For tax purposes, a company is an 'associated company' of another company if one of the two has control of the other, or both are under the control of the same person or persons.

When this is the case the limit for the small companies rate of 19% tax on profits of up to £300,000 is divided by the number of associated companies. So if there are two associated companies, they can each have profits of £150,000 before they start paying tax at the marginal rate of 32.75%. The problem is that one company may make £50,000 of profit and the other £250,000 causing the second company to pay tax at 32.75% instead of 19% on £100,000 of it's profits resulting in total extra tax of £13,750.

It is therefore necessary to weigh up the tax cost of using different Ltd companies for different businesses against the business risks of putting all your eggs in one basket.

There can also be some rather unfair traps you need to look out for. For example, in determining control of a company, other people you are connected with will be considered in determining if the company is under the control of the same persons. So should you and your fiancee each run separated companies and then you get married, your companies automatically become associated. This can also happen to brothers and sisters although there is an extra statutory concession you can use to help.

Another example is any separate businesses that any of your partners control would also be associated with any you control. That's that case even if you don't know about them and your partners don't have to tell you about their other business interests!

Exactly when two companies are associated can be complex and further advice should be sort for multi-company and group tax planning.

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