Two individuals have 50% each of company A and 1/3rd each of company B.
Are A and B associated for CT purposes? I believe they are but a second opinion will be greatly appreiated.
Many thanks
Abdul Qayyum
Abdul Qayyum
Replies (7)
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Yes they are!
Because Company B is effecively controlled by exactly the same two shareholders as Company A.
Gordon Fox is a tax specialist partner with Francis Clark, Chartered Accountants, Devon & Somerset and he can be contacted by email at [email protected] or by telephone 01752 301010.
Loan creditor would not work
The tests in s.416 are not mutually exclusive. In the scenario you suggest, there would be two controlling 'groups' of company A - the loan creditor (group 1) and the two shareholders (group 2). So long as each of the two groups is an irreducible group, there is no need to use the smallest of those two groups. Thus controlling group 2 is identical to the controlling group of shareholders of company B and so the companies would remain connected.
I'm not sure I follow David's logic
"So long as each of the two groups is an irreducible group, there is no need to use the smallest of those two groups."
Surely the definition of an irreducible group means that you DO need to use the smallest group? The Revenue manuals define irreducible group (which they now term a minimum controlling combination) as "A 'minimum controlling combination' means a group of persons which has control of the company but which would not have control of it if any one of the persons were excluded from the group."
Therefore in the scenario outlined in the question, what David terms 'group 1' would be say individual X (both shareholder and loan creditor), and 'group 2' would be both X and Y together. My interpretation of the Revenue's definition is that 'group 2' in this instance isn't an irreducible group, as it can be reduced to 'group 1'. X also has 'control' of company A on his own without Y, therefore X and Y together don't form an irreducible group for company A.
I asked a very similar question a couple of years ago, but I don't think we ever really reached a consensus view on it. A few agreed with me, probably a few more didn't. For what it's worth, we submited the CT600s on the basis that the companies weren't associated, with an explantion to the Revenue explaining why we had taken that view. The enquiry window has now passed without an enquiry. We shall probaly never know whether this is because 1) the Revenue agreed with us, 2) they didn't bother to read it, or 3) they did bother to read it but didn't have a clue what we were talking about and so let it through!
To try and explain the logic...
There are different types of control - voting power, shareholding and right to assets. There can therefore be more than one person or group of persons defined as controlling company at any one time. The concept of irreducible groups applies only when determining who controls the company under any one of the tests. ABC may be an irreducible group under the voting power test, but AB only may be the irreducible group under the shareholding test (you cannot say that the ABC voting group can be reduced to AB just because AB happens to be a controlling group under another test). Having established the minimum controlling groups under the various tests, there is NO requirement to consider the smallest of those groups. Thus, if company 2 is under the control of ABC it will be associated with company 1 because there are two identical irreducible controlling groups (even if those groups are determined by different tests and even if one of the companies happens to have a smaller irreducible group determined by another test).