Associated companies - proposed relaxation
HM Treasury and HM Revenue & Customs have issued a consultation document in relation to a proposed relaxation of the rules that treat companies as associated.
Currently, companies are deemed to be associated if they are under common control, taking into account the rights of associated persons. This can result in companies that are otherwise entirely independent being treated as associated. In 2008 it was acknowledged that companies should not automatically be treated as associated simply by attributing the rights of business partners. The legislation was then amended to disregard such rights for the purposes of corporation tax small companies' relief, except where there are tax planning arrangements to reduce a liability to corporation tax by virtue of an increase in that relief.
It is now proposed to extend the relaxation for business partners to all associates, and to take 'tax planning arrangements' to mean the fragmentation of a business, either by splitting an existing single-company business into two or more companies or by carryng on an economic activity through companies which have financial, economic or organisational links. As a result, companies will only be treated as associated by attributing the rights of associated persons if the companies have such links.
The proposed amendment is well-intended and most welcome. However, it should be noted that the draft legislative changes are minimal, and all references to fragmentation and the economic, financial or organisational test are contained in draft additions to HMRC's Company Taxation Manual.
The deadline for responding to the consultation is 22 January 2010.
