Tag: HMRC

Associated Companies

A simple guide with scenarios encountered by SME practitioners.

Why is it important?

a. Corporation Tax rate

Limits of standard rate (25%) and small profits rate (19%) are divided by number of associated companies plus one.

Example 1: How limits are calculated.
Suppose A Ltd and B Ltd are associates. As A Ltd has one associated company B Ltd, limit will be divided by 1+1 = 2; and reduce from £250k (25%) to £125k and £50k (19%) to £25k.

Corporation tax limits are for 12 months, thus where the accounting period is six months with one associated company, limits will be divided by four.

b. Deadline for Corporation tax (CT) payment

`Large` companies i.e. companies whose annual profits exceed £1.5m, must pay CT by quarterly installments. £1.5m threshold is divided by number of associated companies.1

Who are associates?

Two companies are associates when one is controlled by another or both companies are controlled by the same person or persons.

Example 2: One company owned by another.
A Ltd owns 100% share capital of B Ltd. A Ltd and B Ltd are associates.

Example 3: Subsidiaries
A Ltd owns 50.5% of B Ltd. A Ltd also owns 100% of C Ltd. All three companies are associates.

Example 4: Two different companies fully owned by same person.
Both A Ltd and B Ltd are 100% owned by Mr A. A Ltd and B Ltd are associates.

Example 5: Two different companies 50% owned by same person.
Mr A owns 50% shares of A Ltd and B Ltd. A Ltd and B Ltd are not associates. As the condition is that Mr A has to own more than 50% shares to have control.

Example 6: Two people owning more than 50% shares in two different companies. (Usually husband wife companies). Both A Ltd and B Ltd are owned by Mr A and Mrs B 50% each. A Ltd and B Ltd are associates. Mr A and Mrs B need not be relatives. Even if they are friends A Ltd and B Ltd are associates.

Example 7: Concept of smallest irreducible number
A Ltd owned 50% each by Mr A and Mr B. B Ltd owned 1/3rd each by Mr A, B and C. Smallest irreducible number to control A Ltd is A + B. In B Ltd it is A+B, A+C or B+C. As A+B is common in both companies, they are associated companies.

Example 8: Directorship
A Ltd is 100% owned by Mr A; there are two directors in A Ltd, Mr A and Mr B. B Ltd is 50% each owned by A and B; and both A and B are directors in B Ltd. A Ltd and B Ltd are not associates as Control is at the participator or general meeting level, not at the administrative or board level.

Companies owned by relatives?

They will only be counted as associates if there is substantial commercial interdependence among them.

Example 9: Different businesses

A Ltd is 100% owned by husband Mr A operating an accounting business. B Ltd is 100% owned by wife Mrs B operating an architectural business. If no substantial commercial interdependence, they are not associates.

Inclusions:

  • Overseas companies
  • Company associated even for 1 day in the accounting period.

Example 10: Associates acquired or disposed during the year.
A Ltd accounting period runs from 1st April 2024 to 31st March 2025. A Ltd had one 100% subsidiary, B Ltd, which he disposed on 30th June 2024 and a new 100% subsidiary, C Ltd, was incorporated on 1st March 2025. In this case both subsidiaries will be counted.

Exclusion

  • Dormant companies – usually passive holding companies.

    Example 11: Dormant company
    A Ltd’s year end is 31s Jan 2025. B Ltd,100% subsidiary of A Ltd, is incorporated on 29th Jan 2025. B Ltd commences trading on 15th Feb 2025. B Ltd will not be counted as an associate for A Ltd the year ended 31st Jan 2025 as B Ltd was associate only for part of the accounting period and was dormant in that part.3


Practitioner’s points:

  • Take care when shortening accounting period of companies as it reduces their limits as well.
  • Date of ceasing and commencing trading will become important; as 1 day trade can reduce limits by half.
  • Ownership percentages become more important.
  • Group profits can be shifted via intra-group sales and management charges.4

Notes:

  1. CTM92520
  2. 14.12.5 Tax Planning : Taxation of Small businesses by Malcolm James.

Further readings:

  1. TAX guide 02/23: Associated companies | ICAEW
  2. Associated companies and corporation tax | ACCA Global
  3. AAT FAQs
  4. Taxation of Small businesses by Malcolm James

Taxation of Crypto assets

This article deals with `exchange tokens` like Bitcoins, not with assets like NFTs or stablecoins. It is written for Individual tax payers.

HMRC does not treat Crypto as currency or money1.

Most common scenario is of an individual investing in Crypto optimistic for an increase in its value. Any gains or loss in such a case is treated similar to investment in shares. Rules such as pooling, same day and 30-day2 apply even if crypto held in different exchanges9.

Please note sale of crypto takes place even if it is exchanged for another crypto asset, it is used to buy goods/services or given away to a person (not their spouse)8.

International matters

Gains need to calculated in pound sterling3.

Location of asset – In HMRC’s view, exchange tokens are located where the owner is tax-resident. This rule will be of importance to remittance basis users, as their crypto gains will be taxable even if they do not remit funds to the UK4.

Other taxes

Stamp duty – not applicable5.

VAT – not applicable. But if a trader sells goods or services in exchange of crypto assets, the trader will need to charge VAT6.

Loss

In case of fraud – HMRC does not consider theft as a sale, a negligible value claim can be made7.

In case of loss – similar treatment as in case of shares. Three things to be aware of:

  1. Capital losses will be adjusted against gains in same year.
  2. Carry forward indefinitely and adjust against first available gains.
  3. Cannot be carried back except in case of death.

Disclosure service

HMRC has launched a cryto disclosure service for individuals who may have not paid the correct amount of tax in past tax years.8.

Notes:

  1. CRYPTO10100 means loan relationship rules do not apply.
  2. TCGA 92 sections Pooling (104) Same-day (105) 30-day (106A)
  3. CRYPTO40100
  4. CRYPTO22600
  5. CRYPTO44100
  6. CRYPTO45000
  7. CRYPTO22450
  8. Check cryptoasset disclosures, HMRC tells taxpayers | ICAEW
  9. Share and securities matching rules apply to assets which are fungible assets i.e. assets which are not individually identifiable. Tolley annual CGT book 64.2

Further readings:

Taxation of Dividends

In this article we look at the intricacies of tax computation on dividend income for individuals.

Tax rates

We are aware that dividends are taxed at special rates which are lower than non-saving rates. But, if the foreign income is taxed on the remittance basis, they are taxed at basic, higher or additional rates.1

Resident individuals

Stock dividends from non-UK companies are not taxable. 2

The charge to tax on foreign dividends is on the full amount of the dividends arising in the tax year – ITTOIA05/403. This is different from the paid basis that applies to dividends and other distributions from other UK companies. 3

Dividends from venture capital trusts are exempt from tax, up to shares worth £200k.4

Non-resident individuals

Where a non-resident receives dividend from a UK company, he is treated as if he has already paid tax @ dividend ordinary rate. But this credit is not repayable. 5

Withholding tax

No withholding tax in the UK. But payments to non-residents, UK (under many DTAAs) is entitled to impose 15% withholding tax.

High Income benefit charge (HICBC) and Dividend allowance

Dividend allowance (currently 2024-25 at £500) may reduce tax liability but is counted as income for HICBC calculation.

Dividend allowance, personal saving allowance and starting rate for savings income do not apply to foreign income remitted to the UK.7

Bonus

  1. Expenditure: professional fees – fees for advice about markets or management of a portfolio, not allowable.6

Notes

  1. RDRM31320
  2. ITTOIA05 Sec 402 (4) and SAIM5210
  3. SAIM5210
  4. VCM51200
  5. ITTOIA 2005 Sec 399.
  6. CG15280
  7. ITA 2007, s13 and s18

Taxation of Indian Partnership profits in UK

If a UK tax resident is a partner in an overseas firm, they will be liable to UK income tax on their share of profits.1

Difference between UK and Indian partnership

UKIndia
In UK, partnership pays no tax, partners pay tax on their share of profit.2  In India, partnership pays tax and partners share is exempt income u/s 10(2A) of Indian Income Tax Act.4
Partners salary and/or interest not allowed as deduction for partnership profits.3Any salary and/or interest paid to partners is allowed as a deduction but then taxable in the hands of the partners. 4

Similarities between UK and Indian partnership

UKIndia
Qualifying interest. Monies borrowed to buy interest in a partnership is allowable deduction in partners tax return.5Same in India.  

Computation of taxable profits

  • Taxable profits of the partnership are computed in a manner as if the partnership itself was UK resident3. This means taxable profit and loss of the Indian partnership will need to be re-computed9 as per UK rules.
  • See Book – Alan Melville Taxation for computation examples.
  • FTCR available to UK resident partner on tax paid by the foreign partnership overseas6 . Be aware you will need to add it manually, software does not pick this up automatically.

  • NIC Both Class 2 and Class 4 not payable as trade carried wholly outside the UK.8 Be aware you will need to manually remove it, software does not pick this up automatically.
  • Basis period should not be an issue as most of the firms in India keep their accounting period aligned to the fiscal year.
  • Tax return: for both UK and foreign partnership we need to use form SA104. Plus, use SA106 box 2 to fill in FTCR manually computed.

Notes:
1. RDR1 point 6.8 and 6.63
2. Tolley Income tax 51.1
3. Tolley Income tax 51.4
4. Direct taxes by VK Singhania para 314
5. Tolley Income tax 41.10
6. INTM335500 , DTAA Article 4 1 b and 24 1 a and Tolley Ray – Partnership Chapter 16 & 17.
7. Loss relief for partners – ICAEW Textbook Pg 206
8. Re Class 4 see SSCBA 1992, Section 15 (1) c ; re Class 2 see SSCBA 1992 , Section 11 (3)
9. Besides adding back salary and interest, adjustments as per ICAEW Textbook Pg 124 and 125. See also Tolley Tax Computations.
10. BIM82000

To know more about taxation of foreign income in the UK read our Worldwide Disclosure blog.