There are a number of anti-avoidance measures aimed at closing various loopholes in the corporate tax legislation. These are all targeted at loss buying – on top of the loophole closures, we have two new targeted anti-avoidance rules, or TAARs as we like to call them in the tax world.
The date on which these rules begin to bite is 20 March 2013, the date of this year’s Budget. The “loophole-closure” rules apply to changes in the relevant company’s ownership occurring on or after 20 March 2013. This is the same for the TAARs but there is an exception in the case where the “qualifying change” occurs as a result of an unconditional obligation entered into before 20 March 2013.
So what are the anti-avoidance measures?
As stated above, they are mainly targeted at transactions that are geared towards acquiring the tax losses of another company. These are:
A shell company is simply a company that is not carrying on a trade, property or investment business. The following types of tax deduction are restricted if the shell company changes ownership:
- Non-trading loan relationship debits relating to the period before the change in ownership;
- Carry across relief of non-trading loan relationships deficits following the change in ownership; and
- Non-trading losses on intangibles incurred before the change in ownership.
When a company changes hands, past trading losses are normally disallowed going forward, where there is a major change in the nature or conduct of the trade, or where the company has been effectively dormant, but then comes to life under its new owners.
This measure closes a loophole which makes it possible to circumvent this rule by effecting a suitable trade transfer within the company’s new group following the change in ownership.
For example, in the following scenario, trading losses of the business are transferred to Newco, together with the trade, but these losses may be unavailable when Newco joins P’s group. Whether or not this is the case, depends on how Newco conducts its trading operations under its new owners.
But if, after acquiring Newco, a further trade transfer were to take place:
In these circumstances it is – or rather was – possible to relax the restriction on loss relief. A technical analysis can be found in this article.
Group relief permits a company to surrender various types of tax deduction to other members in its group, thereby lowering the group’s overall tax burden.
Group relief can only be made if the deductions to be surrendered exceed the company’s “gross profits”. At present the gross profits figure doesn’t include profits that are imputed to the company by virtue of its shareholding in offshore companies that are designated as CFCs or “controlled foreign companies”.
This will now change. Accordingly, there is a potentially higher threshold before group relief can be surrendered.
This is designed to restrict the access to a company’s unused capital allowance pool following a change in ownership.
Currently there is a restriction where the amount outstanding in the plant and machinery pool exceeds the company’s balance sheet value. If there is a tax avoidance motive, the excess cannot be surrendered to members of the company’s new group. This rule covers situations where the company has gone to the dogs, and has nothing of value except this unused capital allowance pool.
The rules are being tightened in the following way:
- The restriction on the excess is to apply to all the business activities for which plant and machinery allowances are available – at present, only trading activities are covered. So from now on, property rental and investment businesses will be included;
- Some very complicated looking rules which effectively abolish the requirement of a tax avoidance motive before the allowances become unavailable. This is where the amount of the excess – and therefore the value of the pool – is large.
- Broadly, if the excess is above £50 million, the relevant allowances will be unavailable for group relief following a change of ownership – irrespective of whether a tax avoidance motive is involved;
- In the £2m-£50m band, the benefit has to be insignificant if the new owners want to claim group relief on the excess– what this means will be the subject of yet another mind boggling consultation;
- The safe zone is below £2m, (where the benefit is not likely to be large at all).
The new rules might have affected Vodafone’s ability to access tax losses following its acquisition of Cable and Wireless Worldwide (see the BBC article: Vodafone, C&WW, and a £5bn tax question)
This TAAR will apply where there has been a “qualifying change” in relation to a company C. This is essentially a change in ownership, as when the company is sold, but it can include other scenarios such as a change in control, without there being an out and out transfer to a third party buyer.
Claims for trading losses and group relief for certain deductions following the change are to be disallowed where there is a tax avoidance purpose. The types of deductions covered are:
- Trading expenses;
- Expenses of a property business;
- Management expenses of an investment business;
- Non-trading debits arising from loan relationships and derivative contracts; and
- Non-trading debits for intangibles such as IP and goodwill.
These deductions are caught in circumstances where they were “highly likely” to have been made following the relevant change. This is what HMRC says in its Consultation Document:
“28. The first condition is that at the date of the qualifying change it is highly likely that the deductible amount would be capable of being the subject of, or a deduction in a relevant group relief claim or claim… Factors to take into account in determining the “highly likely” test include arrangements made on or before the day of the qualifying change and any events on or before that day.
29. The second condition is that the main purpose or one of the main purposes, of arrangements connected with the qualifying change is to bring the deductible amount into account in such a relevant claim or to be to be the subject of such a relevant claim.
30. The Deduction Transfer TAAR would not affect any claims, for example, for relief for carried forward of a trading loss against subsequent trade profits (under section 45 CTA 2010). It means that the benefit of the deductible amount may still be realised in a manner consistent with the purpose of the losses rules.”
In other words, they are getting at those transactions that are geared towards claiming the deductions as the main objective – so much to the extent that a certain amount of “tax manoeuvering” (for want of a better expression) has to take place just days before the deal is done.
This is similar to the Deduction Transfer TARR, where profits have been transferred to company that has undergone a “qualifying change” such as a change of ownership or control. The idea is that the profits are transferred to the company to exploit the fact that the latter has deductions available to shelter income or gains. From HMRC’s Consultation document:
“34. The TAAR applies where the purpose or one of the main purposes of the profit transfer arrangements (i.e. arrangements which result in profits being transferred to C or a company connected with C) is to bring the deductible amounts into account to claim relief against the transferred profit.”
Two main conditions are required before the TAAR bites:
“37. The first condition is that at the date of the qualifying change it is highly likely that the deductible amount would be brought into account as a deduction in an accounting period ending at or after the qualifying change. The “highly likely” test is determined on the same basis as the equivalent test in the Deduction Transfer TAAR.
38. The second condition is that the purpose or one of the main purposes, of the “profit transfer arrangements” is to deduct the amounts for corporation tax purposes in any accounting period ending on or after the day of the qualifying change.”
Again, that phrase “highly likely” – the idea is that the whole transaction is geared towards transferring profits to an outsider who has the losses available to shelter them.
This brings us to the end of Corporate Tax Avoidance for today. There is one further anti-avoidance measure affecting close company loans to participators. This hasn’t been included in this article as this is a separate topic which doesn’t tie in with the loss buying theme. We shall look at this in a later article.
HMRC Technical Note – Corporation Tax – “loss loophole closure” Rules.
HMRC Draft Guidance Corporation Tax – “Targeted Loss Buying” – which sets out proposed legislation on capital allowance buying and the TAARs.
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