A number of developments have occurred in the last few weeks regarding the small companies rate.

HMRC published some guidance on the draft legislation regarding the definition of associated companies which put on a statutory basis the thinking behind extra-statutory concession C9 where some companies are not treated as associated companies despite being under the control of the same persons. Under the concession, the Revenue did not treat companies as being under common control if they merely included the interests of a spouse or minor child unless there was substantial commercial interdependence between the companies.

The draft legislation provides a statutory definition of “substantial commercial interdependence” which includes features of financial, economic and organisational interdependence.

The guidance contains numerous examples and an additional statement which says that for the purposes of determining control, the attribution of rights held by associates is not intended to apply where there is an “accident of circumstance” but rather where there is real interdependence between the parties. Quite what this means is not at all clear. It seems to be little more than a broad description of the new tests rather than any further guiding principle.

There is no indication about when these new provisions would come into force; it could be Budget Day or it could Royal Assent of the Finance Act 2011. This will no doubt be revealed soon.

On the same subject, the case of Executive Benefit Services (UK) Limited v HMRC TC 803 dealt with one of the existing rules for associated companies – that relating to control of a company being determined by loan creditors. When determining whether or not a company is an associated company, it is necessary to look at the interests of the participators, and that includes loan creditors. You have to look at who would receive the greater part of the assets of the company which would be available on the winding up for distribution among the participators.

The meaning of “assets available for distribution” in this context has long been the source of uncertainty, but the Tribunal made it clear that the meaning of participator for this purpose is that which applies in accordance with the small companies relief legislation and not the general meaning of participator in a winding up.

Yet another aspect of the small companies rate emerged last month which was the case of Herts Photographic Bureau Limited v HMRC TC 868. This was concerned with whether a company was a close investment holding company (and therefore not entitled to the small companies relief) because it had disposed of a property and placed the proceeds on deposit. HMRC argued that the company was not carrying on a qualifying activity – indeed it had filed dormant accounts. However, the Tribunal accepted the company’s argument that it was intending to reinvest the sale proceeds in other properties, and that although there had been a long delay in such reinvestment, the company’s hesitation was only a result of the financial crisis and it therefore continued to be entitled to the small companies rate.