associated company

associated company

Didn't find your answer?

Company Z has shareholders A=48%, B=24%, C=24% and D=4%
Company Y has shareholders B=45%, C=45% and D=10%

Are the companies associated? I've always thought the companies are associated because shareholders B+C+D controls 52% of Company Z and the same group controls 100% of Company Y.

I was told by a Tax Consultant that the two companies are not associated...

He said the irreducible group of company Y does not control company Z, i.e.

Shareholders B+C of Company Y (90%) does not control Company Z (48%).
Shareholders B+D of Company Y (55%) does not control Company Z (28%).
Shareholders C+D of Company Y (55%) does not control Company Z.(28%).

Any one has a position on this??
JAMES

Replies (16)

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By User deleted
31st Aug 2007 11:21

add another complication
Many thanks David for your excellent explanation. FYI, all shareholders are unconnected.

Say if £20k was loan to Company Y from Z - I understand upon winding up of company Z, shareholders B+C+D would get a bigger share of the payout but how would it affect the association of both companies as the MCC in company Y is only a combination of 2 shareholders (maximum owning 48% of company Z). Would one have to work out some complicated calculation based on the loan, shareholders fund and percentage of shareholdings on a daily basis/annual basis? If so, how is it calculated if upon winding up of Company Z, the distributable shareholders fund was £200k

James

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By User deleted
07th Sep 2007 10:09

I'm just back from holidays, actually!
David is correct:

The irreducible group who control Z ltd is any combination of A plus any one other shareholders (two people in total).
As A is not a shareholder of Y, they are not associated.

On the loan creditor front, it depends on the ratio of assets within Y (assuming as David noted that it is Z who loans Y cash). So imagining that Y has a balance sheet which has a loan creditor of say £100k due to Z and assets of £100k, which give a balance sheet total of £nil, then rights on winding up would be:
Company Z £100,000
B - nil
C - nil
D - nil

Y would be controlled by company Z (by rights on winding up) and of course, A & one other contol Z so the companies would be associated by virtue of rights on winding up.

It does depend on the size of the loan creditor and assets in the company (year on year) -

Tip the balance sheet of Y around a bit:
Assets 500,000
Loan 100,000
Net 400,000

Rights on winding up:
Company Z £100,000
B - 180,000
C - 180,000
D - 40,000

Y is not controlled by Z any more (on rights on winding up), and so they are not associated, and of course, they are not associate by voting rights anyhow.


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By User deleted
07th Sep 2007 13:58

Thank you very much
to both David and Nicola for your expert help.

What if we tip the situation abit further, company Y's b/s has £100k creditor (co Z), £20k assets and £80k retained loss. Would Z still controls Y and if Y has company X as it's fully owned subsidiary then would all 3 companies be associated.

On another simplier question on a different scenario, I have another client - Company E who is owed by shareholders Joe and Ron equally. Joe is also 50% shareholder of Company F - the other 50% shareholder is his wife. Ron is a 100% shareholder of company G. Company F made a loan to Company E of £25k. Correct me if I'm wrong - would Company E and F (but not Company G) be associated?

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By User deleted
07th Sep 2007 17:36

Davids' first Q:
"Assume also that A, B, C and D are all unconnected. If B and C are associates, for instance, then BD (and CD) becomes an MCC of Z - the companies are then associated. Or are they? If HMRC attribute B's rights to C in connection with Z, do they also have to attribute those rights re Y? If so, then C alone controls Y - not associated. Nicola - where are you?"

OK, so Z Ltd is controlled (by votes) by:
A plus either B, C, or D
B (attributing C's rights) plus A or D
C (attributing B's rights) plus A or D
D plus either A, B (attributing C's rights) , or C (attributing B's rights)

Y Ltd is controlled by either B (attributing C's rights) or C (attributing B's rights) - that is the minimum irreducible group.

So (after all that - I am sorry I have to write it down to work it out) they are not connected by virtue of voting rights.

Yup, David, we agree again!

Oh lawks, I have just read all the other additional questions that have popped up below! I'll go for these on Monday!

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By User deleted
07th Sep 2007 18:51

Among you two I feel so dim
Referring to David's first question:

"Assume also that A, B, C and D are all unconnected. If B and C are associates, for instance, then BD (and CD) becomes an MCC of Z - the companies are then associated. Or are they? If HMRC attribute B's rights to C in connection with Z, do they also have to attribute those rights re Y? If so, then C alone controls Y - not associated. Nicola - where are you?"

If A,B,C and D are all UNCONNECTED then how could B and C be associates? Are you assuming they are in partnership elsewhere for instance?

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By User deleted
10th Sep 2007 11:42

Minimum controlling combinations
I have always based my understanding on this from an item in Taxation 2/9/1993 contributed by Ian K Young, then Editor of Longmans IR Practices and Concessions. He reported that the Revenue said to him that:

"We regard two companies as under the control of the same person or persons only if an irreducible group of persons having control of one company is identical with an irredicible group which has control of the other company.
"An irreducible group of persons her means a group of persons that has control of the company but which would not have control of the company if any one of them were excluded. It is not necessary that the control of both companies be under the same test in s. 416(2), it is sufficient if each company is under the control of the identical irreducible group under any of the alternative tests of control".

Basically, they will just look for any type of controlling combination, but the irreducible group is deemed the one which controls, as it consists of the smallest number of people (and don't forget that the basis for this is the close company rules, whereby one is looking for the smallest number of people at any one time).
So, does this mean that if necessary HMRC will not attribute rights then? Well, I think that you cannot ignore attributable rights, especially if that would get you to a minimum controlling combination that is smaller than if you did not. It is hard to see that this might work in practice, but looking at what was said in Newfields I think that it is possible for HMRC to not attribute rights, even though I can't really imagine a scenario where this could physically happen.
Bit of a brain teaser, I am sure that you can come up with an example to illustrate it though David!

By the way, I just treated Davids question as if A, B, C, & D were unconnected i.e. not associated apart from the fact that B & C were associated, as that is what he clearly meant, sorry to confuse you James, but you get the gist of it?

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
11th Sep 2007 09:42

Not me!! Just for the record
Those who think they have recognised me as the speaker, are, I am afraid mistaken. I only have a very simple example on MCC which involves three individuals none of whom are connected or associates of each other, although the 40/30/30 split is one I use.

I use the example (3 unrelated individuals, and 40/30/30) as a very simple way of showing the "irreduceable" rule in action, but wouldn't cloud the point by including married couples - who are the subject of the next example in my notes. You may have been misled by the names I used "Fred, Betty and Wilma", but I am careful to say that "contrary to popular belief these individuals have no connection with each other."

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By User deleted
10th Sep 2007 16:13

Circular debates
Shall we put this one to RIP too?

Clearly, one either goes with the guidance on irreducible groups or one does not. You may have to attribute rights to create an irredicible group, if not you might create a group which can also control, but it is not an irreducible one, because you would get the smaller group by attributing.

The examples we have been using turn on some of the early arguments in Newfields, and as this went all the way to the House of Lords, who did not care to look at the examples first put forward in detail we have no real way of deciding what is correct.

For once I will stick to HMRC's guidance (!) and go for the minimum controlling combination, it is the only workable solution in a really bad set of rules.

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By User deleted
10th Sep 2007 11:59

Illustration - much easier than I thought
X Ltd:
Control by votes:
A 15%
B 45%
C 15%
D 25%

C & D are married and so associated, everyone else unconnected

XLtd is controlled by:
A & B
B & C
B & D
CD (i.e. C or D after attributing their spouses rights) & A
CD or D & B

My thinking is that HMRC would use any of the above combos.

Now if it were like this:
X Ltd:
Control by votes:
A 33%
B 33%
C 33%
and B & C were married, then you would say that X Ltd was controlled by
B or C (attributing the rights of their spouses), you would not say it was controlled by A & B or A & C or B & C, as these groups all contain two persons, and the irreducible number here is clearly one person ( B or C).

There may be other examples where this rule does not apply so the lecturer might still be correct.


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By sdkellner
10th Sep 2007 12:16

Associates
Hi all

I'd be very grateful for your comments on this scenario.

Company 1 is owned 36% Mr A, 36% Mrs A and 28% Mr B - totally unconnected. Mr and Mrs A are (obviously) husband and wife.

Company 2 is owned 51% Mr C, 24 % Mr A and 25% Mrs A. Mr C is Mrs A's brother.

For Company 1, it looks to me like either Mr A or Mrs A are the minimum controlling combination.

For Company 2, I'd assumed that Mr C was the MCC. But is there an argument that Mrs A is also, as with her brother she would control the company? I'd assumed that this was not possible, as I'd thought the associates of an individual would only be considered if there was no other single-person MCC. In this case, as Mr C controls the company anyway, I assumed Mrs A would be ignored.

Clearly if HMRC can argue that Mrs A is a MCC by virtue of her brother's shares, then they can argue that Companies 1 and 2 are associated.

Many thanks.

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By User deleted
10th Sep 2007 13:13

David
I am sorry I do not agree with your example or the lecturer (see the quote I wrote out below - you look for the minumum controlling combination or irreducible group). If the irreducible group is one, you cannot chose a group of two or more, because clearly that will not be the minumum controlling combination. This is why my first example below works, but your does not if you see what I mean.

Stuart
Yes, your example appears to defy logic and this is what the widow found in the Newfields case. It looks as if attributions will make the two companies associated but ESC C9 may well help out as you say.

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By sdkellner
10th Sep 2007 13:34

Thank you...
... David and Nichola. Looks like ESC C9 will be required.

I'd always seen one person on his/her own (i.e. Mr C) as being more of a 'minimum controlling combination' than what is effectively two people, i.e. Mrs A and Mr C. Clearly the attribution rules effectively combine the two holdings to make it appear as if one individual (Mrs A in my example) owned all the attributed shares.

What a daft piece of tax law, surely due for a rewrite!

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By Taxi
10th Sep 2007 15:06

But, Newfield did not confirm the discretion you are talking abo
that is what the widow argued and failed on!

I think you are getting muddled by the discretionary elements here.
1. Discretion as to which control test is used.
2. Discretion as to which irreducible group is used.

No discretion though to ignore minimum controlling combination and go for a higher combination, as this will not be the minimum (we are going dangerously close to going back in a big circle to the other post that we agreed was RIP).
There is no discretion not to attribute if attribution is possible either (hence widow in Newfields was caught).

Rather than argue further I will ask the lecturer her side, I can't beleive that she is really arguing that you do not use the MCC. HMRC's manuals all direct to use a MCC, the piece I quoted below, which is quoted all over the place as the authority on it all says you use the MCC. I reckon there is just a misunderstanding going on here.

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By User deleted
10th Sep 2007 16:53

Not when it suits!
I am none too pleased with that allegation! My comment was based on fact, the examples were from early stages of Newfields and did not help the case, so they were dropped by HMRC, and not picked up on by the higher courts.
That was not my decision, I am only pointing out that was what happened then. This may have lead HMRC to bring in the concept of the irreducible group - a group is not irreducible if one person is spare.

Do also note if you are looking for Newfields on the net, that some sites do not have the final judgment from the Lords which is misleading to say the least.

RIP this thread please!

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By AnonymousUser
12th Sep 2007 13:41

Removed
I have removed all my posts to this thread as my words have been misconstrued. At no time did I suggest that you do not need to find an irreducible group. The basic principle of irreducible groups is not the issue. The problem was one of interpretation of both the legislation and the Newfields decision as to what rights need to be attributed in finding those irreducible groups.

RIP this thread

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By User deleted
11th Sep 2007 11:09

Editorial intervention
I have edited some postings in an effort to close this debate:

For readers: David's examples showed that you could include any group of individuals to control a company, not necessarily an irreducible group and this was based on some extreme views of a lecturer. Apologies to Rebecca Benneyworth for being drawn into this - she was not the lecturer concerned.

I have done an article to illustrate the points made and show arguments for and against.


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