CORPORATION TAX - 28.11.2011

An alternative to associated companies

More than one trade

It’s not unusual to see more than one business housed in the same factory or office. Maybe the owners started out with one trade and, having become successful, branched out into others each spawning a new company with a separate identity. This might seem a perfectly logical business structure, but it could be costing both your businesses extra tax.

Associated tax

Each company, while separate, will be connected for Corporation Tax purposes to another where both are controlled by the same owners. These are known as associated companies. Normally, a company will be allowed to earn profits of up to £300,000 per year and be taxed on these at the small profits rate (SPR) of 20%. Thereafter, the higher CT rate is phased in. The trouble is, where two or more companies are associated, the SPR band is divided between them.

Example. Two associated companies, Acom Ltd and Coma Ltd, produce profits of £260,000 and £40,000 respectively for the year to March 31 2013. Overall, their profits of £300,000 are within the SPR band and if the 20% rate applied to these, the companies’ aggregate CT bill would be £60,000. But because the SPR band is divided equally, the overall tax is worked out as follows:

Profit shifting

By running the companies separately, the joint CT bill is £8,250 more than a single company. To solve this they could shift profits, for example Coma could charge Acom a management fee for services it provides, such as supplying staff or accommodation. But the facts must fit the circumstances. Coma can only charge Acom for services it actually supplies and this will limit profit shifting opportunities.

Tip. Acom and Coma could merge and operate through one company but with each business as a separate division. They can retain their existing trading names etc. as far as their customers and suppliers are concerned, although changes to their stationery etc. would be needed (see The next step). They can even prepare separate accounts so that the directors and shareholders can see how much each division is making.

Divisional caveat

While it may make sense to operate more than one business through a single company for tax purposes, there are other factors to consider. If one division of a company is in danger of failing, its creditors are entitled to look at the company as a whole for payment not just the division which owes them money. In other words, the protection of ring fencing a loss-making business would be lost by merging multiple companies into one. Typically, new businesses are more vulnerable, so it might make sense for them to start life as separate companies, merging when they are established.

For details of the changes required to company stationery, visit http://tax.indicator.co.uk (TX 12.05.05).