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HMRC internal manual

Company Taxation Manual

From
HM Revenue & Customs
Updated
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Corporation Tax: small profits relief: substantial commercial interdependence: financial interdependence

SI2011/1784 paragraph 3

Two companies are financially interdependent if (in particular):

  • one gives financial support (directly or indirectly) to the other, or
  • each has a financial interest in the affairs of the same business.

Examples

R is the major shareholder and director of Company D which provides IT services. His son, S, is the major shareholder and director of Company E which provides business management services. R provided, as a family, rather than business matter, a personal guarantee in respect of a bank loan made to Company E when S set up the business. The companies are controlled by associated individuals but there is no financial (or other) link between the two companies because the guarantee has been given by R in a personal capacity and this financial support has no link to Company D - the companies are therefore not associated. If, however, the loan to Company E was made direct from Company D or R had given additional security over the assets of Company D in support of his loan, there would be a financial link between the two businesses, either directly or indirectly, which would cause the companies to be ‘associated’.

L is the major shareholder and director of Company M, a large road haulage company. His son P is the sole shareholder in Company Q, a furniture business, which P has built up from scratch and runs with his wife. The premises occupied by Company Q are owned by L but Company Q pays a market rent for them. The two companies are controlled by associated individuals but there is no financial (or other) link between the companies. L has never had any involvement with Company Q and P has never had any involvement in Company M. Since there are no financial links, beyond a simple rental of premises on market terms, the companies are not interdependent and therefore not ‘associated companies’.

Some years ago Mr X started a taxi business, Company T, using money loaned to him by his wife Mrs X, secured against the assets of her property rental business, Company U. Company T was successful and over time paid off the loan in full. Neither Mr X nor Mrs X now has any involvement in the other’s business and similarly the two companies have no links to one another. In the absence of any links between the two companies, whether financial, economic or organisational, Mrs X and Company U’s historic link with Company T is not relevant and the two companies are not associated.

On retiring, Mr F sold his farming business to his son’s G and H. The two sons raised the money to buy their father’s farm through a joint loan from the bank secured against the assets of the business. On taking over the farm they split it into two companies one of which was owned by G and the other by H. Both companies undertake similar, albeit not identical activities, using substantially common facilities, staff and equipment. While the two companies are separately owned, the level of financial, economic and organisational interdependence between G and H and their companies mean that their two companies are associated.

Mr J owned a newsagents Company T and a joinery business, Company U. On retirement Mr J’s son bought all J’s shares in Company T and Mr J’s daughter bought all J’s shares in Company U. Neither J’s son nor daughter has any involvement in the other’s company and the companies themselves have no economic, financial or organisational links. Notwithstanding Mr J’s previous ownership of both, company T and company U are not associated.