Mar 222013

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:

Restriction on loss relief when a shell company changes ownership;

Tightening of the rules on claiming trading losses following a change in corporate ownership;

Restrictions on group relief – amendment of “gross profits” to include CFC profits;

Restrictions on capital allowance buying;

A new Deduction Transfer TAAR; and

A new  Profit Transfer TAAR.

We shall look at these new rules in the above order.

Restriction on loss relief – shell companies

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.

Restriction on trading losses following a 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.

Restriction on group relief – amendment of “gross profits” to include CFC profits

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.

Restrictions on capital allowance buying

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)

New Deduction Transfer TAAR

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.

New Profit Transfer TAAR

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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Satwaki Chanda

Satwaki Chanda

Satwaki Chanda is a tax lawyer with a First Class degree in Mathematics. Called to the Bar in 1992, he is the Editor of Tax Notes.
Satwaki Chanda

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  4 Responses to “Budget 2013 – Corporate Tax Anti-Avoidance”

  1. Satwaki would the new legislation stop the transfer of losses from the acquired (north sea oil) company to another (north sea oil) company – assuming both companies are uk registered and are both in the same business of oil and gas exploration and production, and both are cash flow positive – and both are expected to remain the same type of businesses over the next three years?

    • Satwaki Chanda

      Hello Joe – Happy Easter.

      It is very unlikely that the new or old legislation would stop losses being transferred in this type of situation.

      The key is what the acquired company is doing? If it’s just carrying on as normal, doing the same sort of things as it did before it was acquired, the losses can still be used. It’s when there’s a major change in the trade that the restrictions bite.

      I’m going to be shortly publishing two articles on the rules for trading losses and what constitutes a major change. There’s also a more technical article here. if you’re interested (though I rather hope you’ll be enjoying the rest of your Easter holiday, cold as it is!)

      • Thank you Satwaki – when I was deciphering the revised HMRC notes of the 28th, all I could see what the intention was. Best wishes, Joe

        • You can find the new article on buying trading losses here. This is actually Part One of a two part series. I hope to have Part Two finished shortly.

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