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Finance Act 2010

Qualifying Change

5.New section 212C provides that where one or more of the four conditions A to D are met, then there is a qualifying change in relation to C.

6.Subsection (2)(a) provides that condition A is met where there is (in broad terms) a change of ownership of C (defined in this legislation as a change in one or more principal companies (as defined in new section 212E) on the relevant day. This includes the creation of a consortium company.

7.For example, condition A is met in the following scenarios:

  • C is a wholly owned member of the Y Group and on the relevant day C is sold to the X Group;

  • C is a consortium company equally owned by the Y Group and the X Group. On the relevant day Y Group sells its whole interest in C to the X Group (or another Group, the Z Group). Condition A is met as, at the end of the relevant day, Y Group is no longer a principal company of C.

8.Subsection (2)(b) provides that condition A is also met where C is not owned by another company or companies at the start of the relevant day, but is owned by another company or companies at the end of that day.

9.For example, C is owned by the Jones family. On the relevant day the Jones family sell their shares to the X group and condition A is met.

10.As with the majority of the legislation, new section 212C has effect from 21 July 2009, but subsection (2)(b) only has effect where the relevant day is on or after 9 December 2009.

11.Subsection (3) provides that condition B is met where a principal company of C is a consortium principal company (CPC) and CPC’s ownership proportion of C is greater at the end of the relevant day than it was at the beginning of that day.

12.For example, C is a consortium company owned equally by the A and X Groups. The A group sells 30 per cent of its 50 per cent share-holding (that is, a 15 per cent share holding in C) to the X group. Condition B is met because the X Group’s ownership proportion has increased from 50 per cent to 65 per cent.

13.Subsection (4) provides that condition C is met where C ceases to carry on the whole or part of the relevant trade and the trade (or part of it) begins to be carried on in partnership by two or more companies in circumstances where Chapter 1 of Part 22 of the Corporation Tax Act (CTA) 2010 applies (previously section 343 of the Income and Corporation Taxes Act 1988 (ICTA)). For Chapter 1, and therefore condition C to apply, C cannot be a member of the partnership.

14.Subsection (5) provides that condition D is met where at the beginning of the relevant day the relevant trade is carried on by C in partnership and C’s relevant percentage share in the relevant trade at the end of the day is less than at the beginning of the day (or is nil).

15.For example, condition D is met in the following scenarios:

  • a partnership P carries on a trade of widget manufacturer and the partners are C, X Ltd, and W Ltd. C’s percentage share at the start of the relevant day is 70 per cent and at the end of that day it is 30 per cent;

  • P carries on a trade of widget manufacturer and the partners in the trade are C, X Ltd, and W Ltd. C’s percentage share at the start of the day is 70 per cent and C leaves the partnership so at the end of the day its percentage share is nil.

16.New section 212D is a guide to the sections explaining the terms used in new section 212C.

17.New section 212E explains the rules for deciding if any particular company is a principal company of C and if that principal company is a consortium principal company of C. New sections 212E to 212I are based on similar provisions in Chapters 3, 4 and 5 of Part 9 of CTA 2010 (Sales of lessors).

18.Subsections (1) to (3) provide the detail for determining the principal company of C. The definitions describe a series of relationships traced upward from C until this chain of relationships can go no further because the company at the top of the chain is not a 75 per cent subsidiary of another company.

19.Subsections (4) to (7) provides the detail for determining a consortium principal company of C where C is owned by a consortium or C is a qualifying 75 per cent subsidiary of a company owned by a consortium. As with subsections (1) to (3) the definitions describe a series of relationships but the chain of relationships also includes the situation where C is a qualifying 75 per cent subsidiary of a company owned by a consortium. The chain of relationships also ends when the company at the top of the chain is not a 75 per cent subsidiary of another company.

20.New section 212F defines when a company is owned by a consortium and who the consortium members are for the purposes of new Chapter 16A. It explains the company cannot be a 75 per cent subsidiary of another company and that at least 75 per cent of the company’s ordinary share capital must be owned by other companies and those other companies must each own 5 per cent or more of the ordinary share capital.

21.For example, C is a company owned by a consortium in the following scenarios:

  • C’s ordinary share capital is owned equally by Y Ltd, X Ltd, W Ltd and Q Ltd. The consortium members are Y Ltd, X Ltd, W Ltd and Q Ltd;

  • C’s ordinary share capital is owned as follows: Y Ltd - 25 per cent, X Ltd - 4 per cent, W Ltd - 55 per cent and Q (an individual) - 16 per cent. C is a company owned by a consortium but the consortium members are only Y Ltd, and W Ltd. X Ltd only holds 4 per cent of the ordinary share capital and Q is not a company.

22.New section 212G provides the definition of qualifying 75 per cent subsidiaries. The section gives three conditions, and states that a company is a qualifying 75 per cent subsidiary if Condition 3 is and either Condition 1 or 2 is met. The definitions use the same approach as is used for determining whether companies are in the same group for group relief purposes, but with a modification so that companies without share capital, such as companies limited by guarantee, can be treated as subsidiaries by extending the application of Chapter 6 of Part 5 of CTA 2010 to treat members as if they were equity holders and then applying the tests in Chapter 6.

23.New section 212H provides the rules for establishing the ownership proportion of a consortium principal company for the purposes of Condition B in new section 212C. As for the definition of 75 per cent subsidiaries in new section 212G, provision is made for companies without share capital.

24.New section 212I provides the rules for establishing C’s “relevant percentage share” in a partnership. The relevant percentage share is established on a “just and reasonable” basis but particular regard must be had to the matters that would be taken into account in determining a partner’s share of the profits or losses of a trade carried on by a firm for the purpose of section 1262 of CTA 2009. This means that normally the profit sharing arrangements of the firm for the particular period will be followed but there may be instances where circumstances are such that to follow the profit sharing arrangements in force for the period would not be just and reasonable.

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