Association Rules

[spotpush]

I understand why these rules are in place and if they are the rules then I'll pay accordingly although it's unfair on small businesses.

With that said;

According to Association Rules if I own with 2 companies then each company is allowed to earn £150k before paying a higher rate of Corporation Tax.

If Company 1 earns £200k and Company 2 earns £50k why should Company 1 have to pay a higher rate of Tax on the £50k, when the total profits of both Companies is less than 300k?

1) Is there any way round these association rules?
2) Would setting up Company 2 with nominee directors/secretarys/shareholds allow me to run two companies without being hit by 'Association Rule' limitations?

 

[MikeJ]

We got hit in exactly the same way. We had one very profitable company, but the second was barely breaking even. It's not fair, but it's the easiest way for HMRC to implement the rule.

Can either of the companies be partnerships or LLPs?

You can dump ownership of one of the companies, but the issue is "control" not "ownership". If HMRC inspect you and judge you to be in control of the second company, then they'll tax you in the same way.

 

[Mitchells Bristol]

Another possibility would be for company 2 to charge company 1 for services, to increase the profit in company 2 by £50k and reduce the profit in company one by £50k. However, the charge would have to be justifiable, i.e. shared use of staff or premises etc etc

 

[spotpush]

Could i set up a trading name with company 2 which is named the same as company 1 and then change the bank details that customers pay into sort of like redirecting funds from one company to another without any notable change seen by the customer....?

 

[MikeJ]

I'm not sure what you mean. But you can have trade as something other than your Ltd company name, and have more than one bank account in the Ltd.

So, ABC LTD is Company 1. XYZ is company 2. Each have their own bank accounts. However, you must state on paperwork that XYZ is a trading name of ABC Ltd (you have to make clear the legal entity that your customers are trading with, and that's ABC Ltd).

The downside is if something goes wrong with XYZ, then it takes down ABC Ltd too.

 

[spotpush]

Sorry, my post wasn't that clear. But, I think what your suggesting is the same thing.

From what I understand Banks allow you to create sub accounts under the primary account with a given trading name. This trading name just so happens to be the same name as your other business. Thus allowing customers to pay into either companies' bank account and the name stays the same.

Company 1 (Cheap Cars) - Bank Account 1 - Sub Account 'Pet Food'
Company 2 (Pet Food) - Bank Account 2 - Sub Account 'Cheap Cars'

If you selling 'Cheap Cars' you don't want customers paying monies into a company called 'Pet Food'. With this type of layout customers can pay 'Pet Food' into either account as 'Pet Food' and be none the wiser apart from a change in account number and sort code.

This allows you to use up the 150k limit in both businesses before hitting the 300k threshold. It's a bit messy but I think it would work….?

 

[astutiumRob]

I think you're over complicating things (aside from it being technically money-laundering)

Why not simply have smaller-business invoice larger business for it's general-administration services etc ?

 

[spotpush]

If that works then yes

 

[Grayson Moore]

If you are making profits at levels at which the associated rules are having an impact then you should be getting planning advice from your accountant rather than a general forum.

If your accountant is not delivering this then I respectfully suggest that you would be better off with a new accountant!

 

[spotpush]

Say if you create a 2nd company, which is owned by another company do you still fall within the association rules or would it be viewed as one company?

so any profits the secondary company makes are calculated separately but count towards the profits made by the parent company....

 

[teddys]

I can suggest two possible options:

1. Your second business is run as an LLP: whether or not that fits in your current tax position is an issue though.

2. If your business comprises income from outside the UK, incorporate a subsidiary outside the UK for the non-UK part of the business.

 

[Mitchells Bristol]

2. If your business comprises income from outside the UK, incorporate a subsidiary outside the UK for the non-UK part of the business.

Although, of course, this will not help with the problem of having an associated company

 

[teddys]

Although, of course, this will not help with the problem of having an associated company

Well, I'd elaborate on my previous post: the OP could address this issue either at the transaction level, structure level or both:

Transaction level: for the current tax year:

a) Shift income: try to get new contracts in to company 2 with 50k
b) Load the company 1 (larger income) with expenses where possible
c) Claim AIA in company 1 if possible

Structure level: for next tax year on, try re-organising:

a) If operating within the UK - try LLP route
b) If have business outside the UK then create a subsidiary outside the UK for overseas business (this is considering the recent revamp of CFC rules)

Whether or not these are workable solutions only the OP would know!