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Currently, companies are deemed to be associated if they are under common control, taking into account the rights of associated persons. The strict application of these rules can result in companies that are otherwise entirely independent being treated as associated. In 2008 it was acknowledged that companies should not automatically be treated as associated simply by attributing the rights of business partners. The legislation was then amended to disregard such rights for the purposes of corporation tax small companies' relief, except where there are tax planning arrangements to reduce a liability to corporation tax by virtue of an increase in that relief. 

In the consultation document, the government made a welcome proposal to extend the relaxation for business partners to all associates, and to take 'tax planning arrangements' to mean the fragmentation of a business, either by splitting an existing single-company business into two or more companies or by carryng on an economic activity through companies which have financial, economic or organisational links. Consequently, companies would only be treated as associated by attributing the rights of associated persons if the companies have such links.

However, under the original proposals, the draft legislative changes were minimal, and all references to fragmentation and the economic, financial or organisational test were contained in draft additions to HMRC's Company Taxation Manual. The government has accepted comments by respondees that this was unsatisfactory, and has embodied more detail in the draft legislation, which now explicitly states that the rights of associates will only be taken into account when there is substantial commercial interdependence between the companies.

A draft statutory instrument sets out factors to be taken into account in determining substantial commercial interdependence. Companies will be regarded as:

• Financially interdependent if one gives direct or indirect financial support to the other, or if each has a financial interest in the affairs of the same business.
• Economically interdependent if they seek to realise the same economic objective, or if the activities of one benefit the other, or if they have common customers.
• Organisationally interdependent if they have or use common management, common employees, common premises or common equipment.

It is proposed that the change will take effect from 1 April 2011, when the current Extra Statutory Concession C9 (under which HMRC does not treat companies as associated in certain defined circumstances) will be withdrawn.

The government has decided not to proceed at present with a suggestion to apply the small profits rate by reference to the total profits of all associated companies, due to practical difficulties, but has not ruled this out if a solution to these difficulties can be found.