Group companies

Question 1

In what circumstances can parental liability in tort be established?

where the parent company has a practice of intervening in the affairs of it subsidiary

where the parent has a controlling stake in its subsidiary

where the parent has agreed contractually to be liable

Answer 1

where the parent company has a practice of intervening in the affairs of it subsidiary

Question 1

Each of the companies in a group is automatically liable for the debts and liabilities of the other group companies.

Is this statement true or false?

False

True

Answer 1

False

Question 2

What parental liability can arise under the Insolvency Act 1986 if a subsidiary becomes insolvent?

Wrongful trading

Transaction defrauding creditors

Misfeasance

Answer 2

Wrongful trading

Question 3

Which of the following transactions would constitute a distribution under s 829 CA 2006?

Company A transfers a property to a sister subsidiary company for market value where the market value of the property exceeds the book value.

Company A transfers a property to its shareholder for market value where the market value of the property exceeds the book value.

Company A transfers a property to its shareholder for under the market value where the market value of the property exceeds the book value.

Answer 3

Company A transfers a property to its shareholder for under the market value where the market value of the property exceeds the book value.

Question 4

Company A transfers a property to its shareholder at just over book value (the book value is £1 million). Market value is currently £2 million. How would you determine whether the distribution is lawful or unlawful?

Provided Company A has sufficient distributable profits to cover the amount of the shortfall from market value, the distribution will be lawful.

The distribution will be unlawful because the value of the transfer is less than the market value of the property.

Provided Company A has distributable profits, the distribution will be lawful. This is because the transfer is at over book value so the amount of the distribution would be nil.

Answer 4

Provided Company A has distributable profits, the distribution will be lawful. This is because the transfer is at over book value so the amount of the distribution would be nil.

Question 5

Company A and Company B are both wholly owned subsidiaries of Company C. The directors of Company A arranged for Company A to transfer an asset at book value to Company B. Company A did not have distributable profits at the time of the transfer. Which of the following statements represent the best advice to the directors of Company A?

The distribution was unlawful; the directors of Company A have breached their directors’ duties; and they may be liable to repay to Company A the unlawful amount.

The directors of Company A have breached their directors’ duties but Company C as the parent company of Company A can pass an ordinary resolution to ratify the unlawful distribution.

The distribution is lawful as the transfer was at book value; the directors have not breached their directors’ duties.

Answer 5

The distribution was unlawful; the directors of Company A have breached their directors’ duties; and they may be liable to repay to Company A the unlawful amount.

Question 6

What is the purpose of group relief?

Group relief allows trading losses in one group company to be set off against profits or gains of another group company

Group relief allows trading losses and capital in one group company to be set off against profits or gains of another group company

Group relief allows trading losses in the parent company to be set off against the profits or gains of its subsidiaries

Answer 6

Group relief allows trading losses in one group company to be set off against profits or gains of another group company

Question 7

What is a consortium company?

A consortium company must be owned by two or more other companies who own not less than 25% of the ordinary share capital but not more than 75% of the ordinary share capital

A consortium company must be owned by ta company who owns not less than 5% of the ordinary share capital but not more than 75% of the ordinary share capital

A consortium company must be owned by two or more other companies who own not less than 5% of the ordinary share capital but not more than 75% of the ordinary share capital

Answer 7

A consortium company must be owned by two or more other companies who own not less than 5% of the ordinary share capital but not more than 75% of the ordinary share capital

Question 8

What if the definition of ‘ordinary share capital’ for the purposes of group relief?

Shares other than shares which grant the shareholder a right to a fixed dividend but no other right to share in the company’s profits

Shares which grant the shareholder a right to a fixed dividend and a further right to share in the company’s profits

Shares other than shares which grant the shareholder both a right to a fixed dividend and a further right to share in the company’s profits

Answer 8

Shares other than shares which grant the shareholder a right to a fixed dividend but no other right to share in the company’s profits

Question 9

What is the beneficial ownership test?

Where a company owns at least 75% of the shares in its subsidiaries

Where a company owns at least 51% of the shares in its subsidiaries

Answer 9

Where a company owns at least 75% of the shares in its subsidiaries

Question 10

What are the tax consequences of a transfer of a chargeable asset within a chargeable gains group?

The tax liability is deferred until the asset is sold out of the group or the transferor company leaves the group.

The tax liability is deferred until the asset is sold out of the group or the transferee company leaves the group.

There will be a charge to corporation tax on any gain that results.

Answer 10

The tax liability is deferred until the asset is sold out of the group or the transferee company leaves the group.

Question 11

In a share sale, which party should be concerned about an SDLT clawback?

The seller

The buyer

Answer 11

The buyer

Question 12

Definition of group?

Answer 12

• It is important to note that different definitions of ‘group’ will apply, depending on whether you are considering company law, taxation or accounts.
• In addition, when looking at a contract, for example, as part of a due diligence exercise, you should always check what definitions have been used for ‘groups’. The contract will often refer back to the Companies Act 2006 (‘CA 2006’) definitions but will sometimes make amendments to these definitions.
• A group of companies will have a ‘parent’ or ‘holding’ company and one or more subsidiary companies. Depending on the size and structure of the group, subsidiaries may have subsidiaries of their own.

Question 13

• Definitions of ‘subsidiary’ and ‘holding company’

Answer 13

• It is not necessary for one company to own the whole of another company for the group relationship to exist, however.
• S 1159(1) CA 2006: a company is a subsidiary of another company, its holding company, if that other company
• holds a majority of the voting rights in it; or
• is a member of it and has the right to appoint or remove a majority of the board of directors; or
• is a member and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it.

Question 14

• Non-UK companies

Answer 14

• It is important to note that references to ‘company’ in s.1159 capture ‘any body corporate’ which includes entities incorporated outside of the UK. This is as a result of s.1159(4) and s.1173. Therefore, whilst the example above includes only UK companies, it could have included non-UK entities.

Question 15

• Nominee shareholdings

Answer 15

• Schedule 6, paragraph 6 CA 2006 states that rights held by a person as nominee for another shall be treated as held by the other. Prior to 1992, all companies were required to have at least two shareholders even if they were, effectively, wholly-owned subsidiaries. In order to satisfy this requirement for two shareholders, a wholly-owned subsidiary would have one principal shareholder and a second shareholder who held a small proportion of the shares (often just one) as nominee for the principal shareholder (i.e. on behalf of the principal shareholder).

Question 16

• Parent liability

Answer 16

• Parent companies are not automatically liable for the debts or other liabilities of their subsidiaries, but liability can occasionally arise, either through commercial practice or process of law. We will now consider other examples where parent companies may incur liabilities of their subsidiaries.

Question 17

• Parent liability: contract

Answer 17

• One of the most common ways for a parent to assume liability in respect of its subsidiaries under contract is by means of a guarantee.
• A guarantee from a parent company is often required where the business and assets of the subsidiary are not considered to be substantial enough on their own to be sure that the subsidiary will be able to perform its obligations under a contract.
• In the context of a corporate acquisition, if a subsidiary is selling its business, the buyer is quite likely to request that the selling company’s ultimate parent company joins in to the acquisition agreement in order to guarantee the subsidiary’s performance under the warranties and indemnities contained in the acquisition agreement. On the other hand, if a newly-formed company is the buyer under an acquisition agreement, the seller may request that the buyer’s parent company guarantees its liabilities in respect of the purchase price, particularly if there is any deferred consideration.
• Additionally, companies in a group can be called upon to guarantee the obligations of each other. A common example of this is when each of the companies in a group guarantees the liabilities which each of the other group companies have to a bank (for example, loans and overdrafts). This is called a cross-guarantee.

Question 18

• Parent liability: tort

Answer 18

• The case of Chandler v Cape plc [2012] 3 All ER 640 provided that parent liability could be established where the parent has a practice of intervening in the trading operations of the subsidiary, such as production and funding issues or superior knowledge or expertise.
• This issue of when an English parent company may owe a duty of care to people who are harmed by the activities of an overseas subsidiary has been litigated extensively in recent years. In Lungowe v Vedanta Resources plc [2019] UKSC 20, the Supreme Court stated that Chandler provided examples of when a duty of care may be imposed on a parent company. In Lungowe, an English parent company of a Zambian subsidiary company was held to owe a duty of care to the claimants, a neighbouring community, whose health and farming activities were harmed by discharge of toxic material from the mine of a subsidiary company. The parent company intervened sufficiently in the affairs of its subsidiary for it to assume a duty of care to the claimants. Relevant factors included that the parent company was responsible for:
• establishing group-wide environmental control and sustainability standards;
• for their implementation throughout the group by training;
• for their monitoring and enforcement, and
• there was a management agreement between parent and subsidiary.
• Similarly, in Okpabi v Royal Dutch Shell plc [2021] UKSC 3, the Supreme Court held that an English parent company of a Nigerian subsidiary company may owe a duty of care to local inhabitants who were harmed by oil leaking from its subsidiary’s pipelines causing water pollution and environmental damage.
• Whether a duty of care is imposed on a parent company turns on the extent to which it assumes responsibility for managing the relevant activity of the subsidiary and/or controls relevant activities of the subsidiary. It was further held that a parent company can incur a duty of care by:
   maintaining groupwide environmental and safety policies which impose mandatory standards;
   monitoring and reporting on the subsidiary’s compliance with those standards; and,
   having overall responsibility for implementing groupwide health and safety standards.

Question 19

• Parent liability: Insolvency

Answer 19

• Fraudulent trading
• Any person knowingly a party to carrying on the business of a company with intent to defraud creditors may be required to make such contributions to the company’s assets as the court thinks proper on the application of a liquidator or administrator.
• ‘Person’ includes a body corporate so that if a holding company is involved with carrying on the business of its subsidiary in a way intended to defraud creditors the holding company may be held liable.
• Wrongful trading
• Directors of a company that has gone into insolvent liquidation or administration may be held liable to make a contribution to the company’s assets if at some time before the commencement of the winding up or administration of the company such directors knew or ought to have concluded that there was no reasonable prospect of avoiding an insolvent liquidation or administration. Director includes shadow directors. This means that if the holding company effectively determines the way in which the directors of the subsidiary will act, the holding company may be found to be a shadow director of the subsidiary and incur liability accordingly.

Question 20

• Intra-group transfers

Answer 20

• Group companies often carry out a pre-sale re-organisation, prior to the sale of one of those group companies, or a post-sale re-organisation following an acquisition. If the transaction has a split signing and completion a re-organisation will often be implemented in the gap in between.
• The buyer would need to be comfortable with the plan for the reorganisation and would require safeguards to be put in place in relation to its implementation. For example, an indemnity from the seller for any loss or liability incurred by the buyer in connection with the reorganisation.
• Group re-organisations can also take place for tax reasons or to increase business efficiency.
• As part of a re-organisation, assets may be transferred from a subsidiary company to its parent company or to another company within the same corporate group. This gives rise to two key considerations.
   The statutory restrictions on distributions in the CA 2006 must be considered.
   The directors of the transferring company need to be advised as to their statutory duties.

Question 21

• What is a distribution?

Answer 21

Distribution means every description of distribution of a company’s assets to its members, whether in cash or otherwise (s. 829 CA 2006).

Question 22

• What is a restriction?

Answer 22

A company may only make a distribution out of profits available for the purpose (s. 830 CA 2006).

Question 23

• Non-cash distributions

Answer 23

• Section 845 CA 2006 applies for determining the amount of a ‘distribution consisting of or including……the sale, transfer or other disposition by a company of a non-cash asset’ i.e., the amount of a ‘distribution in kind’
• TECH 02/17BL provides guidance on realised and distributable profits under the CA 2006. Its purpose is to identify, interpret and apply the principles relating to the determination of realised profits and losses for the purposes of making distributions under the CA 2006. The document provides guidance for example on how to determine what a distribution in kind is (paragraphs 2.8F-H) and which intra group transactions may involve a distribution (paragraph 9.69-9.71)

Question 24

• Types of non-cash distributions

Answer 24

• Where a company transfers an asset to its shareholder either as a gift or at an undervalue*, this will constitute a distribution.
• Where an asset is transferred between subsidiaries (rather than from a subsidiary to its parent) either as a gift or at an undervalue*, this will constitute a deemed distribution in kind to the parent following the case of Aveling Barford v Perion.
• Note: *‘Undervalue’ in this context means less than the market value. An asset transferred for market value above its ‘book value’ (the value recorded for the asset in the company’s accounts) will not constitute a distribution.
• In each of these cases, the transferring company is making a distribution so, for the distribution to be lawful, it must have sufficient profits available to cover the amount of the distribution.

Question 25

• Is the distribution lawful?

Answer 25

 Establish whether there is a distribution
 Does the transferring company have distributable profits?
* A distribution will only be lawful if the transferring company has distributable profits at the time of the transfer (£1 would be sufficient to satisfy this initial condition).

Question 26

What is the value of the amount of the distribution?

Answer 26

• If the transferring company has distributable profits, then it is necessary to value the amount of the distribution by reference to the asset’s book value*, not its market value.
• If the transfer is at or above ‘book value’ the distribution is valued at nil and it will be lawful.
• If the transfer is at less than book value, (including when the market value is below the book value) then the distribution will be an amount equal to the shortfall, and the company will need sufficient distributable profits to cover this shortfall. If it has enough distributable profits, the distribution will be lawful. If it does not, the distribution will be unlawful.
• *The book value of an asset is the value of the asset after accounting for depreciation. It does not necessarily align with the assets market value.

Question 27

• Consequences of an unlawful distribution

Answer 27

• An unlawful distribution cannot be ratified by the shareholders.
• The directors who authorised the unlawful distribution will be liable, jointly and severally, to repay the company.
• If the shareholders receiving the distribution knew, or had reasonable grounds for believing, that the distribution was being paid in contravention of s 830 CA 2006, they will be liable to repay the company a sum equal to the amount of the distribution.
• In practice if a historic unlawful distribution is identified, it is unlikely that the money will be recovered by way of a direct payment from the shareholders. It is more likely that a new lawful dividend will be declared and approved and instead of being paid, will be set off against the money owed by the shareholder to the company.

Question 28

• Consequences of an unlawful deemed distribution

Answer 28

• Deemed distributions are governed by the statutory rules on distributions under CA 2006. Accordingly, the statutory provisions on the consequences of an unlawful distribution will apply.
• If the deemed distribution is unlawful and the recipient acquired the property with knowledge of the facts, then the recipient will hold the asset as a constructive trustee. This means that the recipient could be liable to return the asset to the transferring company.

Question 29

• Directors’ duties and group companies

Answer 29

• the principle of separate legal personality applies to each group company. In addition, common law directors’ duties were codified under CA 2006.
• The general rule is that where decisions are made within a group of companies, the directors of each company within the group should act primarily with the success of that company in mind and not have regard to the success and demands of other group companies. This means that the board of each company must consider the benefit of each proposed transaction to that company, rather than just to the group as a whole.
• However, the mere fact that, in a particular transaction, the directors of a company looked to the success of the group as a whole, will not of itself mean that they have acted in breach of their directors’ duties. Provided that an ‘intelligent and honest man’ in the position of the directors would have reasonably believed the transaction to be in the interests of their company this will be sufficient (Charterbridge Corporation Limited v Lloyds Bank Ltd (1970)).
• Finally, the shareholders can ratify certain breaches of directors’ duties by passing an ordinary resolution.

Question 30

• Ostensibly, the directors of a transferring company will be breaching their duty to promote the success of that company if they arrange for the company to transfer its assets at an undervalue. There are two potential outcomes:

Answer 30

 Provided the transferring company is solvent and has sufficient distributable profits to cover the amount of the undervalue so that the distribution is lawful, then the shareholders can ratify the breach by passing an ordinary resolution to approve the transfer of assets.
 If the transferring company is insolvent or it does not have sufficient distributable profits to cover the amount of the undervalue so that the distribution is unlawful, then the shareholders cannot ratify the distribution. The directors have breached their duties and they may be held personally liable to repay to the company the unlawful amount.

Question 31

Ordinary share capital is defined as

Answer 31

all the company’s issued share capital (however described), other than capital [i.e. shares] the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits”.

Question 32

• The objective of group relief is

Answer 32

to treat group companies as if they were carrying on their trading activities in a single company. Provided the necessary group relationship is satisfied, trading losses of one group company (the surrendering company) may be set off against any profits or gains of another group company (the claimant company) in a corresponding accounting period or (for trading losses arising after 1 April 2017) a later accounting period (i.e. carried forward).

Question 33

To qualify for group relief…

Answer 33

• To qualify for this treatment a parent company must satisfy a beneficial ownership test and an economic ownership test.

Question 34

• The beneficial ownership test:

Answer 34

A group for the purposes of group relief comprises a company and its 75% subsidiaries. The parent company must beneficially own (directly or indirectly) at least 75% of the ordinary share capital of each subsidiary.

Question 35

• The economic ownership test:

Answer 35

 In order to satisfy the economic ownership test for group relief the parent company must also be beneficially entitled (directly or indirectly) to at least 75% of (1) the profits available for distribution; and (2) the assets available for distribution to its shareholders on a winding-up.

Question 36

• Groups relief: Indirect ownership

Answer 36

• In applying both the beneficial ownership test and the economic ownership test for these purposes, where one company holds shares in another company, which in turn holds shares in a third company, the first company is treated as holding indirectly a percentage of shares in the third company. The percentage is found by multiplying the percentage of shares the first company holds in the middle company, by the percentage of shares the middle company holds in the third company.

Question 37

• Consortium relief

Answer 37

• Where group relief for trading losses is not available because either the beneficial ownership test or the economic ownership test is not satisfied, consider whether consortium relief is available instead.
• Consortium relief applies in a case where one company (a consortium company) is owned by two or more other companies (the consortium members) but the requirements for group relief are not satisfied.

Question 38

• In order to qualify as a consortium company:

Answer 38

 at least 75% of the consortium company’s ordinary share capital must be owned by two or more corporate shareholders;
 each such shareholder owns at least 5% of the ordinary share capital; and
 no one shareholder owns 75% or more of the ordinary share capital.

Question 39

• Consortium relief: surrender of trading losses

Answer 39

• Once a consortium company has been identified you then apply further tests to assess the extent to which trading losses can be surrendered. Trading losses claimed/surrendered under consortium relief can be used to reduce any profits or gains of the claimant company. First you need to find each consortium member’s ‘relevant fraction’. This is the lowest of its:
   shareholding;
   percentage entitlement to profits; and
   percentage entitlement to assets on a winding up.
• Then, if the consortium company is the surrendering company (i.e. it has a loss while the consortium member has profits or gains), multiply the relevant fraction by the amount of the consortium company’s loss. This is the maximum amount the consortium member can claim to reduce its own taxable profits and gains.
• If the consortium company is the claimant company (i.e. it has profits or gains while the consortium member has a loss), multiply the relevant fraction by the amount of the consortium company’s profits or gains. This is the maximum amount the consortium company can claim to reduce those taxable profits and gains. As with group relief, the amount of losses surrendered to a company under consortium relief cannot exceed that company’s taxable profits i.e. consortium relief cannot be used to turn a profit into a loss.

Question 40

• A group for chargeable gains purposes comprises:

Answer 40

 the ‘principal’ company;
 its 75% subsidiaries; and
 75% subsidiaries of those subsidiaries (and so on)
 provided, in each case, that they are ‘effective 51% subsidiaries’ of the principal company.
* The 75% subsidiary test is the beneficial ownership test and the effective 51% subsidiary test is the economic ownership test.
* To be an ‘effective 51% subsidiary’ of the principal company in a chargeable gains group the principal company must be entitled to more than 50% of the subsidiary’s:
 profits available for distribution; and
 assets available for distribution to its shareholders on a winding-up.
* It is important to be able to determine which companies are part of a group for chargeable gains purposes because those companies may benefit from favourable tax arrangements.

Question 41

• Transfers of chargeable assets within a group

Answer 41

• Transfers of capital assets between companies within a chargeable gains group do not give rise to a gain or loss at the time of the intra group transfer. Instead, the transferee company adopts the transferor company’s base cost for the asset in question.
• The tax liability (if any) is deferred until the asset is sold out of the group or the transferee company now owning the asset leaves the group, whereupon (in each case) an exit or de-grouping charge may arise.

Question 42

• Transfers of chargeable assets outside the group

Answer 42

• When a chargeable asset is sold outside the group there will be a charge to corporation tax on any gain that results. For the purpose of calculating the gain, the base cost of the asset will be the price paid by the group member who first brought the asset into the group (together with indexation). When one company in a chargeable gains group makes a chargeable gain, it is possible to set that gain off against any capital losses elsewhere in the group.
• Whenever there is a chargeable gains group of two or more companies and one of those companies is disposing of a capital asset, the disposing company and any other member of the same chargeable gains group can jointly elect that any gain or loss (or part of it) arising on the disposal of the capital asset should be treated as accruing to the other group company. This will enable the capital losses in a loss-making company to be set off against the gain made on the disposal of the capital asset, or vice versa.
• To qualify, the joint election must be made within two years after the end of the accounting period (of the disposing company) in which the gain or loss to which the election relates arises. Note that capital losses can be carried forward indefinitely within the company which made them, so it is not necessary for the gain to accrue within the two years following a loss.

Question 43

• Effect of company leaving group: exit (or de-grouping) charges

Answer 43

• When a company, which has received a chargeable asset as a result of an intra group transfer, leaves the group (for example on a share sale) within six years of the receipt of the asset, a charge may arise under s.179 TCGA . This is the ‘exit’ or ‘de-grouping’ charge.
• The exit charge is an anti-avoidance measure designed to prevent groups of companies transferring chargeable assets around the group on a no gain/no loss basis and then selling the company out of the group, whilst still holding the asset, without any member of the group paying tax on the increase in the value of the asset.

Question 44

• Calculation of the exit (or de-grouping) charges

Answer 44

• The charge is calculated by treating the company leaving the group with the asset (‘Company A’) as if it had sold and immediately reacquired the asset at market value on the date of the intra group transfer from the other group company (‘Company B’). The deemed gain is therefore calculated by taking the market value of the asset on the date of the intra group transfer as the deemed disposal proceeds, and deducting the base cost of the asset, which will be the cost of the asset at the time it was first brought into the chargeable gains group (together with indexation).
• The deemed gain is notionally added to the consideration due from the buyer of Company A to the seller - note that no additional consideration is actually due from the buyer. This increases the seller’s chargeable gain on the sale of the shares; however, provided that the seller can benefit from the substantial shareholding exemption (SSE) no tax liability should arise in respect of this deemed additional consideration (or in respect of any of the gain on the sale of the shares).
• If SSE did not apply, then the seller’s tax advisers would need to consider other ways of mitigating the corporation tax on the (increased) gain. Since the company leaving the group is deemed to have disposed of and reacquired the asset at market value at the date of the intra group transfer, its base cost in the asset, following the exit charge, will be the market value of the asset at the date of the intra group transfer.

Question 45

• Rollover relief on replacement of business assets

Answer 45

• The rollover relief on replacement of business assets that you learnt about in Business Law and Practice is also available within chargeable gains groups. Gains realised by one group member on disposal of business assets may be ‘rolled over’ into the acquisition cost of business assets purchased by another group member.

Question 46

• Companies will be grouped together for the purposes of stamp duty and stamp duty land tax(‘SDLT’) if one company is a 75% subsidiary of another or both companies are 75% subsidiaries of a third company. A company (‘Company A’) is a 75% subsidiary of another company (‘Company B’) if Company B:

Answer 46

 is the beneficial owner (directly or indirectly) of not less than 75% of the ordinary share capital of Company A; and
 is beneficially entitled to not less than 75% of any profits of Company A available for distribution; and
* would be beneficially entitled to not less than 75% of any assets of Company A available for distribution on a winding up.
* Although it is worded differently, this is basically the same group test as for groups for the surrender of trading losses.
* In the diagram, B Ltd has a direct interest of 75% in A Ltd, an indirect interest of (75% x 100%) 75% in C Ltd and only an indirect interest of (75% x 100% x 80%) 60% in D Ltd. That means only A Ltd, B Ltd and C Ltd form a group for stamp taxes.

Question 47

• Stamp duty and SDLT relief on intra group transfers

Answer 47

• Stamp duty (on a transfer of shares) and SDLT (on a transfer of land) are not generally chargeable on transfers of assets between a parent and a 75% subsidiary or between two 75% subsidiaries of a common parent.
• Relief from stamp duty has to be claimed from HMRC by submitting a letter stating that the conditions for the relief have been met and that certain anti-avoidance provisions do not apply. Relief from SDLT is claimed from HMRC in the land transaction return that must be submitted to HMRC within 14 days of the intra group transfer.

Question 48

• SDLT claw back provisions for land

Answer 48

• SDLT group relief on intra group transfers of land can be clawed back where the transferee company (i.e. the recipient of the property which was transferred intra group) leaves the group within three years of the transfer (or after the three year period, but pursuant to arrangements put in place before the end of the three year period). The SDLT claw back is like the degrouping charge except that the claw back charge arises in the company leaving the group.
• The issue of SDLT claw back is relevant to share sales only.
• If SDLT relief is clawed back this will mean that SDLT will become payable by the company which originally received the relevant asset as a result of the intra group transfer. As a result, it is something that a buyer carrying out due diligence on a target company will want to make enquiries about, because the buyer is purchasing a company which will have an SDLT liability as a result of the claw back. The buyer’s solicitor should make enquiries about transfers of land within the seller’s group involving the target company, to assess the risk of SDLT claw back. In the event that a claw back will arise, a buyer will usually request an indemnity from the seller to cover the additional costs involved, or simply seek to reduce the purchase price.

Question 49

• Groups for Value Added Tax (‘VAT’)

Answer 49

• Two or more companies with a UK business establishment may apply to HMRC for group VAT registration if one company holds a majority of voting rights in the other or controls the composition of the board of directors of the other or they are under common control.
• Group registration is made in the name of the ‘representative member’, which may be any of the VAT group members. The representative member submits a single VAT return to HMRC and pays/reclaims all VAT due to or from HMRC on behalf of all the members of the VAT group. All VAT supplies and expenditure by any VAT group member are deemed to be made by the representative member and supplies between members of a VAT group are disregarded for VAT purposes.
• All members of a VAT group are jointly and severally liable to HMRC for VAT due from the representative member. This means that when a company leaves a VAT group a buyer of the company will want to make sure that an application is made to HMRC for the target company to be removed from the seller’s VAT group with effect from the date of completion, and that either:
   all the VAT due to HMRC from the group is paid up to the date the company leaves the group (not generally a practical possibility); or
   the buyer is indemnified against any loss and costs it may incur as a result of the company being liable after the sale for any of the seller group’s VAT.

Question 50

You are advising a company on its purchase of the entire issued share capital of a private limited company (‘Target’). The Target is a wholly-owned subsidiary of the seller. As part of your due diligence investigations you discover that in March 2016, the Target acquired premises (the ‘Premises’) from another wholly-owned subsidiary (‘Transferor’) of the seller. The Target acquired the Premises for the then book value of £500,000. At the time of the transfer to the Target the market value of the Premises was £700,000. The Transferor originally bought the Premises in 2005 from an unconnected third party for £250,000.

Which ONE of the following statements is CORRECT in relation to the transfer of the premises?

If the shares in the Target are sold in March 2021, the Target will be liable to pay an exit charge in relation to the Premises. The deemed gain on which the exit charge will be calculated is £450,000.

If the shares in the Target are sold in March 2021, the seller may be liable to pay an exit charge in relation to the Premises. The deemed gain on which the exit charge will be calculated is £250,000.

If the shares in the Target are sold in March 2021, the seller may be liable to pay an exit charge in relation to the Premises. The deemed gain on which the exit charge will be calculated is £450,000.

If the shares in the Target are sold in March 2021, your client will be liable to pay an exit charge in relation to the Premises. The deemed gain on which the exit charge will be calculated is £200,000.

Answer 50

If the shares in the Target are sold in March 2021, the seller may be liable to pay an exit charge in relation to the Premises. The deemed gain on which the exit charge will be calculated is £450,000.

Correct. Exit charge is a seller liability and deemed gain calculated by deducting the cost at which the premises were originally acquired from the market value at the time of the last intra-group transfer.

Question 51

You are advising the seller on the sale of its wholly owned subsidiary (‘Target’). The seller informs you that two years ago the Target acquired a property from another wholly owned subsidiary (‘Transferor’) of the seller. The Target still owns the property.

Which of the following statements is correct in relation to the Target leaving the seller’s group?

A SDLT claw back charge will arise in the Buyer as it is acquiring the Target within three years of the transfer of the property.

A SDLT claw back charge will arise in the Seller as the Target is leaving the seller’s group within three years of the transfer of the property.

A SDLT claw back charge will arise in the Target as it is leaving the seller’s group within three years of the transfer of the property.

A SDLT claw back charge will arise in the Transferor as the Target is leaving the seller’s group within three years of the transfer of the property;

Answer 51

A SDLT claw back charge will arise in the Target as it is leaving the seller’s group within three years of the transfer of the property.

Question 52

Your client is proposing to buy the entire issued capital in a private limited company (the ‘Target’). The Target operates from a manufacturing plant (the ‘Plant’). During the due diligence process, your client discovers that two years ago the Target’s sister company transferred the Plant to the Target for £300,000. The sister company’s audited accounts from the time of the transfer shows that the book value of the Plant at the time of transfer was £350,000.

What is the best advice to give to your client in relation to the legal consequences of the transfer of the Plant?

Your client should seek an indemnity in the share purchase agreement from the seller as it is unlikely that the Target has good title to the Plant.

Your client should request a warranty in the share purchase agreement from the seller that the Target has good title to the Plant.

Your client should not be concerned about the transfer of the Plant because this is a matter for the seller as it received an unlawful distribution.

Your client should not be concerned about the transfer of the Plant if the audited accounts of the sister company show that it had sufficient distributable profits at the time of the transfer.

Answer 52

Your client should not be concerned about the transfer of the Plant if the audited accounts of the sister company show that it had sufficient distributable profits at the time of the transfer.