My employer, a UK based Ltd Coy., is 100% owned by a BVI Coy which in turn is 100% owned by an Offshore Trust.
In 2003, the BVI Coy loaned the UK Ltd. Coy funds in the region of £100,000 on which interest of 10% was agreed. The loan was fully repayed during 2004/5 tax year and nett interest of approx. £7000 was paid to the BVI Coy. during this tax year.
No other trade was conducted by the BVI Coy nor does it hold any other assets other than a bank account.
The tax authorities have advised that the single interest payment constitutes a trade and classifies the BVI Coy as an Associated Coy. They want to disallow the UK Coy the benefit of the small companies tax rate of CT.
Are there any similar cases on which previous decisions have been made and what is the true interpretation of associated trade?
I would be very grateful if anyone could steer me in the right direction or advise what defence might be helpful.
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