Managing associated companies can be a complex task, but with the right understanding and strategic planning, it can be done effectively. In her recent session “Tax Planning Ideas for Small Businesses”, Rebecca Benneyworth gave insight into how to best manage associated companies.
Rebecca explained that associated companies are those controlled by the same person or persons. Control is measured largely by ownership, including shares, votes, distributable income, and assets in a winding up. It's important to understand that even if one company is not generating profits, it can still be considered active if it's carrying out business activities, such as being a holding company.
One common strategy for managing associated companies is to divide a company with high profits into several companies with profits below the limit. However, this strategy should be used carefully, considering anti-avoidance rules and other regulations. For instance, if a director pays money into a company, it must be matched with money taken in 30 days on either side.
In terms of tax planning, if the profits of associated companies are roughly equal, Rebecca states that there's no need to rush about and get stressed. However, if one company is making significantly more than the other, it may be beneficial to switch some operations, like pensions, to the company paying more corporation tax.
Holding companies present a unique challenge. Even if a holding company isn't doing anything, it's still considered active as it carries on the business of owning shares in subsidiaries. To avoid dividing your limits by three, you can make the holding company passive. There's specific guidance available on how to do this so be sure to consult a professional before embarking on this route.
Lastly, Rebecca advised that one must be cautious about overseas companies. They might not be liable to UK corporation tax, but profit shifting into them could bring down your profits in the UK. Therefore, foreign companies should also be counted.
Remember, the key to managing associated companies effectively is understanding the rules and regulations, and planning strategically. If a company is dormant, it's not counted. So, if you have companies that you want to make dormant, bear that in mind.
Managing associated companies requires a deep understanding of control, profit distribution, and tax implications. With careful planning and strategic decision-making, you can ensure that your associated companies are managed to their best effect. You can watch the below clip from Rebecca’s session:
To watch the full session by Rebecca Benneyworth, just click here. In the session, Rebecca covers the above as well as:
- Incorporation – or not? What are the thought processes at the moment and in the medium term? Should we be pulling clients out of limited companies and how difficult is this?
- New small profits marginal relief – how does this affect profit extraction strategies? What ideas can we explore with clients for tax-efficient extraction of profits? And how do we deal with the admin of all this?
- Managing associated companies to best effect. Where to look and what to do?
- Planning issues with basis period reform and why you need to talk to partnerships in particular.
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.