CTM03941 - Small profits rate: financial year 2023 onwards: associated company definition: control by the same person or persons

CTA10/S18E (4)

More than one person (or group of persons) may have control of a company at the same time. For example, one person may have the greater part of the voting power, while another holds the greater part of the issued share capital and yet a third is entitled to the greater part of the assets in a winding-up. A person controls a company if that person, exercises, is able to exercise, or is entitled to acquire direct or indirect control over the company’s affairs

Whether or not two companies are under the control of the same person will be evident after applying the control tests in CTA10/S450 and S451 to both companies.

For detailed guidance on the meaning of control see CTM60210 to CTM60230.

However, to determine whether two companies are under the control of the same persons it is necessary to look at which group or groups of persons control each company.

Two companies are only under the control of the same persons if:

  • a group of persons which controls one company is identical to a group which controls the other, and
  • for each company, that group is a ‘minimum controlling combination’.

A ‘minimum controlling combination’ means a group of persons which has control of the company but which would not have control of it if any one of the persons were excluded from the group.

For example, if three unconnected persons, A, B and C, each hold one third of the shares in a company, there are three minimum controlling combinations; A and B together, or B and C together, or A and C together. Control is held by any two together, so the addition of another person to the controlling combination is superfluous - A, B and C together do not form a control group for this purpose.

Example

Company 1

Shares

  • Mr A - 50
  • Ms B - 50
  • Mr C - 50

Total issued shares = 150

Company 2

Shares

  • Mr A - 50
  • Ms B - 50
  • Mr C - 50
  • Mr D - 50

Total issued shares = 200

A, B, C and D are not associates.

Company 1 is controlled by A and B together, or A and C together, or B and C together, that is by any two of them together.

Company 2 is controlled by A, B and C together, or A, B and D together, or A, C and D together, or B, C and D together, that is by any three of them together.

As there is no group of persons controlling Company 1 which is identical to a group of persons controlling Company 2, the two companies are not associated.

However, if for example, A’s and B’s shares together entitled them to the greater part of the voting power in Company 2, then there would be an identical group controlling both companies, through applying the separate test in CTA10/S450 (3)(b) and so the two companies would then be associated.

Minimum Controlling Combinations interpretation

The interpretation of ‘minimum controlling combination’ was considered by the First Tier Tribunal in Ghelanis Superstore and Cash and Carry Ltd v HMRC (TC03251). The decision confirms that, in establishing the minimum controlling combinations, all possible situations in which control is, or could be exercised, should be considered and superfluous members should be disregarded. The appellant Company X had the following possible minimum controlling combinations:

  • A, B and C (75%)

  • A, B and D (75%)
  • A, C and D (75%)
  • B, C and D (75%)

Company Y (which HMRC argued was associated with X) had the following possible minimum controlling combinations:

  • B and C (66%)

  • A, B and D (67%)
  • A, C and D (67%)

The appellant argued that the only minimum controlling shareholding of Y was B and C because the other potential combinations included 3 members. They considered that X and Y were not associated because B and C did not also control X.

The Tribunal agreed with HMRC and found that it does not matter how many people are in each combination, only that the combination cannot be further reduced by excluding one or more of the shareholders from it. As X had two minimum controlling combinations (A, B and D & A, C and D) that were identical to minimum controlling combinations for Y, the two companies were associated.