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Connected company confusion for shared AIA

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It’s not always clear when a company may need to share its £1m annual investment allowance. Emma Rawson takes a closer look at the rules, and how these interact with other areas of the tax regime.

27th Mar 2024
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HMRC recently wrote to companies that it suspects have claimed too much annual investment allowance (AIA). This letter reminds the recipient that the maximum £1m AIA may have to be shared where companies are part of a group, or under common control. 

The rules on when the AIA has to be shared are quite complex, so it’s unsurprising that some companies may have got it wrong. As a further complication, the rules are different for the AIA compared to other parts of the tax regime where we also need to look at closely related or connected companies.

What are the AIA rules?

The maximum AIA is £1m per chargeable period. However, that does not mean every company is entitled to the full amount each year. Instead, the Capital Allowances Act (CAA) 2001 sets that only a single £1m AIA is available to: 

  • groups of companies, and
  • companies (or groups) that are under the control of the same person (“common control”) and are “related” to each other.

This means that groups of companies, or related companies under common control, must share the single allowance between them.

For these purposes, a “group” takes the Companies Act definition, so it should be fairly obvious whether or not one exists. However, it can be harder to determine whether companies and groups are under common control.

Control is defined for AIA purposes in s51F and s574(2) CAA 2001. This says that a person controls a company if they have the power to secure that the affairs of the company are conducted in accordance with their wishes. This could be through the holding of shares, voting power or any powers conferred by the articles of association or other documents (such as a shareholders’ agreement).

However, even where the same person controls two or more companies, they won’t necessarily have to share their AIA. For that to be the case, the companies also need to be related. This requires the companies to either share premises or receive more than 50% of their turnover from the same economic activities.

Therefore, it’s not enough for two companies to have the same majority shareholder – there also needs to be a relatively close connection between the two companies.

Similar, but different

The AIA isn’t the only part of the tax regime where companies might need to share allowances and limits.

As of April 2023, we have two corporation tax rates – a main rate and a small profits rate. Which rate a company pays depends on where its profits fall in relation to the upper limit and lower limit. Those limits have to be divided by the number of associated companies, and spotting what is and isn’t an associated company can be tricky. Broadly, companies will be associated if one controls the other, or they are under common control.

Similar rules apply for the employment allowance, which must be shared where companies are connected. For these purposes, companies will be connected if one controls the other, or they are under common control.

For both the employment allowance and corporation tax rates, the definition of control is taken from s450/s451 CTA 2010. This is a different definition to that which applies for AIA purposes. Whereas the focus for the AIA is on the power to ensure a company’s affairs are conducted in line with an individual’s wishes, the CTA 2010 definition talks more widely about exercising direct or indirect control over the affairs of a company. 

A further complication for corporation tax rates and the employment allowance – but not the AIA – is that under s451 CTA 2010, the rights of an individual’s associates (that is relatives, partners and so on) have to be attributed to them when looking at control if there is “substantial commercial interdependence” between the two companies involved. 

Associated vs connected vs related

These different definitions mean that a company might need to be taken into account for the purposes of the AIA, but not corporation tax rates and the employment allowance (and vice versa).

For example, let’s assume we have two unrelated companies – A Ltd and B Ltd – both of which are controlled by the same individual, Mr Z.

A Ltd and B Ltd are under control of the same individual and will be “associated” companies for the purposes of corporation tax rates, and “connected” for the purposes of the employment allowance. We therefore have to divide the upper/lower limits and employment allowance between them.

However, A Ltd and B Ltd will only have to share their AIA if they are also “related” – in other words they share premises or more than 50% of their turnover is from the same economic activity. If this is not the case, then both companies can receive the full £1m AIA.

To complicate matters further, let’s assume Mr Z’s wife – Mrs Z – also owns a company called C Ltd. The rules in s451 CTA 2010 mean that C Ltd may need to be taken into account for the purposes of corporation tax rates and the employment allowance if there is “substantial commercial interdependence” between it and A Ltd and/or B Ltd. However, as s451 doesn’t apply for the AIA, C Ltd will not be under common control with A Ltd or B Ltd for AIA purposes regardless of how closely related the businesses are. 

Asking the right questions

The above outlines how important it is for companies, and their advisers, to keep track of the various webs of ownership, control and interaction between companies. 

To ensure that companies pay the right rates of corporation tax and don’t over claim allowances, advisers need to ask the right questions to make sure they get to the bottom of exactly what other companies their clients might be involved in, and the connections that exist between them.

Replies (1)

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By FactChecker
27th Mar 2024 13:28

".. it’s unsurprising that some companies may have got it wrong" is a worthy under-statement!

But an excellent article that should answer many AA queries (if of course posters look here).

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