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Friday Teaser – Connected Company Transactions

Does a sale between connected companies have to be at market value?

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Mr Maker owns a company, Company A, which manufactures and sells computers.

He also owns Company B, an investment company which invests in shares and property for rent. They are connected company’s, but not in a group. Both companies are SME’s and so are exempt from the transfer pricing rules.

Company B requires 10 computers, which will be fixed assets in this company. It costs Company A £1,000 to manufacture these. The Market value of the 10 computers is £5,000.

Company B buys the 10 computers for £1,000, meaning there is no trade profit in Company A, and Company B can only claim capital allowances on £1,000.

Can anyone point me towards any legislation that says we have to use the £5,000 value rather than the £1,000 value for tax purposes?

I can find plenty or references for capital gains purposes, and transfer pricing rules for larger entities, but I’m struggling to find anything that compels an SME to use MV for trade purposes.

Would your answer be any different if Company A was in fact a property developer, and Company B was buying the properties to rent out?

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By AnnAccountant
24th Aug 2018 16:26

If an asset had been transferred to a member at undervalue, s1020 CTA 2010 could have caught it. But it doesn't mention transfers to other companies.

Out of interest, what is the tax advantage HMRC could have a go at? Is one company utilising losses?

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Replying to AnnAccountant:
Lone Wolf
By Lone_Wolf
24th Aug 2018 16:34

In reality the case is a property developer who wants to start renting some of the properties. This would involve appropriations to fixed assets, and the associated trading profit that brings.

I'm considering whether setting up a separate non-group company could get round the trading profit.

There would then be things like SDLT to consider which may render it not worthwhile, but I'll cross that bridge when I come to it.

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By Accountant A
24th Aug 2018 16:31

What about VAT? Presume A is registered and B not.

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Lone Wolf
By Lone_Wolf
24th Aug 2018 16:37

I wonder whether CTA 2009 s159 could hamper this.

Could a sale at undervalue be said not to be " disposed of otherwise than in the course of the trade".

I have my doubts that this is going to work...

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Replying to Lone_Wolf:
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By Accountant A
24th Aug 2018 17:12

Lone_Wolf wrote:

I wonder whether CTA 2009 s159 could hamper this.

Looks like a decent shout.

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