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HMRC internal manual

Company Taxation Manual

Corporation Tax: small profits relief: substantial commercial interdependence: financial, economic and organisational links

CTA10/S27, SI2011/1784

A company is treated as an associated company of another at a particular time if one of the two has control of the other or both are under the control of the same person (or persons).

  • From 1 April 2011, there are new rules that determine ‘control’ for the purposes of the small profits rate: CTA10/S18. Under the new rules, attribution of rights held by associates of participators only applies where there is ‘substantial commercial interdependence’ between the two companies concerned.
  • The purpose of the new rule is to take the existence of other companies into account, for the purposes of the small profits rate, where there is a substantive relationship between the relevant companies but not where any ‘association’ is an accident of circumstance, including circumstance of family relationships that do not extend into business.
  • The new rules apply only to the attribution of rights held by associates of participators. Rights held by the participators themselves are always taken into account, whether or not there is substantial commercial interdependence between the companies concerned.
    • When considering whether there is substantial commercial interdependence, regard should be had to the degree of financial, economic or organisational interdependence between the companies concerned. See CTM03785, CTM03790 and CTM03795.
    • Each case will depend on its specific circumstances. The examples in CTM03785, CTM03790 and CTM03795 illustrate the types of factors indicative of the necessary links between separate companies that are controlled by associated persons, although there will be many others.
    • For substantial commercial interdependence to exist it is not necessary for all three types of links to exist. For example, if there is a sufficient financial link, one company will be an associated company of another even if no economic or organisational links exist.
    • However, even if substantial commercial interdependence is not present, two companies may still be associated. For example, a husband and wife may separately own the shares in and run two completely different and separate companies but the husband has made a loan to his wife’s company and as part of that loan is entitled to the company’s assets if it is wound up. The two companies will be associated, not through the focus of the interdependence rules - attribution of associates’ rights - but because the husband will control both companies through his shareholding and rights to assets on winding up.