HMRC have released a letter providing guidance on the new rules for associated companies for the purposes of the small companies rate of corporation tax.
These new rules came into force on 1 April 2008 and were designed to narrow the definition of associated companies. This definition had proved to be unacceptably wide, particularly in the context of film partnerships. All the partners in partnership are associates for the purposes of the associated company definition, and any company controlled by any of the partners in a film partnership would, therefore, be an associated company for the purposes of the small companies rate of corporation tax.
This was not only absurd, but imposed an impossible compliance burden on such partners. Accordingly, Section 35 Finance Act 2008 introduced a general exclusion from the associate rules in relation to rights held by other members of the partnership. However, this exclusion does not apply when there are “relevant tax planning arrangements” in existence that involve the taxpayer and any partner securing a reduction in the company’s liability to corporation tax by reason of the small companies rate.
HMRC have confirmed that these changes will apply to periods only after 1 April 2008. Furthermore, they explain that as far as prior periods are concerned, enquiries regarding associated companies will be opened only in cases in which the amount of tax at risk is significant and where there is evidence of associated companies.