Budget Notes


Who is likely to be affected?

1. Companies whose directors or shareholders are separately members of business partnerships.

General description of the measure

2. Simplification of associated companies rules as they apply to the small companies rate (SCR) of corporation tax.

Operative date

3. This measure will have effect on and after 1 April 2008.

Current law and proposed revisions

4. The SCR rules are contained in section 13 of the Income and Corporation Taxes Act 1988 (ICTA). The SCR has effect for companies whose annual rate of profits does not exceed the 'lower relevant maximum amount' (section 13(1)). If the rate is above this amount but does not exceed the 'upper relevant maximum amount' a marginal relief is due (section 13(2)).

5. The upper and lower maximum relevant amounts are set out in section 13(3). Section 13(3)(b) reduces the amounts if the company has one or more associated companies. 'Associated company' is defined at section 13(4) as one company controlling another or two companies being under common control, with section 416 of ICTA being used to determine control. In establishing control of a company, section 416(6) requires the attribution to a person of any rights or powers held by his associates.

6. Section 417(3) of ICTA defines the meaning of associate and section 417(3)(a) includes business partner within that definition.

7. Legislation will be introduced in Finance Bill 2008 to revise the definition of 'control', solely for the purposes of SCR, by amending the wording of section 13(2) of ICTA and inserting new subsections 4A, 4B and 4C into section 13 of ICTA.

8. The new wording and subsections will ensure that the rights or powers held by business partners will be attributed only when "relevant tax planning arrangements have at any time had effect in respect of the taxpayer company". "Relevant tax planning arrangements" will be defined as arrangements which involve the shareholder or director and the partner and secure a tax advantage by virtue of greater relief under section 13 of ICTA.

Further advice

9. If you have any questions about this change, please contact Simon Moulden on 020 7147 2629 (email: simon.moulden@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk