Corporation Tax on Chargeable Gains – Companies Leaving Groups
13 August 2008
The Court of Appeal has recently upheld the High Court decision in an appeal against the decision of the Special Commissioners in Johnston Publishing (North) Limited v Revenue and Customs Commissioners.
The case concerns de-grouping charges which bite where a group company has received an asset on a no gain no loss basis from another group company and then leaves that group. The company leaving the group is charged to corporation tax on chargeable gains to the extent there would have been a charge levied on the transferor company.
There is an exception from this de-grouping charge where both the transferee and transferor companies leave the group together as "associated companies".
The Special Commissioners and the High Court confirmed that the exemption only applies where both the transferee and the transferor companies are associated not only at the time they leave the group but also at the time of the intra-group asset transfer.
At the time of the intra-group transfer, the transferee and transferor company in Johnston Publishing were not associated. At the time of the transfer, the transferor company was a member of the same group of companies as the transferee company but neither company held shares in the other nor was entitled to dividends or assets of the other on a winding up. Following the transfer of assets from the transferor to the transferee the transferee acquired the entire issued share capital of the transferor company.
The requirement to be an "associated company" for the purpose of the legislation relating to de-grouping charges is that the transferee and transferor company must by themselves be capable of forming a group of companies. Effectively therefore one of the companies must hold the other.
Although therefore the transferee and the transferor company were associated at the time they left the group they were not associated at the time of the intra-group transfer and therefore the exemption from the de-grouping charge could not apply.
The purchasers of a sub group of companies should, following this case, carefully consider the circumstances in which those companies acquired assets and should take appropriate contractual protection if an unexpected charge is to be avoided.