Worldwide Groups of Companies

United Kingdom

The Chancellor announced in his last Budget a number of important changes that will affect the taxation of groups of companies. A commentary on the Budget 2000 which included comment on some of the implications for groups was produced in March and can be accessed on The Information Archive. The Finance Bill has since been published and a number of issues arise from the detailed provisions.

1. Groups or consortia can establish the group/consortium relief relationship through non-UK resident companies. This implements the ICI v Colmer decision although it also goes further in that it permits the group/consortium relationship to be traced through not only companies resident in another member state but any non-resident company. The Finance Bill 2000 only permits claims to be made on this basis for accounting periods ending on or after 1st April 2000. The Revenue have however already announced (February 1999) that they will accept claims for group/consortium relief where the relationship is traced through EU or EEA resident companies at least for open cases. This nevertheless leaves open the question as to whether claims may be made based on ICI v Colmer in respect of closed years.

Where the group/consortium relationship is traced through a non-EU/EEA resident company, ICI v Colmer is not relevant and the Finance Bill provisions must be relied upon unless it could be argued that the non-discrimination provisions of a relevant double taxation agreement can apply. A non-discrimination provision operates to ensure that a company resident in the UK but wholly or partly owned by residents of the other treaty state are not subjected to more burdensome tax than UK resident and owned companies are subject to. However, it is known that generally, the Revenue do not accept that non-discrimination provisions of a double taxation agreement apply to require group/consortium relief claims to be traced through non-resident companies. The Revenue take the view that the comparison that needs to be made to determine whether there is discrimination is not with two companies owned by a UK resident but with two companies owned by a non-resident so that there is no discrimination.

2. S406 Taxes Act 1988 permits a company grouped with a consortium member (the "Link Company") to surrender or receive group relief vis a vis the consortium group in the same way as the Link Company. It might have been expected that the Finance Bill 2000 would contain provisions under which group relief could be surrendered both by a group company to the consortium company and by the consortium company to the group company even though the Link Company is a non-resident company not carrying on a trade through a UK branch. This approach would at least be consistent with ICI v Colmer. This is however not the case although there is an argument that a consortium company can make a claim from a group company even though the Link Company is a non resident not carrying on a trade through a UK branch.

3. The Finance Bill 2000 provisions extend group relief to UK branches of non-resident companies. However, any branch losses cannot be surrendered against UK profits of another group company if the branch losses are available to set against non-UK profits for the purposes of foreign tax. UK branch losses are very likely to be available to set against overseas profits and accordingly these provisions severely restrict UK relief. Even where relief is not given overseas eg for a French parent it is interesting to note that if the ultimate US parent "checks-the box" for the French company the restriction will apply in the UK! Because of these restrictions it does not automatically follow that establishing a UK branch is a better option for a foreign company than incorporating a UK subsidiary. For example, a US company that checks the box will find it preferable to incorporate a UK subsidiary which will permit the UK losses to be grouped relieved against existing profitable UK activities as well as being consolidated in the US. Might a future Budget restrict the use of UK losses arising in a UK company where they can be relieved in the parent's overseas group?

The way in which the Finance Bill provisions restricting the ability to group relieve UK branch losses will operate is far from certain. For example, the UK branch losses may not be deductible for foreign tax purposes but may nevertheless be taken into account for the purposes of lowering the rate of tax that applies to the profits taxable in the overseas country. Arguably, this should not restrict the ability to group relieve the UK branch losses. Similarly, does the restriction operate if the losses could be utilised in the overseas country had there been sufficient overseas profits?

4. The Finance Bill 2000 also introduces restrictions on the ability to group relieve losses arising in an overseas branch of a UK resident company. These are designed to mirror the rules applying to UK branches of non-resident companies. Note that the restrictions only apply to group relief and overseas branch losses remain available to relieve UK profits arising in the company. Therefore, provided that the company establishing the overseas branch is otherwise in profit it is preferable to set up an overseas branch so that relief can be obtained in the UK for the overseas start up losses. It should be noted that the losses of the overseas branch of the UK resident company will not be available for group relief where the overseas losses are available for indefinite carry forward in the overseas jurisdiction. It is not so clear what the position would be where branch losses cannot be utilised within any time limit imposed for the utilisation of carry forward losses.

5. The Finance Bill 2000 provisions amending group/consortium relief mean that overseas investors establishing a business in the UK will no longer need to put in place a UK holding company in order to preserve group/consortium relief. At least in theory, it is also open to a UK group/consortium to put in place an intermediate overseas holding company eg a Dutch holding company permitting capital gains free disposals of shares in UK trading subsidiaries. The UK controlled foreign companies rules do not currently extend to capital gains. However, if such a structure is put in place for a UK trading group the Inland Revenue would no doubt look carefully at the residence of the overseas holding company. There would also be a host of commercial factors that may make such a structure undesirable.

6. The Finance Bill 2000 provisions permitting the notional transfer of capital assets intra-group so as to accumulate capital gains and losses in the same company would seem to give taxpayers a real benefit without any corresponding burden. Hitherto, an intra-group disposal prior to a sale to a third party could, in the case of the sale of an investment property, jeopardise transfer as a going concern relief for VAT purposes and in the case of shares risk an extra layer of stamp duty or stamp duty reserve tax.

7. The Finance Bill 2000 extends the provisions that ensure intra-group transfers of capital assets take place at no gain and no loss so that they apply even where common ownership is traced through a non resident company. The provisions will also apply where the transferee is non resident carrying on a trade through a UK branch. Where an asset comes within the charge to UK tax either because the owning company becomes resident or it starts to be used by a UK branch for the purpose of its trade there would appear to be no uplift in its base cost. One might legitimately expect the asset to enter the charge to UK tax at its market value.

8. The Finance Bill replaces Sections 190 and 191 Taxation of Chargeable Gains Act 1992 with a new Section 190. The new provision means that any company which is (or, importantly, was during the 12 months prior to the gain accruing ) a member of the same group as a company that has failed to pay corporation tax on chargeable gains can be served with a notice requiring that company to pay the unpaid tax. It also permits a notice to be served on a controlling director of the company that has failed to pay the tax or another company within the group during the relevant period. Because a notice can be served on a company or controlling director (up to 3 years after the tax becomes due) at a time when the company failing to pay the tax was not within the same group these provisions have implications for mergers and acquisitions. In particular sellers of companies will wish to obtain a covenant from the purchaser requiring the purchaser to recompense the seller should a notice be served on the seller.

These brief observations on the Finance Bill provisions relating to groups of companies demonstrate that the operation of these new provisions in the context of specific group situations will require careful thought and that there will inevitably be a number of areas where the legislation creates uncertainty and the potential for dispute with the Revenue as well as necessitating changes to the terms of company purchase documentation.

Contact Names : Mark Nichols, Mike Boutell