My client and his wife own two separate trading companies as follows:Company A:
The shares are owned 75% by husband, 25% by wife. The company’s only activity is a trade of providing engineering technical and consultancy services. The business is conducted solely by the husband as its only director-employee.
The shares in this company are owned 80% by wife, and 20% by husband.
The company’s only trade is the provision of educational training, and this is carried-out solely by the wife as the only director-employee.
Despite the mutual shareholdings in each other’s company, and given the separate and distinct businesses concerned, husband and wife control and run their respective companies independently of each other. In the early years of Company B there were occasional short-term loans of money from Company A, or the lending of assets (for example, company vehicles).
Schedule 1 of Finance Act 2021 introduced a new corporation tax charging structure with effect from 1/4/23 (Financial Year 2023) and summarised as follows:
Small Companies rate: 19% on “augmented profits” (*) not exceeding £50,000
Main corporation tax rate: 25% where profits exceed £250,00
Main corporation tax rate but with “marginal relief” (*): where profits are between £50,000 and £250,000.
(*) ‘Augmented profits’ are, broadly, a company’s total taxable profits and distributions received from non-group companies (despite not actually being taxable in many cases) (CTA 2010, s. 18L).
From April 2023, companies will therefore pay tax at either the small companies rate, the main rate, or a hybrid rate where the taxable profits fall between the two limits (the charge is at the main rate, with (*) “marginal relief” which results in an incremental net rate of corporation tax on profits between those limits).
Where two or more companies are “associated” with each other, these limits are divided-by the number of companies concerned. In your clients’ case, this potentially means dividing the thresholds by two with potential consequential increases to the tax payable for either or both of them.
Companies are “associated” if they are under common control, or where one has control of the other (s18E CTA 2010).
In considering control by shareholders, we are required to attribute the rights of “associates”, a definition which includes spouses and civil partners (s18G CTA 2010).
At first glance, we might therefore conclude that the two companies in question are clearly associated because of the spousal relationship of the respective controlling shareholders. However, provisions with the legislation permit a disregard of companies under the control of associates, provided-that there is no “substantial commercial interdependence” (SCI) between the companies concerned (s18G CTA 2010).
SCI is defined for these purposes by reference to the existing definitions given in the Employers Allowance legislation (para 3, Schedule 1 National Insurance Contributions Act 2014) and focuses on the extent of the following factors between the companies:
Financial interdependence –direct or indirect financial support between the companies.
Economic interdependence – companies would be ‘economically interdependent’ if (in particular) they seek to realise the same economic objective, the activities of one benefit the other, or they have common customers.
Organisational interdependence – this will be the case where the businesses of the companies have common management/employees, common premises, or common equipment.
The historical intercompany transactions referred-to above would have little significance in the current period where no similar transactions have taken place recently. In your client’s case it seems clear that there would be no current SCI between the two companies, and each can calculate and pay its own corporation tax liability without regard to the other.
HMRC’s updated guidance on the small profits rate is at CTM03900 and note HMRC’s comments at CTM03950 where they confirm each case will depend on its own specific circumstances – note especially the comments in the final two paragraphs. Therefore, it is not simply a question of whether the two companies run separate businesses but also whether and how they operate in conjunction with each other.
As your two client companies seemingly have no financial, economic or organisational interdependence then at present there is no substantial inter-dependence. Remember that under s18E CTA 2010, the test is whether there is an associated company at any time in the accounting period and so this must be constantly reviewed.
The foregoing is, or course, subject to any changes that may be made in the forthcoming Budget.