HM Revenue and Customs Brief 59/08
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Issued 17 December 2008
Capital Gains degrouping charge - response to enquiries following decision
in Johnston Publishing (North) Ltd versus HM Revenue & Customs (HMRC)
This Brief outlines our view of what it means to be 'associated companies'
for the purposes of the exception to the degrouping charge, following the Court
of Appeal decision in Johnston Publishing.
The case of Johnston Publishing (North) Ltd versus HMRC concerns the
degrouping charge which may arise when a company leaves a group of companies at
a time when it owns an asset that had been acquired from a fellow group company
(Section 179 Taxation of Chargeable Gains Act 1992).
The Court of Appeal decision confirmed our view of the exception to the
degrouping charge for 'associated companies' in Section 179(2): the transferor
and transferee company are required to be 'associated' at the time of the
intra-group transfer as well as at the time they leave the group.
Now that the Court of Appeal decision is final, we have received enquiries
about how this decision affects its view of what it means to be 'associated
companies' for the purposes of the exception.
Our view of what it means to be 'associated companies' for the capital gains
The question of what may constitute 'two or more companies (that) by
themselves form a group of companies' for the purposes of Section 179(10) was
not directly in point in the Johnston case and was not fully explored.
It is necessary to refer back to the basic definition of a capital gains
group at Section 170 TCGA when considering whether any company(ies) other than
the transferor and transferee must be present in the 'sub-group' of companies at
the time that it leaves the group. We also consider that the question of whether
companies are associated arises in respect of each potential degrouping charge
and that regard must be had to the use of the words 'by themselves' in Section
179(10). Therefore, in this context, the 'sub-group' in point would comprise the
minimum number of companies necessary to establish the required group
Thus, as noted in the decision, if transferor A and transferee B can only be
considered to form a group by reference to some other company C at the time of
the transfer then A, B and C must also form a group at the time they leave. That
is the 'sub-group' to be considered.
This situation will arise, for example, where A and B are sibling
subsidiaries of C.
We take the view that the use of the words 'by themselves' in Section 179(10)
means that the presence, or absence, of any company(ies) other than
A, B and such other companies that are required to identify a group relationship
between A and B would not prevent S179(2) applying.
- P is the principal company of a capital gains group. Q is one of its 100
per cent subsidiaries.
- Q has a 100 per cent subsidiary R which in turn has two 100 per cent
subsidiaries A and B.
- A also has an 80 per cent subsidiary S.
- A transfers an asset to B; Section 171 means no gain or loss arises.
- Later, R is liquidated and its shareholdings passed up to Q.
- S is then transferred elsewhere in the group.
- B then acquires a new 100 per cent subsidiary, T.
If P sells Q, along with its subsidiaries at the time, to a third party then
we would consider that there will be no degrouping charge in respect of the
asset transferred from A to B. This is because Q, A and B formed a group of
companies by themselves when the asset transfer took place (A
and B were both 100 per cent indirect subsidiaries of P) and at
the time when P left the main group (A and B were both 100 per cent direct
subsidiaries of Q).
Section 170(2) defines a group by reference to a principal company and its 75
per cent subsidiaries and Section 170(10) provides that a group remains the same
while the principal company remains the same. Applying these to the provision at
Section 179(10), we would expect the sub-group to remain defined by reference to
the same company from the time of the asset transfer to the time the companies
leave the group.
We will update page 45,456 of the Capital Gains Manual to state that the view
expressed there has been confirmed by the Court of Appeal. Our interpretation of
what it means to be 'associated companies' will also be added to the manual.
About the Author
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Article Published/Sorted/Amended on Scopulus 2008-12-18 12:48:01 in Tax Articles