Transfer pricing

by **Chanmuganathan** on Thu Jun 02, 2011 1:51 pm

I have situation where two companies, owned by same individuals were made profit for YE 31.03.2011 and one pay CT on 21% and the other 29.75%.

Is any a provision which is preventing a transfer some profit between the companies (Transaction will not arm length).

Please note both are UK Companies and no cross border transactions involved.

by **section 44** on Thu Jun 02, 2011 5:00 pm

There's nothing preventing it but it may not be as tax efficient as one might expect.

Transfer pricing may be in point. Also, remember that any deduction against profits may need to satisfy the "wholly and exclusively" test if it is to be deductible for tax purposes.

by **collich** on Thu Jun 02, 2011 8:40 pm

There is no provision allowing a transfer of profit between the companies in this case.

So one company will have to charge the other for some reason. Often one company will charge the other a management charge, but there has to be some basis for this (i.e. HMRC will want to know what services the other company is paying for). It isn't allowed if it is simply an accounting entry.

by **Chanmuganathan** on Fri Jun 03, 2011 1:02 pm

Thank you very much

by **Incredulum** on Fri Jun 03, 2011 5:53 pm

If the group is large (EU definitions, so over 250 employees, £40m etc - so unlikely) then the transfer pricing has to be right. IF the group is medium sized (EU definitions) then HMRC could make a transfer pricing direction. If it is small (as I presume it is), then they cannot make a direction.

However, they may be able deny a deduction in the company which has the expense - whether as it is not wholly and exclusively, or possibly unallowable purposes. Or, more fundamentally, they can just point out that the accounts have not been prepared in accordance with GAAP.

So no, you cannot just make a charge, willy nilly.

by **Chanmuganathan** on Mon Jun 06, 2011 1:56 pm

This is the scenario
One company made profit of £287K , and the other company set up few year ago by the previous accountant to manage their commercial properties which made a profit of £5k.
As they are associates companies the CT limit has to divided, therefore the poor owners have to pay 29.75% for 137K. Extra tax of 12K.

This is a small company with 812K T.O and 7 Empalyees including directors

by **section 44** on Mon Jun 06, 2011 2:28 pm

Practically, how do you propose to divert some of the profits from the higher tax paying company to the lower tax paying company?

What service worth £137k would the latter company be providing?

by **Incredulum** on Mon Jun 06, 2011 5:56 pm

Tough I'm afraid. The law of unintended consequences in action. You should have reviewed whether this was still a sensible option given the higher level of profits you now make.

Solution for the present year, hive up the trade from the current operating company ('Opco') into the company with the properties in it ('Propco"); and immediately make the old Propco dormant; then cease a period of accounts (i.e. have a year end). Then you only have one active company in the next AP and can get into the small profits band.

Actually, I wonder if there's a way just to make Propco dormant and put all the property transactions through Opco. Depends on where your debt and various expenses arise. Haven't thought about this one, but might be worth further investigation.

by **Generix** on Wed Jun 08, 2011 10:49 am

You could always use the good old 'variable royalty' (although in this case it would be a reverse royalty right?). Which tax people / accountants seem to use as a means of transferring profits on a % or scaled basis from one company to another without any reasonable explaination of the charge except that it qualifies for a CIT deduction and thats all I need to know :evil: