Groups and consortia

Introduction
So far we have studied the corporation tax rules for single companies. In this
chapter we consider the extent to which tax law recognises group relationships
between companies.
Companies in a group are still separate entities with their own tax liabilities but
tax law recognises the close relationship between group companies. They can,
if they meet certain conditions, share their losses and pass assets between
each other without chargeable gains.
Consortium companies are companies which are controlled by several
companies. They can also share their losses, but the rules are restricted to
recognise the ownership shares of the controlling companies.
In the next chapter, we will complete our study of corporation tax by looking at
overseas aspects.

Study guide

    Intellectual level
4 Corporation tax liabilities in situations involving further overseas and group aspects and in relation to special types of company, and the application of additional exemptions and reliefs  
(a) The contents of the Paper F6 study guide, for corporation tax, under heading: 2
E5 The effect of a group corporate structure for corporation tax purposes  
(e) The effect of a group structure for corporation tax purposes: 3
(i) Advise on the allocation of the annual investment allowance between group or related companies  
(ii) Advise on the tax consequences of a transfer of intangible assets  
(iii) Advise on the tax consequences of a transfer of a trade and assets where there is common control  
(iv) Understand the meaning of consortium owned company and consortium member 2
(v) Advise on the operation of consortium relief  
(vi) Determine pre-entry losses and understand their tax treatment  
(vii)

 

Determine the degrouping charge where a company leaves a group within six years of receiving an asset by way of a no gain/no loss transfer  
(viii) Determine the effects of the anti-avoidance provisions, where arrangements exist for a company to leave a group  

Exam guide

Groups and consortia are likely to be examined at most sittings. You must understand the difference between the definitions of a 75% group for group relief and a chargeable gains group, and understand the

definition of a consortium. The question is likely to require a consideration of the various reliefs specifically available in group situations, with a view to minimising the group’s tax liability.

 

This chapter revises the rules for group relief and for the transfer of capital assets between group companies and extends these to cover intangible fixed assets. It introduces the rules on allocation of the annual investment allowance between companies, consortium relief, and examines the anti-avoidance rules specifically applicable to groups.

There are no technical changes in Financial Year 2015 from Financial Year 2014 in the material you have studied at F6. However, note that the single rate of corporation tax means that the rate of corporation tax is no longer an issue when considering groups.

1 Types of group

A group exists for taxation purposes where one company is a subsidiary of another. The percentage shareholding involved determines the taxation consequences of the fact that there is a group.

The types of relationship for tax purposes covered in this chapter are:

  • Groups for annual investment allowance purposes
  • Loss relief
  • Consortia
  • Chargeable gains groups

2 Annual investment allowance

A group of companies is only entitled to a single annual investment allowance (AIA) which can be allocated between the companies as they think fit. A similar rule applies to companies under common control.

FAST FORWARD

 

One of the competencies you require to fulfil Performance Objective 15 Tax computations and assessments of the PER is to prepare or contribute to the computation or assessment of tax computations for single companies, groups or other entities. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.
                                2.1 Allocation of AIA between group companies            6/12, 12/14, 9/15

A group of companies is entitled to a single annual investment allowance between the group companies. The companies may allocate the allowance between them as they think fit.

A group for these purposes is defined in relation to a “parent undertaking”. A company is a parent undertaking of another company (“the subsidiary undertaking”) if:

  • It holds a majority of the voting rights in the undertaking; or
  • It is a member of the undertaking and has the right to appoint or remove a majority of its board of directors, or
  • It has the right to exercise a dominant influence over the undertaking by virtue of a provision in the articles or under a control contract; or
  • It is a member of the undertaking and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in the undertaking.

The parent undertaking company must satisfy one of these conditions at the end of the subsidiary company’s chargeable period of account ending in the Financial Year being considered.

The following factors may be relevant when considering how to allocate the annual investment allowance:

  • Nature of expenditure, for example main pool or special rate pool (more tax efficient to set against special rate pool because of lower subsequent WDA)
  • If the company is making a loss, how that loss can be relieved (the AIA will create or increase a loss).
2.2 Allocation of AIA between companies under common control

Companies under common control are entitled to a single annual investment allowance between them and the companies may allocate the allowance between them as they think fit. 

Companies are under common control if:

         They are controlled by the same person, and They are related to one another.

“Control” means that a person has power to secure that the affairs of a company are conducted in accordance with the wishes of that person. This could be by the holding of shares or voting rights or as the result of any powers in the company’s constitution or that of another body.

Companies are related to one another if either they share premises or carry on similar activities.

Similar considerations apply to the consideration of how to allocate the annual investment allowance between companies under common control as to companies within a group. 

                                3 Group relief               12/11, 6/12, 6/13, 6/14, 9/15

One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the PER is to mitigate and/or defer tax liabilities through the use of standard reliefs, exemptions and incentives. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.

3.1 Definitions

FAST FORWARD

Group relief is available where the existence of a group or consortium is established through companies resident anywhere in the world.

The group relief provisions enable companies within a 75% group to transfer trading losses to other profit making companies within the group, in order to reduce the group’s overall corporation tax liability. Group relief is given by the company receiving the loss deducting it from total profits.

Key term          For one company to be a 75% subsidiary of another, the holding company must have:

  • At least 75% of the ordinary share capital of the subsidiary
  • A right to at least 75% of the distributable income of the subsidiary, and
  • A right to at least 75% of the net assets of the subsidiary were it to be wound up.

Two companies are members of a group for group relief purposes where one is a 75% subsidiary of the other, or both are 75% subsidiaries of a third company. Ordinary share capital is any share capital other than most preference shares.

Two companies are in a group only if there is a 75% effective interest. Thus an 80% subsidiary (T) of an

80% subsidiary (S) is not in a group with the holding company (H), because the effective interest is only 80%  80% = 64%. However, S and T are in a group and can claim group relief from each other. S cannot claim group relief from T and pass it on to H; it can only claim group relief for its own use.

A group relief group may include non-UK resident companies. However, losses may generally only be surrendered between companies within the charge to corporation tax (UK resident companies and overseas resident companies with a UK permanent establishment). We look in detail at overseas aspects of groups in the next chapter.

3.2 Example

The companies in the group for group relief purposes are:

  • Ltd
  • Ltd

W Ltd (81% effective holding by A)

C Ltd

E Inc

Z Ltd (75% effective holding by A)

In addition C Ltd and X Ltd and also D Ltd and Y Ltd form their own separate mini-groups.

3.3 The relief

FAST FORWARD

Within a 75% group trading losses can be surrendered between UK companies.

A claimant company is assumed to use its own current year losses or losses brought forward in working out the profits against which it may claim group relief, even if it does not in fact claim loss relief against total income for current losses. Furthermore, group relief is against profits after all other reliefs for the current period or brought forward from earlier periods, including non-trading deficits on loan relationships and qualifying charitable donations. Group relief is given before relief for any amounts brought back from later periods.

A surrendering company may group relieve a current period loss before setting it against its own profits for the period of the loss, and may specify any amount to be surrendered.

Any amount of trading losses, non-trading loan relationships deficits and excess capital allowances may be surrendered: they need not first be used by the loss-making company.

Excess qualifying charitable donations, property business losses, management expenses and non-trading losses on intangible fixed assets can be surrendered as group relief only to the extent that they exceed the surrendering company’s other profits of the accounting period, ignoring any losses of the current period or any other period. Other profits include any amounts apportioned from controlled foreign companies. 

Where a surrendering company has more than one of these types of loss available for surrender, the order of surrender is:

  • Qualifying charitable donations
  • Property business losses
  • Management expenses
  • Non-trading losses on intangible fixed assets.

The legislation does not specify the order of surrender of trade losses, excess capital allowances or nontrading loan relationship deficits. The surrendering company is free to choose which of these it surrenders in what order.

Capital losses cannot be group relieved. However, see later in this chapter for details of how a group may net off its gains and losses.

 

 

K plc has one 75% subsidiary, L plc. The results for the group for the year ended 31 March 2016 are as follows:

  K plc L plc
  £ £
Trading (loss) (4,000) (20,700)
Trading loss brought forward at 1 April 2015 0 (5,000)
Non-trading loan relationship income 10,000 2,900
Chargeable gain 15,000 0
Qualifying charitable donations (2,000) (3,200)

What is the maximum group relief that K plc can claim from L plc?

 

 

 

L plc can surrender losses under group relief as follows:

 
   £
Current year trading loss  20,700
Excess qualifying charitable donations £(3,200 – 2,900)       300
Total losses available for group relief

L plc cannot surrender its brought forward trading loss under group relief.

K plc has the following available taxable total profits:

 21,000
   £
Non-trading loan relationship income   10,000
Chargeable gain   15,000
    25,000
Less current year trading loss   (4,000)
   21,000
Less qualifying charitable donations   (2,000)
Available taxable total profits   19,000
   

Maximum group relief that K plc can claim from L Ltd (lower of £21,000 and £19,000)                                                                                                    19,000

K plc must take account of its current year trading loss in working out available taxable total profits even if it does not actually make a claim for current year relief.

 

Only current period losses are available for group relief. Furthermore, they must be set against profits of a corresponding accounting period. If the accounting periods of a surrendering company and a claimant company are not the same this means that both the profits and losses must be apportioned so that only the results of the period of overlap may be set off. Apportionment is on a time basis.

However, in the period when a company joins or leaves a group, an alternative method may be used if the result given by time-apportionment would be unjust or unreasonable.

 

 

Question   Corresponding accounting periods
  £
S Ltd incurs a trading loss for the  year to 30 September 2015  

(150,000)

H Ltd makes taxable profits:

for the year to 31 December 2014

 

200,000

     for the year to 31 December 2015

What group relief can H Ltd claim from S Ltd?

100,000

 

 

Answer  

 

H Ltd can claim group relief as follows.

£

For the year ended 31 December 2014 profits of the corresponding accounting period 50,000 (1.10.14 – 31.12.14) are £200,000  3/12

Losses of the corresponding accounting period are £150,000  3/12               37,500

A claim for £37,500 of group relief may be made against H Ltd’s profits

For the year ended 31 December 2015 profits of the corresponding accounting period 75,000 (1.1.15 – 30.9.15) are £100,000  9/12

Losses of the corresponding accounting period are £150,000  9/12 112,500 A claim for £75,000 of group relief may be made against H Ltd’s profits

 

If a claimant company claims relief for losses surrendered by more than one company, the total relief that may be claimed for a period of overlap is limited to the proportion of the claimant’s profits attributable to that period. Similarly, if a company surrenders losses to more than one claimant, the total losses that may be surrendered in a period of overlap is limited to the proportion of the surrendering company’s losses attributable to that period.

A claim for group relief is normally made on the claimant company’s tax return. It is ineffective unless a notice of consent is also given by the surrendering company. Where the surrendering company is also claiming loss relief against its own profits the group relief surrender must be made first.

Any payment by the claimant company for group relief, up to the amount of the loss surrendered, is ignored for all corporation tax purposes.

3.4 Arrangements to leave a group

Group relief is not available for any period during which there are arrangements in force for either the surrendering company or the claimant company to leave the group. If necessary, profits and losses are apportioned on a time basis.

The term ‘arrangements’ is not defined, but HMRC normally accept that negotiations to sell a company are not arrangements until an offer is accepted, even if it is then subject to contract or is conditional. If shareholder approval is required for the sale, arrangements do not exist until approval has been given.

                                 3.5 Consortium relief                                                      6/12, 9/15

FAST FORWARD

Within a consortium there is some scope for loss relief.

The definition of a consortium is given below.

A company is owned by a consortium (and is known as a consortium-owned company) if:

•              75% or more of its ordinary share capital is owned by companies (the members of the consortium), none of which has a holding of less than 5%, and

•              Each member of the consortium is entitled to at least 5% of any profits available for distribution to equity holders of the company and at least 5% of any assets so available on a winding up.

Key term

Illustration of a consortium

X Ltd is the consortium-owned company A Ltd, B Ltd and C Ltd are the consortium members.

Consortium relief is a loss relief which is available:

  • Where the surrendering company is a trading company owned by a consortium and is not a 75% subsidiary of any one company and the claimant company belongs to the consortium
  • Where the surrendering company is a trading company which is a 90% subsidiary of a holding company which is owned by a consortium and is not a 75% subsidiary of any one company and the claimant company is a member of the consortium
  • Where the surrendering company is a holding company owned by a consortium and is not a 75% subsidiary of any one company and the claimant company is a member of the consortium.

A trading company is one whose business consists wholly or mainly in carrying on a trade. A holding company is one whose business consists wholly or mainly in holding shares in companies which are trading companies.

A consortium-owned company can surrender losses in proportion to the stakes of the members of the consortium. Thus if a member holds 20% of the shares in the company, up to 20% of the company’s losses can be surrendered to that member. Only current period losses are available for consortium relief and they must be set against profits of a corresponding accounting period. Consortium relief is given by the company receiving the loss deducting it from total profits.

Consortium relief can also flow downwards. A consortium member may surrender its losses to set against its share of the consortium-owned company’s profits. So, a member with a 25% stake in the consortium-owned company can surrender losses to cover up to 25% of the company’s profits.

Whereas normally a surrendering company can surrender group relief without having to consider any possible current period loss relief claim, a loss made by a consortium-owned company must be reduced by any potential loss relief claims against current period profits (not profits of previous periods) before it may be surrendered as consortium relief.

Although a consortium can be established with non-UK resident companies, losses cannot, in general, be surrendered to/from a non-UK resident.

 

 

C Ltd is owned 60% by A Ltd, 30% by B Ltd and 10% by an overseas company X Inc. Results for the year ended 31 March 2016 are as follows.

  A Ltd B Ltd C Ltd
  £ £ £
Trading profit/(loss) 200,000 75,000 (50,000)
Property income 0 0 12,000

Compute the corporation tax liabilities of all three companies, assuming that all possible consortium relief claims are made but that C Ltd does not claim current period loss relief.

 

 

 

A Ltd may claim £(50,000 – 12,000)  60% = £22,800.

B  Ltd may claim £(50,000 – 12,000)  30% = £11,400.

A Ltd’s corporation tax liability is:

 
£(200,000 – 22,800) = £177,200  20% B Ltd’s corporation tax liability is:  £35,440
£(75,000 – 11,400) = £63,600  20% C Ltd’s corporation tax liability is:  £12,720
 £12,000  20%   £2,400

 

3.6 Alternative loss reliefs

Several alternative loss reliefs may be available, including group relief and/or consortium relief. In making a choice consider:

  • How quickly relief will be obtained: obtaining loss relief by using group relief or consortium relief is quicker than carry forward loss relief and so generally preferable to carrying forward the loss.
  • The extent to which relief for qualifying charitable donations might be lost: group relief is deducted after qualifying charitable donations in the claimant company, so relief for these donations is not lost. By contrast, if the loss-making company claims relief for the loss against its own current year total profits, relief for qualifying charitable donations in that company may be wasted.
3.7 Capital allowances and group relief

Companies with profits may benefit by reducing their claims for capital allowances in a particular year. This may leave sufficient profits to take advantage of group relief which may only be available for the current year. The amount on which writing-down allowances can be claimed in later years is increased accordingly.

                                 4 Chargeable gains group           12/11, 6/13, 9/15

4.1 Definition

Companies are in a chargeable gains group if:

  • At each level, there is a 75% holding, and
  • The top company has an effective interest of over 50% in the group companies.

If A holds 75% of B, B holds 75% of C and C holds 75% of D, then A, B and C are in such a group, but D is outside the group because A’s interest in D is only 75%  75%  75% = 42.1875%. Furthermore, D is not in a group with C, because the group must include the top company (A). This is illustrated in the diagram below.

The companies in a chargeable gains group are:

  • Ltd
  • Ltd

W Ltd

C Ltd

X Ltd (75% subsidiary of 75% subsidiary, effective interest over 50%) E Inc

Z Ltd

There is a separate chargeable gains group of D Ltd and Y Ltd.

4.3 Intra-group transfers

FAST FORWARD

Within a chargeable gains group, assets are automatically transferred at no gain/no loss.

Companies in a group make intra-group transfers of chargeable assets without a chargeable gain or an allowable loss arising. No election is needed, as this relief is compulsory. The assets are deemed to be transferred at such a price as will give the transferor no gain and no loss. Similarly, intangible assets can be transferred between members of a chargeable gains group without a trading profit or loss arising (see earlier in this Text).

Non-UK resident companies are included as members of a chargeable gains group. Provided the assets transferred do not result in a potential leakage of UK corporation tax, no gain/no loss transfers are possible within a worldwide (global) group of companies. This means that it may be possible to make no gain/no loss transfers to non-UK resident companies with a branch or agency in the UK.

                                 4.4 Degrouping charge on company leaving the group                                                                12/12, 12/13, 6/15

FAST FORWARD

A degrouping charge arises if a company leaves a group within six years of acquiring an asset from another group member.

A charge arises if a company leaves a group while it owns one or more assets transferred to it by another group member within the previous six years under the provisions described above. The departing company is treated as though it had, at the time of its acquisition of such assets, sold and immediately re-acquired them at their then market values. The consequent gain or loss (computed using indexation allowance up to the date of the no gain/no loss transfer) is sometimes referred to as a degrouping charge. This gain is added to (or if a loss, deducted from) the consideration received by the selling company when calculating the gain or loss on the disposal of shares of the departing company.

Any exemption or relief that may apply to the share disposal, such as the substantial shareholding exemption (dealt with earlier in this Text), also applies to the element of a gain on the share disposal relating to the degrouping charge. 

 

 

In May 2015, Top Ltd, a trading company, sold the whole of the share capital of Bottom Ltd, a 100% subsidiary, to Take plc for £600,000. Bottom Ltd is an investment company and had been owned by Top Ltd since July 2003 when Top Ltd acquired the entire share capital for £50,000. The indexation allowance on the sale is £21,098.

Included in Bottom Ltd’s assets is a warehouse acquired by Side Ltd in January 2005 for £96,000. Side

Ltd is also a 100% subsidiary of Top Ltd. The warehouse was transferred by Side Ltd to Bottom Ltd in August 2009 for £100,000. Its market value at the date of transfer was £310,000. The indexation allowance on a sale in August 2009 would have been £12,960.

What is the effect of Bottom Ltd leaving the group? Compute Top Ltd’s corporation tax for the year ended 31 March 2016 if it has trading income of £2,000,000. How would your answer be different if Bottom Ltd was a trading company?

 

 

Bottom Ltd leaves the group within six years of acquiring the warehouse from Side Ltd. Bottom Ltd will be treated as if it had sold the warehouse at its market value in August 2009 and then immediately reacquired it.

£   £

Proceeds (ie MV in August 2009)                310,000 Less cost: cost to Side Ltd             96,000                  indexation allowance to August 2009             12,960

(108,960)

Chargeable gain                                                                                                                                                  201,040

Top Ltd’s gain on the sale of the shares in Bottom Ltd is as follows.

£   £

Proceeds received from Take plc                  600,000 Degrouping charge gain                              201,040

801,040

Less cost: cost  50,000                  indexation allowance         21,098

)

Chargeable gain

Top Ltd’s corporation tax for the year to 31.3.16 is as follows.  
  £
Trading profits  2,000,000
Chargeable gain on sale of Bottom Ltd shares     729,942
Taxable total profits  2,729,942
   
Corporation tax £2,729,942  20%  £545,988

If Bottom Ltd was a trading company, Top Ltd will not have a chargeable gain on the sale of its shares in Bottom Ltd, due to the substantial shareholdings exemption applying to the sale of the subsidiary. This will include the element relating to the degrouping charge. The corporation tax liability of Top Ltd for the year to 31.3.16 will therefore be £2,000,000 × 20% =  £420,000.

 

The degrouping charge was tested in December 2012 Question 1 Flame plc group. The examiner commented that ‘The degrouping charge was done well on the whole. Those candidates who did not do so well were divided into two groups. The first group missed the degrouping charge altogether. The second group of candidates knew that there would be a degrouping charge somewhere in the answer and earned most of the marks available for saying why and for calculating it. However, they did not know which of the two possible transactions [a sale of a group company’s shares or a sale of its assets] would give rise to the charge and either put it into the wrong section of the report or put it into both sections. This was not particularly costly, but would have been in a different question which was only concerned with one of these two transactions. Candidates must know their stuff; degrouping charges only occur on the sale of a company, ie on the sale of shares, and not on the sale of assets.’
Exam focus point
                                 4.5 Transfer of gains and losses within group                  6/15
Gains and losses can be transferred between group companies.

One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the PER is to mitigate and/or defer tax liabilities through the use of standard reliefs, exemptions and incentives. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.

Two members of a chargeable gains group can elect to transfer a chargeable gain or allowable loss, or any part of a gain or loss, between them. This election must be made within two years of the end of the accounting period in which the gain or loss accrues in the company which is making the transfer.

From a tax planning point of view, elections(s) should be made to match gains and losses.

                                 4.6 Rollover relief                                                                    12/14

FAST FORWARD

Rollover relief is available in a chargeable gains group.

If a member of a chargeable gains group disposes of an asset eligible for chargeable gains rollover relief it may treat all of the group companies as a single unit for the purpose of claiming such relief. Acquisitions by other group members within the qualifying period of one year before the disposal to three years afterwards may be matched with the disposal. However, both the disposing company and the acquiring company must make the claim. If an asset is transferred at no gain and no loss between group members, that transfer does not count as the acquisition of an asset for rollover relief purpose. Claims may also be made by non-trading group members which hold assets used for other group members’ trades.

Try to remember the following summary – it will be of great help in the exam.

Parent Co owns 75% of subsidiary and has indirect holding of 75% of sub-subsidiaries 

•              Surrender trading losses, excess property income losses, excess qualifying charitable donations, loan deficits, excess management expenses to companies with some taxable total profits for same time period

Parent Co owns 75% of subsidiary and has indirect holding of > 50% of sub-subsidiaries (but must be 75% at each level)

•              Transfer assets between companies automatically at no gain/no loss

•              Chargeable gains and losses can be matched between group member companies              All companies treated as one for rollover relief purposes.

Exam focus point
4.7 Intangible fixed assets

Similar rules apply to intangible fixed assets held within a chargeable gains group, although with some differences particularly regarding degrouping. The rules are:

  • Rollover relief can be claimed where an intangible fixed asset used for trade purposes is sold where the reinvestment is made by another member of the chargeable gains group, and also where the reinvestment is in the shares of another company
  • Transfers of intangible assets between members of a chargeable gains group are on a ‘no gain/loss basis’
  • Where a company leaves a chargeable gains group holding an intangible asset transferred to it in the previous six years the gain or loss that would have arisen on the date of the transfer is realised and included (in the computation of the departing company) in trading profits (if the asset is used for the trade), the profits of a UK property letting business (if the asset is used for letting), or miscellaneous income (if the asset is an investment)
  • The degrouping charge may be transferred from the company leaving the group to another (old) group company
  • Either the company leaving the chargeable gains group or a continuing member can claim to rollover any profit arising. The departing company can claim relief if it retains the profit and acquires a new asset. The continuing company can claim relief if the profit has been switched to it and it acquires a new intangible asset.
                                  4.8 Pre-entry capital losses                                                    6/15

FAST FORWARD

Restrictions apply to the use of pre-entry losses within chargeable gains groups.

A group might acquire a company that has capital losses brought forward. The use of such ‘pre-entry’ losses is restricted.

If a company (X) joins a group (G), X’s pre-entry (capital) losses are losses made on disposals before X joined G. 

X’s pre-entry losses may (subject to the usual rule against carrying back capital losses) be set against gains on assets which:

  • X disposed of before joining G
  • X already owned when it joined G, or
  • X acquired after joining G from someone outside G and which have, since acquisition, not been used except for the purposes of any trade or business which X was carrying on immediately before joining G and either continued to carry on or was carried on by another group member until the disposals giving rise to the gains.

In any one accounting period, pre-entry losses (whether of the current period or brought forward) are used (so far as possible) before other losses.

5 Succession to trade

FAST FORWARD

A succession occurs when a trade carried on by one company is transferred to another company in substantially the same ownership. In this case losses may be carried forward and balancing adjustments do not arise for capital allowances purposes.

Generally, if a trade is transferred from one company to another, that is treated as a cessation of the trade by the transferor and a commencement of the trade by the transferee. Any trading losses brought forward by the transferor are extinguished and cannot be utilised by the transferee. In addition, balancing adjustments may arise on assets qualifying for capital allowances. If however the transfer of the trade amounts to a ‘succession‘, it is treated as continuing for certain specific purposes.

Key term                A ‘succession to trade’ occurs if a trade carried on by one company (the ‘predecessor’) is transferred to another company (the ‘successor’) in substantially the same ownership.

The above test is met if the same persons hold an interest of at least 75% in the trade both:

(a)        at some time during the 12 months prior to transfer, and (b)   at some time during the 24 months following the transfer and throughout those periods the trade is carried on by a company chargeable to tax in respect of it.

The transfer of a trade from a company to its 75% subsidiary will generally qualify as a succession. Such a transfer is often referred to as a ‘hive down’.

Other circumstances where a succession takes place include a transfer from a 75% subsidiary to its parent and a transfer of trade between two companies with a common 75% parent (or indeed owned to the extent of at least 75% by the same individual). There is no stipulation that the companies have to be UK resident, so the provisions can apply to UK branches of non-resident companies.

When a trade is transferred in this way:

  • an accounting period ends on the date of transfer
  • the predecessor may claim capital allowances in the final accounting period as if no transfer had taken place. The successor takes over the unrelieved expenditure and is entitled to capital allowances thereon in the period in which the transfer takes place
  • the successor is entitled to relief for carried forward trading losses not utilised by the predecessor, against future profits from the trade in which the losses were incurred.

The following are not transferred and remain with the transferor company:

  • capital losses
  • deficits on non-trading loan relationships.

These provisions do not enable a trading loss incurred by the successor company to be carried back against profits realised by the predecessor. Also, the predecessor’s cessation of trade does not qualify it for a three year carry back of losses.

A group of companies is only entitled to a single annual investment allowance (AIA) which can be allocated between the companies as they think fit. A similar rule applies to companies under common control.
Group relief is available where the existence of a group or consortium is established through companies resident anywhere in the world.
Within a 75% group trading losses can be surrendered between UK companies.
Within a consortium there is some scope for loss relief.
Within a chargeable gains group, assets are automatically transferred at no gain/no loss.
A degrouping charge arises if a company leaves a group within six years of acquiring an asset from another group member.
Gains and losses can be transferred between group companies.
Rollover relief is available in a chargeable gains group.
Restrictions apply to the use of pre-entry losses within chargeable gains groups.
A succession occurs when a trade carried on by one company is transferred to another company in substantially the same ownership. In this case losses may be carried forward and balancing adjustments do not arise for capital allowances purposes.

Chapter roundup

Quick quiz

  • Under what circumstance may companies be entitled to a single annual investment allowance between them?
  • List the losses which may be group relieved.
  • What is the definition of a consortium?
  • When may assets be transferred intra-group at no gain and no loss?
  • How can gains and losses within a chargeable gains group be matched with each other?

Answers to quick quiz

  • Companies are entitled to a single annual investment allowance between them either if they are in a group with a parent undertaking and a subsidiary undertaking or if the companies are under common control (controlled by a person and either sharing premises or carrying on similar activities).
  • Trading losses, excess UK property business losses, non-trading deficits on loan relationships, excess qualifying charitable donations and excess management expenses.
  • A company is owned by a consortium if 75% or more of its ordinary share capital is owned by companies none of which have a holding of less than 5%.

Each consortium member (ie company shareholders) must have at least a 5% stake in profits and assets on a winding up in the consortium company.

  • No gain no loss asset transfers are automatic between companies in a chargeable gains group.
  • Two member of a chargeable gains group can elect to transfer all or part of gains and losses between them.

 

 

Number Level Marks Time
Q29 Introductory 18 35 mins

 

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