Chapter 1: Transfers of trade without a change of ownership
Overview
2780.The Chapter rewrites sections 343, 343A and 344 of ICTA (company reconstructions without a change of ownership).
2781.It is possible (and common) for the trade, assets and liabilities of one company (“the predecessor”) to be transferred to another (“the successor”). As a rule, on such a transfer the predecessor’s trade ceases. This has two consequences in particular.
2782.First, if the predecessor has incurred qualifying expenditure on plant and machinery, a balancing charge is imposed or a balancing allowance is given under Part2 of CAA (plant and machinery allowances). Also, the successor is entitled to plant and machinery allowances on the amount paid to the predecessor for the plant and machinery. Similar rules apply to the other types of capital allowance.
2783.Second, if the predecessor has incurred losses in its trade they cannot be carried forward under section 393 of ICTA. To the extent that they cannot be relieved under section 393A of ICTA or by group relief, they are wasted.
2784.But the predecessor and the successor are not necessarily independent. If they are under common ownership, the owners of the companies may have commercial reasons for transferring the trade and net assets from one to another. Where this is the case, section 343 of ICTA makes it possible for:
capital allowances to be given to the successor as if the trade was still being carried on by the predecessor; and
the predecessor’s unrelieved trade losses to be carried forward to the successor.
2785.Sections 343 and 344 of ICTA were based on section 61 of FA 1965, which was itself modelled on section 17 of FA 1954 and Schedule 3 to that Act.
2786.Section 343A of ICTA was inserted by paragraph 1 of Schedule 6 to FA 2007.
2787.The sections rewriting sections 343, 343A and 344 of ICTA are laid out in the following order.
Sections 938 and 939 are introductory.
Sections 940 to 943 specify the transfers to which the Chapter applies.
Sections 944 to 950 specify the effect of the Chapter in relation to transfers to which it applies.
Sections 951 to 953 are supplementary.
Section 938: Overview of Chapter
2788.This section gives an overview of the Chapter. It is new.
Section 939: Meaning of “transfer of a trade” and related expressions
2789.This interpretative section is based on section 343(1) of ICTA.
Section 940: Transfers to which Chapter applies
2790.This section states that there are two conditions which must be met if the Chapter is to apply to a transfer of a trade: the ownership condition and the tax condition. It is based on section 343(1) of ICTA.
Section 941: The ownership condition
2791.This section lays down the first of the two conditions which need to be met if the Chapter is to apply to a transfer. It is based on sections 343(1) and 344(1), (2) and (4) of ICTA.
2792.The ownership condition works in the following way. First, it is necessary to identify persons having a 75% interest in the transferred trade at the time of the transfer or at any time in the two-year period beginning immediately after the transfer. Then, it is necessary to see whether those same persons have a 75% interest in the transferred trade at any time in the one-year period beginning immediately before the transfer. If they do, the ownership condition is met.
2793.Subsections (3) and (4) are based on the second sentence of section 343(1) of ICTA; in that context, “comprise” is non-exhaustive.
2794.Subsection (5)(a) is based on section 344(1)(a) of ICTA. Section 344(1)(a) refers to “a trade carried on by two or more persons”, but does not actually need to cover trades carried on by non-corporates. Subsection (5)(a) therefore says, more precisely, “if two or more companies carry on a trade”.
Section 942: Options that may be applied for the purposes of the ownership condition
2795.This section sets out various options that may be applied to see whether the ownership condition is met. It is based on section 344(2) and (3) of ICTA.
2796.Schedule 1 to the Interpretation Act 1978 defines “person” as including a body of persons corporate or unincorporate. Option 3 in subsection (1) therefore compresses “person or body of persons” in the tail words of section 344(2) of ICTA to “person”.
2797.Option 3 in subsection (1)is more focused on the final result than the tail words of section 344(2) of ICTA. But this difference is merely verbal.
2798.It is implicit in section 344(3)(c) of ICTA that ownership includes indirect ownership; subsection (6) makes this implication explicit and, therefore, applies to the whole of the section.
Section 943: The tax condition
2799.This section lays down the second of the two conditions which need to be met if the Chapter is to apply to a transfer. It is based on section 343(1) of ICTA.
2800.Briefly, the tax condition is that the trade has been subject to United Kingdom corporate taxation at all material times.
2801.Section 343(1)(b) of ICTA has a cryptic reference to “the period taken for the comparison under paragraph (a) above”. Subsection (2) expressly defines this period. Subsection (2) refers to section 941(1)(a) and (b) in reverse order. This is deliberate. Section 941 (the ownership condition) starts with the new owners of the transferred trade and moves from there to see whether common ownership can be established. By contrast, section 943 (the tax condition) is seeking to establish whether the trade has been subject to United Kingdom corporate taxation throughout the relevant period and so starts at the beginning of that period and works forwards.
Section 944: Modified application of Chapter 2 of Part 4
2802.This section modifies the application of the Chapter of this Act giving relief for trade losses. It is based on section 343(1), (3) and (4A) of ICTA.
2803.If this Chapter applies to a transfer of a trade, subsection (2) disapplies the terminal loss rules and subsection (3) entitles the successor to relief for trade losses carried forward.
Section 945: Cases in which predecessor retains more liabilities than assets
2804.This section restricts the relief given to the successor under section 944(3) to the extent that (a) the successor does not take over the predecessor’s liabilities and (b) the predecessor does not have enough assets to meet them in full. It is based on sections 343(4) and 344(5) to (7) of ICTA.
2805.The aim of this section is to stop tax relief being given twice for the same expenditure. It is fairly common, especially in receivership cases, for the liabilities of the business not to be transferred with the trade. Those liabilities are then left stranded in the predecessor company, and the creditors stand little or no chance of being paid. In such a case, the creditors have to write off the debts owed to them by the predecessor. If these creditors have incurred these debts in the course of their trades of (a) supplying goods or services or (b) lending money, the write-offs are tax deductible as trading expenses.
2806.But for this section, the successor could also claim tax relief for the same expenditure under the heading of losses carried forward. Under this section, broadly speaking, the losses disallowed in the successor’s hands equate to the amount of the debts which the predecessor is unable to pay.
2807.Subsection (1) states when the section applies, using the terms “L” and “A”.
2808.Subsections (2) and (3) define “L” and “A” respectively.
2809.Subsections (4) and (5) use a formula to determine the amount by which the successor’s relief is restricted. That formula uses “L” and “A” to define “E”.
Section 946: Rules for determining “L”
2810.This section supplements section 945 of this Act. It is based on section 344(6), (8), (9), (11) and (12) of ICTA.
2811.This section recasts section 344(9) of ICTA to remove the curious expression “a liability representing the predecessor’s share capital, share premium account, reserves or relevant loan stock”.
2812.In subsection (6)(a), the expression “issued or otherwise originated” is broad enough to cover a transfer to reserves.
2813.The wording of section 344(9) of ICTA is broad enough to cover a series of conversions of capital. Subsection (6)(a) makes this point explicit. In practice, however, such a series would be unlikely to meet the temporal condition imposed by subsection (6)(b).
2814.In section 344(11) of ICTA, the words “(whether secured or unsecured)” block the argument that unsecured loan notes cannot be “relevant loan stock” because if they are not secured they cannot be securities. Subsection (8) therefore retains this parenthesis.
Section 947: Rules for determining “A”
2815.This section supplements section 945 of this Act. It is based on section 344(5), (7) and (10) of ICTA.
2816.Section 344(7)(a) of ICTA defines “the value of assets (other than money)”. Subsection (3) omits as unnecessary the reference to money.
Section 948: Modified application of CAA 2001
2817.This section modifies the application of CAA. It is based on section 343(1) and (2) of ICTA.
2818.Under subsections (2) to(4), for capital allowances purposes, the successor stands in the predecessor’s shoes.
2819.Section 561A(2)(c) of CAA refers to section 343 of ICTA, whereas section 561(5) of CAA refers to section 343(2). Nothing turns on this distinction, so subsection (6) simply refers to sections 561 and 561A of CAA.
Section 949: Dual resident investing companies
2820.This section prevents the successor from benefiting from section 948 if it is a dual resident investing company. It is based on section 343(2) of ICTA.
2821.The source legislation refers to section 404 of ICTA. Section 404 of ICTA is rewritten in section 109. As far as possible, this section is conformed to that section.
2822.The source legislation defines “dual resident investing company” by reference to section 404 of ICTA but does not spell out how the reference in that section to “the material accounting period” is to be applied in the context of transfers of trade. This section uses the concept of “the transfer accounting period” to bring out the implicit requirements of the source legislation. This is a drafting clarification which does not change the law.
2823.Subsection (1) is the main operative provision.
2824.Subsection (2) specifies when a company is a dual resident investing company.
2825.Subsection (3) defines the expression “dual resident company”, which is used in subsection (2)(a), and subsections (4) to (6) specify the conditions mentioned in subsection (2)(b).
2826.Subsection (7) defines “non-UK tax”, “trading company” and “the transfer accounting period”.
Section 950: Transfers of trades involving business of leasing plant or machinery
2827.This section deals with transfers of trades involving businesses of leasing plant or machinery. It is based on section 343A of ICTA.
Section 951: Part of trade treated as separate trade
2828.This section deals with transfers of parts of trade. It is based on section 343(1) and (8) of ICTA.
2829.This section refers to “activities” of a trade and “part” of a trade, as these expressions have been the subject of judicial comment: see Falmer Jeans Ltd v Rodin (1990), 63 TC 55.(6)
2830.Section 344(5) and (6) of ICTA do not expressly provide that, if there has been an apportionment, only the assets and liabilities apportioned to the transferred trade are to be taken into account. Subsection (6) makes these points explicit.
Section 952: Apportionment if part of trade treated as separate trade
2831.This section provides for apportionments to be made if, in accordance with section 951(2) or (4), part of a trade is treated as a separate trade. It is based on section 343(9) and (10) of ICTA.
2832.Subsection (1) expressly requires apportionments to be reasonable as well as just. This is a minor change in the law: see Change 33in Annex 1. The same change has been made in previous rewrite Acts.
Section 953: Application of Chapter to further transfers of a trade
2833.This section deals with further transfers of trades. It is based on section 343(7) of ICTA.
2834.Subsection (1) spells out when the section applies.
2835.Under subsection (1)(a), there must be a transfer (the original transfer) which meets the ownership condition and the tax condition. Under section 940 of this Act, this Chapter applies to the original transfer.
2836.Under subsection (1)(b), there must be a further transfer (as defined).
2837.Under subsection (1)(c), the further transfer must take place at some time before the end of the period specified in subsection (7).
2838.It is implicit in section 343(7) that the ownership condition was met in relation to the original transfer only on or after the further transfer. Subsection (1)(d) lays this down as an express condition for this section to apply.
2839.If section 343(2) to (5) of ICTA already apply in relation to a transfer, there is no need to rely on section 343(7) of that Act. Accordingly, subsection (1)(e) lays down, as an express condition for this section to apply, that, were it not for this section, this Chapter would not apply to the further transfer.
2840.Subsection (2) applies the Chapter to the further transfer as well as to the original transfer.
2841.Subsection (3) explains how the references to “the successor” and “the predecessor” in this Chapter are to be interpreted in cases where the Chapter applies to a transfer by virtue of this section.
2842.Subsection (4) extends the scope of “the successor” in relation to the original transfer.
2843.Subsection (5) extends the scope of “the predecessor” in relation to the further transfer.
2844.Subsection (6) covers successive further transfers.
2845.Subsection (7) defines the period mentioned in subsection (1)(c).
[1990] STC 270.
