CTM03950 - Small profits rate: financial year 2023 onwards: substantial commercial interdependence: financial, economic and organisational links
CTA10/S18G, SI2022/1203
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 2023, the rules that determine ‘control’ for the purposes of the standard small profits rate are at CTA10/S18G. Under those 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 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 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.
S18G is supplemented by regulations at SI2022/1203 that prescribes the factors that are to be taken into account in determining whether a relationship between two companies amounts to substantial commercial interdependence. Regulation 3 of SI2022/1203 provides that the factors in paragraph 3(3) of Schedule 1 to the National Insurance Contributions Act 2014 (NICA 2014) are specified for the purposes of making the determination in S18G.
Schedule 1 to NICA 2014 applies for the purposes of establishing if a company is entitled to claim Employment Allowance and also modifies the usual application of the control rules at CTA10/S450 and S451 to determine if companies are associated with each other. Where companies are only associated with each other because of the attribution of rights of relatives etc, the rule only applies if the companies are substantially commercially interdependent. Reg 3 provides that when considering whether there is substantial commercial interdependence, the degree of financial, economic or organisational interdependence between the companies concerned needs to be taken into account.
Each case will depend on its specific circumstances.
Financial, Economic and Organisational interdependence
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 spouse may separately own the shares in and run two completely different and separate companies, but the husband has made a loan to his spouse’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.