The question of whether a parent company in receipt of interest is carrying on a business and so to be counted as an associate came up again in Any Answers last week like a bad penny.
"Carrying on a business" is a much wider concept than carrying on a trade. The productive management of investments, for instance can amount to a business, whilst it will not amount to trading. As we are talking tax, each case must decided by looking at the facts.
HMRC statement of practice 5/94 says that a non-trading holding company can in certain circumstances be deemed to be not carrying on any business, and can be excluded from the count of associated companies for an accounting period, provided that throughout the period all the following apply:
it has no assets other than shares in companies which are its 51 per cent subsidiaries
it is not entitled to a deduction, as charges or management expenses, in respect of any outgoings
it has no income or gains other than dividends which it has distributed in full to its shareholders and which are, or could be, franked investment income received by that company (Section 832(1) and (4A)); and
the 51 per cent subsidiaries are 51 percent subsidiaries under Sections 13ZA(1), (2), (3) and (4) ICTA 1988.
The sort of holding company envisaged by SP 5/94 clearly has a bank account (in order to enable it to receive and pay dividends), but the bank account is not interest bearing. If the account were interest bearing it would be an income producing asset in its own right, and the company might then to be carrying on business of making investments.
Interest bearing accounts
It is important to establish why the company is in the position it is in, and this comes as a direct result of the Special Commissioners' decision in Jowett v O'Neill and Brennan Construction [1998] STC 482
In that case a company was incorporated as a trading company, had traded for several years, and subsequently ceased trading as 'unable to find any suitable work this year'. The company had closed its bank current account, and maintained an interest bearing deposit account, which yielded interest.
The Commissioner found that the company was in 'a state of suspended animation', but that was neither engaged in a trade nor a business.
Basically, a company may have been set up to act solely as a holding company, or it may have been set up for a specific trade or purpose. If the latter, according to the decision in O'Neill and Brennan Construction, providing that it can demonstrate that its fundamental activities have ceased, it may succeed in proving that it is not engaged in any business activities.
So what of holding companies? Clearly they are formed to carry on the business of holding investments in their subsidiaries. If the criteria in SP 5/94 apply, they can be deemed dormant for the purposes of counting associates.
If they hold an interest bearing bank account, they will be investing funds to produce income and so creating assets. That is an investment business, and so not only will they have to stand up and be counted as an associated company together with their subsidiaries, they will also be Close Investment Holding Companies and taxed at full rates.
Nichola Ross Martin
