Building by numbers
We act for two unconnected individuals. Each of them owns, with his wife, a property development company and a contracting company. The two individuals now propose to get together to form a fifth company to carry out a related building service.
We are foxed about the small companies' corporation tax threshold and by how many it should be divided, either for the new company or the existing ones.
Readers' views are welcome.
(Query T16,169) - Liverpool.
Building by numbers
We act for two unconnected individuals. Each of them owns, with his wife, a property development company and a contracting company. The two individuals now propose to get together to form a fifth company to carry out a related building service.
We are foxed about the small companies' corporation tax threshold and by how many it should be divided, either for the new company or the existing ones.
Readers' views are welcome.
(Query T16,169) - Liverpool.
'Liverpool' asks the question of how many associated companies each of the five companies has, but does not give any detail as to the number of shares held by each party. Therefore I will assume that couple A each own 50 per cent of the shares of their company and likewise for couple B. For the joint company, I will assume that each of the husbands owns 50 per cent of the shares. Finally, I have assumed that the shares held by each individual rank pari passu in all respects with the other shares.
In order for companies to be associated with one another, section 13(4), Taxes Act 1988 requires either one company to control the other or for both of the companies to be under control of the same person or persons. Whether or not the chairman of each of the companies owned by couple A has a casting vote, each of the husband and the wife controls each company. This is because section 416(6), Taxes Act 1988 requires you to attribute the shares held by the wife to the husband and vice versa. The same situation applies to couple B.
In each case, the irreducible minimum number of people needed to control each company is one person from each couple and so, until the new company was started, the small companies rate and very small companies rate thresholds of each of those four companies had to be divided by two.
For the new company, if there is a casting vote the irreducible minimum of persons will be one, who will be the chairman. In that event, for the companies controlled by the chairman of the new company, and for the new company, the thresholds must be divided by three. However, if that part of the articles of association of the new company has been removed, the irreducible minimum number of people required to control that company will be normally both of the shareholders. None of the other companies has the same irreducible minimum of persons and so the thresholds for the new company will not have to be divided. The thresholds for the other companies still have to be divided by two.
This is based on the premise that, as 'Liverpool' describes, the families are unconnected, i.e. they are not relatives, business partners or trustees of a trust of which the other couple were the settlors, and so are not associates.
When describing the position, where there is no casting vote, I commented that my analysis would normally apply. The comments so far have referred to voting power, but a person or persons also have control if they are entitled to more than half of the income of a company if it was distributed as a dividend or more than half of the assets on a winding up. Given the assumptions made, the reference to dividends would not apply as the shares all rank pari passu.
However, if one of the husbands had made a loan to the new company or if both of the husbands had loaned money, but the amounts were unequal, one of the husbands would then have control as he would be entitled to more than half of the assets on a winding up. Consequently, for the new company and the other companies controlled by that husband, the thresholds would have to be divided by three.
It should be remembered that the differing ways of defining control are all 'or' statements. Therefore, if husband A has the casting vote and husband B has loaned a greater amount of money to the new company, each husband, and by attribution his wife, will control the new company under one of the tests and so the thresholds for all five companies will have to be divided by three.
If the above pitfalls have not been avoided, it will be necessary to divide the thresholds by three as, even if any casting vote is removed and loans are equalised, the companies will have been under common control for some part of the accounting period. - Hodgy.
If a company is associated with another company or companies, the nil-rate, starting rate and lower corporation tax rate limits must be apportioned equally between the various companies (section 13(3), Taxes Act 1988).
Broadly speaking, associated companies are those under common control. A company is associated with another company if one of them has control of the other or if both are under the control of the same person or persons (section 416(1), Taxes Act 1988).
A person is considered to control a company if he exercises or is able to exercise control over the relevant company's affairs. This would be the case if the individual holds more than 50 per cent of the share capital, voting power, distributable income or net assets on a notional winding up.
In determining whether companies are under the control of the same person or persons for these purposes, the Revenue seeks to determine whether the companies are under the control of the 'same irreducible group of persons'. An irreducible group of persons means a group of persons that has control of the company but would not have control if any one of them were excluded (see Taxation, 2 September 1993 at page 537).
In the current case, let us call the individuals A, B, C and D, and the existing companies K, L, M and N. K and L are associated as they have a common shareholding of A and B. Similarly M and N are associated as C and D are shareholders of each company. However, there is no relationship between K and L and M and N.
The formation of a new company by A and C is likely to alter the situation, depending on the shareholding, voting rights, etc. If the shares are held 50:50, who will have the casting vote in a directors' meeting? Either A or C must control the new company, in which case the new company will be associated with his two existing companies. There is a danger that all five companies could even be associated.
Have the individuals considered the alternative of a limited liability partnership, which would avoid these problems? Admittedly they would be taxed as individuals, but that structure would avoid the disadvantages of corporation tax thresholds being divided by three (or five). - Magnus.