£300,000 and £1,500,000) were reduced where there were associated companies, resulting in less profit being taxed at the small profits rate and more at the marginal and main rates. The test for whether companies were associated was based on the rules governing 'control' of a company set out in s450 of the Corporation Tax Act 2010.

To determine a person's control under the old rules you had to attribute the rights of their associates to them. 'Associates' include relatives (spouse/civil partner, parents and remoter forebear, children and remoter issue, siblings) and certain trustees. By concession (described in now withdrawn paras 2-4 of ESC C9), HMRC did not attribute the rights of parents (or remoter forebear), children who are not minors (or remoter issue) or siblings to a person when determining control of companies as long as there is no 'substantial commercial interdependence' between the companies in question. Where a person's associates included a partner, the interests of the partner were only attributed to that person if tax planning arrangements existed between the person and the partner that secured a reduction in the taxpayer company's liability to corporation tax.

New rules - accounting periods ending on or after 1 April 2011

Two or more companies will continue to be associated if a person (or persons together) control them. However, the rights of his/her associates will only be attributed to that person for determining control for this purpose if there is 'substantial commercial interdependence' between the companies.

There are two important points to note.

a) This is different to the previous concessionary treatment insofar as the rights of spouses and minor children will no longer automatically be attributed to the person. It is expected that the previous concessionary treatment will be withdrawn as it will no longer be needed.

b) SI 2011/784 sets out the factors to be used to determine 'substantial commercial interdependence' by Statutory Instrument. The factors used to determine substantial commercial interdependence between companies are any of the following:

  • financial interdependence - where one company gives financial support to the other or they share financial interests in the same business;
  • economic interdependence – in particular where companies seek the same economic objective, the activities of one company benefits the other or the companies have common customers; or
  • organisational interdependence – in particular where companies share common management, common employees, common premises or common equipment.

HMRC's guidance (CTM03750 and CTM03770-03800) covers various scenarios in each of these three categories. These tests are clearly subjective and a view will need to be taken on each case, bearing in mind HMRC guidance at the time if appropriate.

An example given of substantial financial interdependence includes a loan between two companies that could be associated through common control. No mention is made of the impact of the existence or otherwise of arms length terms for this situation, though from other examples in the guidance it is doubtful whether this would influence the outcome.

One of the characteristics specified in the Statutory Instrument denoting 'organisational interdependence', is the sharing of common premises. The draft guidance includes an example of a husband and wife each operating separate companies from the family home owned by the wife, which apart from operating from the same premises and sharing the domestic phone line, have no other financial, economic or organisational links. The guidance indicates the companies in this example would not be regarded as substantially interdependent, despite the fact that husband's company could not afford to operate from other premises.

The guidance does not cover every situation and comments that each situation would depend on its own specific facts and circumstances. One example demonstrating organisational interdependence in HMRC's view is of two companies with a common director, all transactions between related parties being on arms length terms, one involved in wholesale activity for the building trade, and one concerned with retail building trade activity, both operating from the same premises owned by one of the directors. However no example is given of two companies with no links apart from having common directors (it is likely each situation will depend on specific facts).

For the avoidance of doubt, there is no need to consider substantial commercial interdependence where a person or persons control two or more companies outright (whether by shares, rights to more than 50% of assets on a winding up, or other means of control). These companies remain associated even if there are no other links between the companies.

Planning opportunity

According to the Treasury, the policy intention behind the new rules is to stop companies being associated by 'accident of circumstance'. In a case where the husband controls one company and the wife controls another, and there are no other links (as defined above) between the two companies, those companies used to be regarded as associated companies but should no longer be so under the new rules.

This may be an opportunity to review potentially associated corporate clients to see if the association between companies can be broken. For example, if there are two companies with no financial/economic/organisational links, both currently owned 51% by the husband, one possibility might be to move shares (subject to any other considerations) to break the association by giving control of one company to the wife.

Consideration should be given to HMRC's guidance on what substantial commercial interdependence means. It may be beneficial to ensure that husband and wife are not each directors of both companies, but it will be necessary to bear in mind the Entrepreneurs' Relief condition that requires a person disposing of shares to be an employee or officer (director or company secretary) of the company to enable the disposal to qualify for the beneficial rate of CGT (subject to the other conditions).

With all planning it is necessary to bear in mind the cost of any restructuring compared to the actual benefit. Assuming a main corporation tax rate of 24% and a small profit rate of corporation tax of 20%, and if one company has a profit of £10,000 while the other has a profit of £290,000, the annual corporation tax saving from not being regarded as associated is £7,000. For two companies each with profits of £600,000, the potential annual corporation tax saving from not being associated is £15,000. Any potential savings from this planning will diminish as the main rate and small profit rate come closer together (for example with a main rate of corporation tax of 22% the savings in these examples become £3,500 and £7,500 respectively).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.