As businesses grow, it’s not unusual for company owners to set up additional companies.
Perhaps you’re launching a new venture, investing in property, or simply looking for a different way to utilise surplus cash within your business group.
One common approach is to lend funds from one company to another through an intercompany loan.
While this can be a legitimate and effective business strategy, it’s important to understand the associated company rules and the potential tax consequences.
What is an intercompany loan?
An intercompany loan is exactly what it sounds like.
One company lends money to another company.
This often happens where one company has accumulated surplus cash and another company needs funding for:
- Property purchases
- Business expansion
- Investment opportunities
- New business ventures
- Working capital
Provided the arrangement has a genuine commercial purpose, intercompany lending can be a useful way to deploy cash within a group structure.
How are intercompany loans taxed?
Most intercompany loans fall within the loan relationship rules.
Where interest is charged on the loan:
- The lending company is taxed on the interest received.
- The borrowing company can usually claim tax relief on the interest paid, subject to the normal corporation tax rules.
Interestingly, many intercompany loans are interest-free.
Even without interest, they can still fall within the loan relationship regime.
What happens if the loan is written off?
This is where problems can arise.
If the borrowing company cannot repay the loan and the lending company decides to write it off, tax relief may not be available.
Where the companies are connected, HMRC will often deny relief for the lender.
This can create an unexpected tax cost, particularly where large sums are involved.
What are associated companies?
Two companies are generally associated if:
- One company controls the other, or
- The same person or group of people controls both companies
Control doesn’t just mean owning shares.
It can include rights over:
- More than 50% of the ordinary share capital
- Voting rights
- Company profits
- Assets on a winding-up
These rules can become surprisingly complex, especially when family members are involved.
Family ownership can affect the position
When determining control, HMRC may take account of the interests of associates.
Associates can include:
- Spouses and civil partners
- Parents and grandparents
- Children and grandchildren
- Brothers and sisters
- Business partners
- Certain trustees and settlors
As a result, companies that appear separate at first glance may still be treated as associated for tax purposes.
What is commercial interdependence?
HMRC will often consider whether businesses are commercially connected.
This can include:
Financial interdependence
For example:
- Intercompany loans
- Guarantees
- Shared financing arrangements
Economic interdependence
Where one business depends on the activities or success of another.
Organisational interdependence
Such as:
- Shared premises
- Shared employees
- Common management
- Shared equipment
The greater the connection between companies, the more likely HMRC is to view them as associated.
Why do associated companies matter?
The biggest impact is often on Corporation Tax.
Many business owners are surprised to discover that Corporation Tax thresholds are shared between associated companies.
For example:
- The standard small profits threshold applies to a single company.
- Where there are two associated companies, the thresholds are divided equally.
- Where there are three associated companies, the thresholds are divided by three.
This means companies can reach the higher Corporation Tax rate much sooner than expected.
As a result, the overall tax bill across the group may increase.
Could associated companies affect payment deadlines?
Yes.
Associated companies can also affect when Corporation Tax becomes payable.
Large companies are required to pay Corporation Tax through quarterly instalments rather than waiting until nine months and one day after the year end.
The threshold used to determine whether a company is “large” is reduced when associated companies exist.
This means some businesses may find themselves paying Corporation Tax earlier than anticipated, creating additional cash flow pressures.
Don’t overlook dormant companies
There is some good news.
Dormant companies are generally ignored when determining the number of associated companies.
Certain passive holding companies may also be excluded in specific circumstances.
However, every structure should be reviewed carefully before assuming an exclusion applies.
Why documentation matters
Intercompany loans should always be properly documented.
Loan agreements, board minutes and supporting records can help demonstrate the commercial purpose of the arrangement.
Regular reviews of ownership structures and control arrangements are also important, particularly where family members are involved.
Are your companies caught by the associated company rules?
Many business owners don’t realise that associated companies can affect Corporation Tax rates, payment deadlines and group cash flow planning.
If you operate more than one company, have family members involved in different businesses, or are considering transferring funds between companies, it’s worth reviewing your structure.
Contact Jon or the team at Jon Davies Accountants for advice.
We’ll help you understand the associated company rules, identify potential tax risks and ensure your business structure remains as tax-efficient as possible.
If you found this useful, please share it using the icons at the side of the page, or leave a comment below.
Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
- You can email us at gr****@*********************co.uk