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HMRC contested a company's claim to the Small Profits Rate because it didn't provide the information HMRC wanted - Peter Vaines looks at the Tribunal case.

Any More 'Associated' Companies?

The recent case of Seascope Insurance Services Limited v HMRC TC 1664 was concerned with a claim to Small Companies' Relief for corporation tax. (I know it's now called the small profits rate under section 3 CTA 2010, but that is what it was called at the time.) The issue was all to do with associated companies because the profit thresholds for the relief have to be shared between all associated companies. Companies are associated if one company controls the other or both companies are under the control of the same person or persons.

In the case of Seascope, the company was 67.59% controlled by Gulfstream Investments Limited, a company resident in Liberia. That was obviously an associated company and HMRC wondered whether there were any more. The company obtained evidence that Seascope did not control any other companies and neither did Gulfstream. That was not enough to satisfy HMRC who quite rightly recognised that if the controlling shareholders of Gulfstream controlled another company that would be associated with Seascope as well.

Seascope could not get that information but asked HMRC to accept that there were not any other associated companies anyway.

HMRC took the view that the Small Companies' Rate is a statutory relief and it is up to the taxpayer to demonstrate that he satisfies the conditions before HMRC can allow the relief.

That must surely be right. Although Seascope could not themselves provide the information, it was certainly in the interests of Gulfstream and those who controlled Gulfstream to provide the necessary information to confirm that the conditions for the small companies relief were available; otherwise a company they controlled would be paying significantly too much tax.

Difficulty of Proving No Associated Companies

However, that is not an easy matter. To determine the question would require an analysis of all the holdings of shares (and loans) which the shareholders and their associates had in all other companies worldwide. That would be a bit difficult although it must have been possible for the shareholders of Gulfstream to confirm that there were no other associated companies within the meaning of section ICTA 1988 s 13 (presumably having taken the appropriate professional advice) and that would probably have concluded the matter.

HMRC were clearly deeply suspicious that Gulfstream was resident in Liberia. They said that it would have been possible to evidence the absence of associated companies by sending them copies of Gulfstream's accounts and a full list of shareholdings. Absolute nonsense : it would not have confirmed anything. The accounts would have disclosed nothing relevant to the question of associated companies, nor would a detailed list of its shareholders. This was just a rather unsubtle attempt at a fishing expedition.

Anyway, the Tribunal did not think much of HMRC's arguments and concluded that they had sufficient evidence to conclude that on the balance of probabilities there were no other associated companies.

To my mind this is a very generous conclusion. It may be that information was not in the possession or power of Seascope who had done everything they could to provide the information - but what has that got to do with it? All it really meant was, in answer to the question: "Are there any more associated companies?" all that Seascope could say is: "We don't know" which is hardly good grounds for saying they are entitled to the relief. The controlling shareholder of Gulfstream was prepared to confirm in writing about his holding of Seascope and he might reasonably have been able to add that he and his associates did not control any other companies. However, clearly this was unnecessary because the Tribunal found that Seascope had done enough - but I think this is a very fortunate decision for the taxpayer.