Associated Companies – changes to enact Extra-Statutory Concession C9

A company with "small" profits - below £300,000 - is liable to corporation tax at 21% (rising next year to 22%) rather than the 28% standard rate. In order to prevent abuse of this lower rate of tax, the threshold is reduced proportionately where companies are connected (broadly, are under common control): two companies being connected will mean each has a threshold of half the £300,000. There is no general tax avoidance motive test in determining whether companies are connected.

Of particular concern has been the fact that companies may be regarded as connected purely because of the personal relationship of shareholders - spouses, children, siblings and partners. Connection through certain partnerships was negated in the last Finance Act and discussions are taking place to enable certain other non-commercial connections to be ignored so that the legislation is only effective in countering arrangements intended to reduce the tax liability.

Whilst the discussions have been taking place since 2001 (although only seriously since 2006), we are hopeful that there will be some announcement regarding progress this autumn with changes likely to apply from 2010.