CTM03770 - Corporation Tax: small companies: substantial commercial interdependence

You should take a broad view of the phrase 'commercial interdependence'. Do not confine your attention simply to inter-company purchases and sales (although these are important indications of commercial interdependence). Instead, look at all the links between the companies and their businesses.

As the word 'interdependence' is used, each company must be dependent on the other in some way, but not in the same way nor to the same extent. 'Dependence' means reliance, but not in the narrow sense of 'unable to do without', so essentially you are concerned with whether or not the companies rely on each other in any way.

The context makes it clear the word 'substantial' is not being used in a comparative sense, but rather as meaning 'not insubstantial'; that is it means 'of real importance' as opposed to merely 'nominal'. There are no rigid limits, but where numerical expression can be given to a particular indicator then (as a very rough rule of thumb) 10%, or more is substantial, but you should consider this in both absolute and relative terms.

For a company with a turnover of £20m, sales of £1m represent only 5% of its turnover but nevertheless, in absolute terms, those sales are substantial. On the other hand, sales of £20,000 may not be regarded as substantial in absolute terms, but if the company's turnover is only £100,000 those sales of £20,000 are substantial in relative terms. However, in many cases you will find there are factors that cannot be quantified precisely or indeed at all.

For example, two companies may have the same (or very nearly, the same) directors who run them both on an informal basis with no clear-cut demarcation between the companies; they may operate from the same premises, share computer facilities and make use of each other's plant and equipment without any formal arrangement for recharging costs; they may make use of the same suppliers and warehousing facilities for their stocks, and so on. Such close links will be evidence of substantial commercial interdependence.

It is the overall picture that must be considered and not each factor in isolation. The following list is not exhaustive, but you should look in particular at:

• administration and directorships,
• use of staff, premises, plant and machinery and so on,
• purchasing or selling arrangements,
• co-operation on joint projects,
• inter-company loans and guarantees.

In a case where substantial commercial interdependence affects the application of ESCC9, you can ask CT&VAT (Technical) for assistance.