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February 6, 2014
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Associated Companies - Minimum Controlling Combination

See our Spring 2014 Tax Update for more recent cases.

The First Tier Tax Tribunal recently heard the case of Ghelanis Superstore and Cash and Carry Ltd v HMRC (TC03251).

HMRC said that two companies were associated and therefore a higher rate of corporation tax was payable than returned.

The two companies in question were owned by the same members of a wider family group but in different percentages.

The case hinged on the interpretation of the concept of "the minimum controlling combination",  with the taxpayers case being that the term refers to the smallest possible combination of shareholders for each company.

However, the Tribunal concurred with HMRC in that the process is to consider all of the combinations of shareholder that owned just over 50% of company A.  If any of these combinations match any of the combinations that owned just over 50% of company  B , then the two companies are associated.

The inclusion of the word 'minimum' means that each combination must include the smallest possible number of shareholders to control, but doesn't preclude each minimum shareholding combination from having different numbers of shareholders.

In this case two combinations of controlling shareholders were the same and the taxpayers appeal was dismissed.

Worked Example

Consider the situation where company A  can be controlled by:

(i) Mr A, Mr B, Mr C & Mr D

(ii) Mr A & Mr B

(iii) Mr B, Mr C & Mr D

Company B can be controlled by:

(iv) Mr B, Mr C, Mr D & Mr E

(v) Mr B, Mr C & Mr D

It was agreed by both HMRC and the taxpayer that the minimum controlling shareholding combinations would exclude combination (i) for company A and combination (iv) for company B because not all of the shareholders interests in those groups were necessary to give control.

The taxpayer believed that the only minimum controlling shareholding of company A was Mr A & Mr B because the only other potential shareholding (Mr B, Mr C and Mr D) included 3 shareholders rather than 2.  As Mr A and Mr B do not have control of company B the two companies would not be treated as associated under this analysis.

HMRC believed (and the Tribunal agreed) that it doesn't matter how many people are in each combination simply that the combination cannot be reduced further by excluding one or more of the shareholders from it.  Therefore company A has two minimum shareholding combinations (Mr A & Mr B and Mr B, Mr C and Mr D) and as one of these is the same as a minimum controlling shareholding for company B, the two companies are associated.

Point of Interest

From April 2015 the question of whether companies are associated will not be at the front of taxpayer and advisor's minds.  This is because the small profits rate and the main rate of corporation tax will both be 20%.

However, the question is not redundant because it is very possible that future governments could once again introduce a differential in the rates.  If the rates do change and care has not been taken in this area when establishing companies then the issue of increased corporation tax rates could creep up unknowingly on taxpayers.

See our Spring 2014 Tax Update for more recent cases.

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