PLC - Groups of Companies

Question 1

What is group relief?

Answer 1

Group relief arises when a company surrenders qualifying corporation tax losses to another company in its group which is then set against that company’s taxable profits.

Question 2

What will a company receiving group relief typically pay the surrendering company for the losses?

Answer 2

An amount equal to the tax saved.

Question 3

What are the two main types of group relief?

Answer 3

Ordinary group relief where the claimant company and the surrendering company are in the same group, and “consortium relief” where one company is owned by a consortium and the other company is either (1) a member of that consortium or (2) is in the same group as a member of that consortium.

Question 4

What is the basic requirement for companies to be in the same group for group relief purposes?

Answer 4

Subject to additional anti-avoidance tests, a company must be a 75% subsidiary of the other or both must be 75% subsidiaries of a third company.

Question 5

How is a 75% subsidiary defined for the purposes of the UK group relief rules?

Answer 5

75% or more of the company’s ordinary share capital must be (directly or indirectly) beneficially owned by another company.

Question 6

If company A owns 90% of company B and company B owns 80% of company C, what percentage of company C is company A deemed to own for the purposes of the UK group relief legislation?

Answer 6

72% (90% x 80%).

Question 7

According to which case would a contract to sell an asset, which leaves the seller with no more than the legal shell of ownership, would result in the seller’s loss of beneficial ownership?

Answer 7

Sainsbury plc v O’Connor [1991].

Question 8

Will an unconditional contract to sell a company result in the seller’s loss of beneficial ownership of that company for the purposes of the UK group relief regime?

Answer 8

Yes.

Question 9

Are call options or conditional contracts for disposal of shares in a company thought to result in the loss of beneficial ownership for the purposes of the UK group relief regime?

Answer 9

Not of themselves and where the seller retains more than the mere legal shell of ownership.

Question 10

Does a company cease to be the beneficial owner of its assets on the commencement of liquidation?

Answer 10

Yes.

Question 11

Does a company cease to the beneficial owner of its assets when it is placed in administration?

Answer 11

Not by that act alone - the administrator may however take actions which could end any entitlement to group relief.

Question 12

How is ordinary share capital defined in section 1119 CTA 2010 for the purposes of the UK group relief rules?

Answer 12

OSC is all of a company’s issued share capital other than capital the holders of which have a right to a dividend at a fixed rate but no other right to share in the profits of the company.

Question 13

What are the two tests which must be satisfied by a company that otherwise appears to have the correct group shareholding for the UK group relief regime to apply?

Answer 13

(1) The Arrangement Tests and (2) the Economic Ownership Tests.

Question 14

What arrangements could prevent group relief from being available?

Answer 14

Arrangements whereby (1) a group company could become a member of another group, (2) a group company could be controlled by persons who do not control the other companies in the group, and (3) a company outside the group could begin to carry on the group company’s trade as successor to the relevant group company.

Question 15

What constitutes control for the purposes of the Arrangements Tests in the UK group relief rules?

Answer 15

Under section 1124 CTA 2010, control for these purposes means the power of a person to secure that the affairs of a company are conducted in accordance with that person’s wishes.

Question 16

How can control over a company arise for the purposes of section 1124 CTA 2010?

Answer 16

Control may derive from holding shares, possessing voting power in relation to the company or another company, or the articles of association of the company or another company.

Question 17

Is board level control thought to be sufficient for the purposes of establishing control under section 1124 CTA 2010?

Answer 17

Yes, though the case in which this was stated did not have to decide the point (Irving v Tesco Stores (Holdings) Limited [1982].)

Question 18

If arrangements are in place which cause a company to fail the Arrangements Tests for the purposes of the UK group relief regime, how long is relief denied for?

Answer 18

For as long as the arrangements exist (Shepherd (Inspector of Taxes) v Law Land plc [1990]).

Question 19

In broad terms, whose participation in a company is considered when determining whether a corporate group passes the economic ownership tests contained in the UK group and consortium relief rules?

Answer 19

All ‘equity holders’, being shareholders and loan creditors other than holders of ‘restricted preference shares’.

Question 20

Do the economic ownership tests in the UK group relief rules only look at current ownership of a company?

Answer 20

No if there are option arrangements in place, ownership must be analysed as if the option arrangements have been exercised.

Question 21

For the purposes of the UK group relief rules, where must a company be located if it is not a UK resident company and it is seeking to surrender losses to a UK company?

Answer 21

The surrendering company must be an EEA-related company, either being resident in an EEA territory or having incurred the relevant losses in the course of carrying on a trade through a PE in an EEA territory.

Question 22

What is the “equivalence condition” which must be satisfied when surrendering non-UK losses to a UK company under the UK group relief rules?

Answer 22

The surrendered amount must correspond in all material respects to an amount of a kind that could be available for surrender by group relief if the surrendering company were to be resident in the UK.

Question 23

What is the “EEA tax loss condition” which must be satisfied when surrendering non-UK losses to a UK company under the UK group relief rules?

Answer 23

The amount being surrendered must be calculated in accordance with the applicable rules under the law of the relevant EEA territory and the amount must not be attributable to activities which are exempt from tax in the relevant EEA country by virtue of a DTA.

Question 24

What is the “Qualifying Loss condition” which must be satisfied when surrendering non-UK losses to a UK company under the UK group relief rules?

Answer 24

An amount meets this condition insofar as it does not qualify for relief for the surrendering company or any other person in the relevant EEA territory or in the territory or territories in which the surrendering company is resident (assuming that every step is taken to secure that the amount does so qualify) and has not given rise to a relief in any other territory outside the UK.

Question 25

What is the “Precedence Condition” which must be satisfied when surrendering non-UK losses to a UK company under the UK group relief rules?

Answer 25

An amount meets this condition if relief for the amount cannot be given in any jurisdiction outside the UK in which any company in the ownership chain between the surrendering company and a UK resident company of which it is a 75% subsidiary is resident.

Question 26

How do you compute losses available for surrender where the surrendering company is located outside the UK?

Answer 26

The losses that can actually be surrendered need to be computed on the assumption that the surrendering company is resident in the UK and under UK tax principles.

Question 27

What seven sorts of losses can be surrendered in principle under the UK group relief rules?

Answer 27

(1) Trading losses, (2) Excess capital allowances,
(3) Deficits arising on non-trading loan relationships (4) Excess losses on transactions in UK real property (5) Excess losses arising in respect of intangible assets (6) Charges on income and (7) Management expenses.

Question 28

Can a company ordinarily surrender capital losses (losses arising on the disposal of capital assets)?

Answer 28

No.

Question 29

How do groups usually offset capital gains against capital losses?

Answer 29

Either by (1) transferring an asset within the group on a no gain/no loss basis before a disposal of the asset outside the group (ie deliberately triggering a degrouping charge in a specific company) or (2) making an election deeming a gain made by one company in the group to have been made by another.

Question 30

What is the effect of section 171 TCGA 1992?

Answer 30

Where an asset is transferred from one member of a group to another and both the transferor and the transferee are either resident in the UK at the time of the disposal or within the scope of UK corporation tax on chargeable gains in respect of the asset, no chargeable gain or allowable loss arises and the transferee inherits the transferor’s latent gain or loss.

Question 31

What is the effect of section 171A TCGA 1992?

Answer 31

Povided that section 171 would have applied to the transfer of an asset, two group companies can jointly elect that a gain arising on the disposal of the asset (or deemed disposal of the asset) by one of the companies should be deemed to have been made by the other.

Question 32

What is the broad effect of the anti-avoidance legislation in respect of capital losses?

Answer 32

To prevent groups with unrealised capital gains from buying in capital losses and groups with unrealised capital losses from buying in capital gains.

Question 33

How is a group defined for capital gains tax purposes?

Answer 33

Under sections 1154-1157, CTA 2010, a chargeable gains group is constituted by a company (the principal company), all of its 75% subsidiaries, all of those subsidiaries’ 75% subsidiaries, and so on, provided a company which is to be included in the chargeable gains group is also an “effective 51% subsidiary” of the principal company.

Question 34

What is an effective 51% subsidiary for the purposes of establishing a UK chargeable gains group?

Answer 34

A company is an effective 51% subsidiary of the principal company if the principal company would be beneficially entitled on a notional distribution of profits to more than 50% of (1) profits available for distribution to the equity holders of the company and (2) any assets of the company available for distribution to its equity holders.

Question 35

What is the most significant exception to the no gain/ no loss rule in section 171 TCGA 1992?

Answer 35

Intra-group share for share reorganisations, where section 135 TCGA 1992 applies instead.

Question 36

Is it possible in practice for a company to be a member of two chargeable gains groups?

Answer 36

No - see section 170(6) TCGA 1992.

Question 37

What is the prevailing view on whether the grant of a lease or licence is covered by the no gain/ no loss rule in section 171 TCGA 1992?

Answer 37

It is generally thought the rule applies even though the lease or licence is only a part disposal of the original asset.

Question 38

How, broadly, does a degrouping charge arise when a company leaves a group which is pregnant with an asset that was transferred to it on a no gain/ no loss basis?

Answer 38

A disposal is deemed to take place when the company leaves the group for the market value of the asset when it was acquired and the company is then deemed to reacquire the same asset

Question 39

What is the time limit for a chargeable gains degrouping charge?

Answer 39

Six years from the acquisition of the asset on a no gain/ no loss basis.

Question 40

What modification was made to the chargeable gains degrouping rules in 2011?

Answer 40

If the degrouping charge arises as a result of a disposal of shares in a group company (but not an issue of shares), the degrouping charge is added to the consideration for the disposal, causing the charge to fall on the disposing company and not the company leaving the group. This allows the substantial shareholdings exemption to apply to the degrouping charge.

Question 41

What modification was made to the substantial shareholdings exemption in 2011?

Answer 41

Subject to certain conditions, if assets used in the trade of a group company are transferred to a newly incorporated company, the investing company is deemed to have held its interest in that company for a continuous 12 month period (a qualifying condition for the SSE).

Question 42

Is it possible to reallocate a degrouping gain or loss on a share sale to a member of a seller’s group?

Answer 42

Yes.

Question 43

In what circumstances can a sub-group avoid a degrouping charge on a no gain/ no loss transfer of assets where the sub-group leaves a chargeable gains group?

Answer 43

Subject to anti-avoidance legislation, where the sub-group members are grouped immediately before and after leaving the group and where they were grouped at the time of the original no gain/ no loss transfer (Dunlop International [1999] and Johnston Publishing [2008].

Question 44

What other group tax regimes duplicate (broadly) the chargeable gains group regime for no gain/ no loss transfers and degrouping charges?

Answer 44

The intangible assets regime, the loan relationships regime and the derivative contracts regime.

Question 45

Section 183 CTA 2010 says what in respect of payments for group relief?

Answer 45

Such payments are not deductible or taxable and do not constitute distributions where the payment is no more than the amounts surrendered (which is technically more than the group relief is actually worth).

Question 46

Under section 119(4) of the Corporation Tax Act 2010, the extent to which CBGR losses of a subsidiary may be surrendered is to be determined immediately after the end of the accounting period in which the losses arise. Is this compliant with EU law?

Answer 46

Yes: the UK requires evidence only that the loss-making subsidiary has ceased trading and is to be put into liquidation, not that the liquidation is actually underway, shortly after the end of the loss-making period, and therefore the definitive amount of losses can be determined (European Commission v UK (Case C-172/13)).

Question 47

What is the CCCTB?

Answer 47

In June 2015, the European Commission published its revised proposal for a common consolidated corporate tax base (CCCTB) for businesses operating in the EU. One of the main benefits of the CCCTB proposal is EU group consolidation, which will eliminate the tax effects of intra-group transactions and enable losses of one EU group company to be set against the profits of another.

Question 48

What is a ‘link’ company for the purposes of the UK’s consortium relief rules?

Answer 48

A “link company” is a member of a consortium and also a member of a group. The consortium rules allow link companies established in the European Economic Area engaged in UK consortia to pass on consortium relief to their UK-resident group members (section 134A, CTA 2010).

Question 49

Do link companies need to be located in particular jurisdictions for the purposes of CBGR consortium relief?

Answer 49

No. Section 35 of the Finance (No. 2) Act 2015 removes the requirements regarding the location of “link” companies for the purposes of consortium relief. This follows Felixstowe Dock and Railway Company Ltd and others v HMRC where the ECJ held that the UK’s pre-2010 legislation denying consortium relief if a link company was non-UK resident breached EU law.

Question 50

How does the APN regime interact with group relief?

Answer 50

HMRC may issue a notice specifying an amount as an “asserted surrenderable amount” and stipulate that the company may not consent to surrender that amount by way of group relief. If consent has already been given, existing provisions on reductions of surrenderable amounts apply and the company must withdraw consent before the end of the payment period. In this situation, the claimant company must amend its return or, if there is an open enquiry preventing this, HMRC may issue it with a notice requiring accelerated payment.

Question 51

How is group relief reactivated if an APN is amended or withdrawn?

Answer 51

A fresh claim for group relief may be made within 30 days after the amendment or withdrawal of the APN. The same applies if the notice ceases to apply due to the final determination of an appeal or the issue of a closure notice. Normal time limits on amending tax returns are disapplied at all stages.