The tax perils of associated companies

Davidson founded Leaf-It-At-Home a year ago. It’s an interior houseplant design company – he makes over your home with plants. Unfortunately, because his parents run a company in the same sector, he’s been unable to register the firm as a standalone operation.

“Leaf-It-At-Home is currently a subsidiary of my parent’s business, Lease-A-Leaf,” says Davidson. “They hire out plants to offices around the UK, so it’s a similar industry. If we were to split the companies, we’d be lumped with ‘associated companies’ Tax.”

Mike Truman, tax expert and editor of Taxation magazine explains, “If you run a small company with profits under £300,000, you pay a lower rate of corporation tax; that’s 21 per cent at the moment, going up to 22 per cent next year. But if your company’s about to hit that bracket, to avoid the tax hike, you could split your business into two and stay in the lower limit.”

“To crack down on this, the Revenue imposed an associated companies rule. It can apply to companies that you control, or businesses owned by people connected with you, including your spouse, civil partner and your parents. If the companies are in different lines of business, they will usually waive the rule. But if there is any commercial inter-dependence, they crack down, even if there’s no attempt to avoid tax.”

There is little hope of Davidson escaping the tax, not when the plants for both businesses come from the same supplier in Holland. The two firms also share staff: Leaf-It-At-Home borrows manpower from the 11-strong team as Lease-A-Leaf for big jobs.

Lease-A-Leaf currently pulls in revenues of around £800,000 per year. Leaf-It-At-Home sees around £6,000 per month. But the smaller company is already profit-rich, making £30,000 on a turnover of £70,000. “Because we buy in bulk for both companies, we get a great rate,” explains Davidson.

“I’ll probably be running the whole operation in five years,” said Davidson. “Then we’ll decide what to do. Ultimately, we’re a family, so the money’s all coming into the same place. But when it comes to inheritance tax, that will complicate things. We might split the firms and sell Lease-A-Leaf. We’ll just have to wait and see.”

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