Associated companies: the small companies rate of tax

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UK anti-avoidance legislation is often extremely widely drafted and rarely changed, even when it is seen to be misdirected, disproportionate or no longer in line with policy. Such is the case with the rules that prevent businesses being fragmented to take advantage of the lower rate of CT for small companies (profits below £300,000). The legislation operates to require the rate thresholds to be reduced pro rata to the number of associated companies.

The main problem is that the meaning of 'associated company' is too widely drawn. Changes have previously been made by way of concession rather than legislation. After 5 years of lobbying it was finally conceded that the legislation needed to be changed and some tinkering was undertaken last year. As the House of Lords has held that a number of concessions are ultra vires, extensive consultation has been undertaken to consider how the necessary changes may be effected.
 
This is now accepted as operating unfairly where the association is not part of a tax motivated arrangement. In particular, this is a concern where the companies are associated because of the shareholders are members of a family.

The problem with partnerships was dealt with in the FA 2008 and discussions have continued to determine whether it is possible to frame the legislation so as to exclude companies associated through family relationships but where there is otherwise no commercial interdependence. Significant progress is being made and detailed proposals have now been announced.