BCL Law Notes > University Of Oxford (Bcl) BCL Law Notes > Corporate and Business Tax Law (BCL) Notes

6. Loss Relief Corporate Groups Notes

This is a sample of our (approximately) 47 page long 6. Loss Relief Corporate Groups notes, which we sell as part of the Corporate and Business Tax Law (BCL) Notes collection, a Distinction package written at University Of Oxford (Bcl) in 2014 that contains (approximately) 506 pages of notes across 11 different documents.

Learn more about our Corporate and Business Tax Law (BCL) Notes

The original file is a 'Word (Docx)' whilst this sample is a 'PDF' representation of said file. This means that the formatting here may have errors. The original document you'll receive on purchase should have more polished formatting.

6. Loss Relief Corporate Groups Revision

The following is a plain text extract of the PDF sample above, taken from our Corporate and Business Tax Law (BCL) Notes. This text version has had its formatting removed so pay attention to its contents alone rather than its presentation. The version you download will have its original formatting intact and so will be much prettier to look at.

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law


1. UK Taxation of Groups - General Issues A. Operating Structures B. Definitions C. Share Ownership / Beneficial Ownership

2. Group Relief for Income Losses A. The Old "Group Income Election" B. When is the Relief Available?
C. Claim for Group Relief D. Operation of the Relief F. EU Dimension: ICI v Colmer E. EU Dimension: Marks & Spencer F. EU Dimension: Unresolved Issues G. EU Dimension: Steele v EVC H. Anti-Avoidance

3. Policy Rationales A. Policy Rationales B. Future Policy

4. Group Relief from Capital Gains Tax A. What is a Group for CGT?
B. Transfer of Assets: Intra-Group Transfers C. Transfer of Assets: Companies Leaving Group / Exit Charge (Pre-2011) D. Transfer of Assets: Companies Leaving Group / Exit Charge (Post-2011) E. Capital Losses: Group Relief F. Capital Losses: Losses pre-Membership / Restrictions on Buying Losses G. Capital Losses: Roll-Over / Roll-Around Relief for Business Assets H. Capital Losses: Appropriation to Trading Stock I. The "Substantial Shareholding Relief"

5. BCL Past Exam Questions & Essay Plans __________________________________________________________________________________

1. UK Taxation of Groups - General Issues

Groups of companies present special tax problems because they may form a single entity in economic terms but may have been set up to make use of the separate legal entity doctrine Should tax law permit special treatment of groups or insist on separation, since this is what the ultimate owners have chosen for company law purposes, and possibly commercially?
The systems commonly found to deal with this are: o o o

Consolidation (Organschaft) Group Contribution Group Relief (as in the UK) 1

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

These issues are exacerbated when there are multi-national groups: what about a desire to set off losses made by one company in the group in country A, against profits made by another member of the group in country B - see the Marks and Spencer litigation below

A. Operating Structures

1. GROUPS v DIVISIONS: A single company -a restaurant business - may have two divisions: the catering portion and the restaurant outlet. From a tax perspective the company will be treated as a single accountable entity. The alternative is to form two separate companies, A and B, with a holdings company (H) which owns both. A, B and H are separate legal entities such that the insolvency of B will not necessarily affect the solvency of A or H.

2. COMMERCIAL ADVANTAGES: Different enterprises can be segregated into different units each with separate identity and limited liability, under a group structure. Each trade will usually have separate management, and in the event of a decision to sell one part of the enterprise, the appropriate company can be sold.

3. TAX DISADVANTAGES: Forming a group may be disadvantageous because the various grouping provisions may restrict certain loss reliefs otherwise available to single entities. Another problem may be the restriction of the small profits rate: the companies will be associated and the upper and lower limits for the rate will be divided between them. The following cases deal with the purpose of expenditure in the group context and the difficult interface between tax and other purposes behind forming groups (X-Reference with expenses notes) Garfoth v Tankard Carpets

The taxpayer company carried on the trade of carpet manufacture; an associated company (JLT) supplied the taxpayer raw materials and handled its products and sales, and JLT got a loan from a bank guaranteed by its subsidiary (TPL); TPL guaranteed in turn by taxpayer by way of floating charge over one of its properties so as to secure TPL's liabilities After both JLT and TPL went into receivership, the taxpayer sold the secured property to a third party purchaser for £40,000, who mortgaged the property back to the taxpayer Thus the property, now belonging to the purchaser, was mortgaged both to the bank (taking priority) and to the taxpayer, to secure the purchaser's payment of £40,000 to the taxpayer The £40,000 plus interest was to be paid into the bank's account to secure TPL's liabilities


Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

After full repayment of the £40,000, plus interest of £1920, the taxpayer claimed that in the computation of its profits, it was entitled to deduct the £41,920 under the bank's charge, since the loss incurred under the guarantee of TPL was wholly and exclusively for the purposes of the taxpayer's trade under Section 34 ITTOIA 2005 and a revenue expense

Walton J held that the sum did not fall to be deducted from the computation of the profits because the Commissioners found as fact that decision of the taxpayer to grant security to the bank was for the interest of all 3 companies jointly; thus precluding an expenditure "wholly and exclusively" for the purposes of the taxpayer's trade.

Walton J

I do not doubt that it was in the "best interests" of the taxpayer to support JLT like this, but this finding leaves at large whether the support was afforded for the sole benefit of the taxpayer, or in part because it enabled JLT - in which they were all interested - a loan…
Nevertheless, the Commissioners found as a matter of fact that "the interests of all three were considered together when the decision to grant security was made" If the interests of all three were considered together, then JLT and TPL's interests must have been considered at the same time as the taxpayer's, and plainly it was in the interest of both the other companies that the security be granted by the taxpayer It appears quite clear that the "wholly and exclusively" test cannot be satisfied…
Although it is for nobody but the taxpayer's directors to say what was in their minds, it takes superhuman effort to rule out entirely the possibility of benefit to only one's own company…
I would expect that in 99 out of 100 case the correct factual finding is that fact found in the present case: the interests of all the companies in the group were considered together

Robinson (Inspector of Taxes) v Scott Bader Ltd

The taxpayer company acquired a 100% interest in a French company and then seconded one of its employees, F, to France to act as a manager and provide the company with skills The taxpayer claimed to deduct F's salary, expenses and social costs as expenditure incurred wholly and exclusively for the purposes of the taxpayer company's trade The Special Commissioners found as a fact that the taxpayer had undertaken the rescue of the French company to further its own business in Europe, and determined that the payment to F was an allowable deduction in computing its profits under Section 34 ITTOIA 3

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

The Court of Appeal held that the Commissioner's decision was perfectly reasonable; the payments made to F were therefore for the purposes of the taxpayer's trade

Waller LJ

In my judgment, "purpose" within the statute contains an ingredient of intention, and it perhaps impossible to determine this without an element of subjectivity…
The payments made to F here could not possibly be solely for the benefit of the subsidiary; either the payments were made partly for that purpose and partly for the taxpayer, or it was made solely for the purposes of the taxpayer company In describing the rescue operation as being to further the taxpayer's business in Europe, this is a finding strongly in favour of the real purpose being for the trade of the taxpayer While I am not prepared to say that "business" could not include that of the subsidiary, in my opinion it could certainly be construed as meaning the taxpayer's, and this in my view is the correct construction in this case No doubt the inevitable result of sending F to France would be to improve the financial position of the French company, it does not follow that this was the real purpose of the expenditure; it was one of the results - perhaps an inevitable one - but not the purpose

Vodafone v Shaw (Inspector of Taxes)

The taxpayer, Racal Electronics, sought a licence to operate mobile phone networks, but one of the conditions of the grant was that no one company could run such a network Therefore Racal formed two subsidiaries Racal had also made an agreement with an American company, Millicom Inc., which later proved to be a liability when new technology became available, and as a result the taxpayer agreed to sever its agreement with Millicom in consideration for £30m The taxpayer sought to deduct that sum as a trading expense, thereby producing a loss which it proposed to surrender to other members of the group The Commissioners and Jacob J concluded that the purpose was to benefit all three companies and not just the taxpayer, so that none of the expense was deductible; The Court of Appeal reversed their decision on the ground that the real purpose was to benefit the taxpayer's own trade exclusively, and not the group as a whole

Millett LJ


Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

The trade of a parent company is for tax purposes distinct from the trade of its subsidiary - the two companies are separate taxable persons, and the trade or business of one is not the same as the trade or business of the other

The Commissioners said that the evidence was that the directors of the taxpayer company gave no conscious thought to the position of the two subsidiaries i.e. the directors of the subsidiaries were not consulted about the decision to abandon the agreement with Millicom They found that the directors of the taxpayer company regarded the taxpayer with its two subsidiaries as one functioning entity as far as the relationship with Millicom was concerned They then concluded that the cancellation payment was to benefit the trading position of the group as a whole - But this conclusion does not follow from the facts as found Their reasoning was that if (a) the entity in question consisted of three separate companies then (b) (conclusion) the purpose was to benefit all three companies - this is a fallacy This is easily demonstrated: if the group contained a fourth company which could not possibly derive any benefit from the transaction, the reasoning would lead to the absurd conclusion that the directors intended to benefit it also

The correct conclusion is that the directors intended to benefit the trading entity and not that they intended to benefit all the companies; they did not set out to benefit any particular one of them

B. Definitions

The rules are complex but without them it would be easy to create groups by issuing shares with few rights, thus removing the legal substance from the economic substance further The legislation is an example of a detailed approach to give recognition to economic substance: is this better than a broad-style technique?

1. SUBSIDIARIES: (Section 1154 CTA 2010) o o o

51% SUBSIDIARY: B is a 51% subsidiary of A if more than 50% of B's ordinary share capital is owned directly or indirectly by A. 75% SUBSIDIARY: B is a 75% subsidiary of A if at least 75% of B's ordinary share capital is owned directly or indirectly by A 90% SUBSIDIARY: B is a 90% subsidiary of A if at least 90% of B's ordinary share capital is owned directly by A.

This can be contrasted with the position under Section 1159 CA 2006 where a company is a subsidiary of another if the latter holds a majority of voting rights in it or is a member of it and can appoint/remove a majority of its board, or is a subsidiary of a subsidiary of that other company. Under Section 1159(2) CA 2006, a 5

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

company is a wholly owned subsidiary if it has no members except its parent and the parent's other wholly-owned subsidiaries. And in defining "Parent Undertaking" and "Subsidiary Undertaking" Section 1162 CA 2006 talks of the "right to exercise a dominant influence" by virtue of the subsidiary's articles or of a control contract, or "managed on a unified basis"

2. ORDINARY SHARE CAPITAL: (Section 1119 CTA 2010) "Ordinary share capital in relation to a company, means all the company's issued share capital (however described), other than the capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company's profits" Thus loan stock and non-participating preference shares are not treated as ordinary share capital unless convertible into or giving an option to acquire shares or securities carrying a right greater than that of a dividend at a fixed rate. However, shares may be ordinary share capital even if they carry no voting rights. Ownership of the share capital must be beneficial but may be direct or indirect (see below)

3. CONTROL: (Section 1124 CTA 2010) "Control means the power of a person to secure that the affairs of a company are conducted in accordance with his wishes by means of (a) the holding of shares or possession of voting power or (b) as a result of the articles or any other document regulating the company…" C. Ownership of Ordinary Share Capital / Beneficial Ownership

Section 1154(5) CTA 2010 says that a parent can own a subsidiary "directly or indirectly or partly both," and indirect ownership is defined by Section 1155 CTA 2010

Section 1155 Corporation Tax Act 2010 - Indirect Ownership of Ordinary Share Capital "(1) For the purposes of this Chapter ordinary share capital is owned indirectly by a body corporate if it is owned through another body corporate or other bodies corporate.

(3) Suppose that 3 or more bodies corporate are ordered in a series such that each body in the series (other than the last) owns ordinary share capital of the body immediately below it in the series.


Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

(4) If [C] is a body that is below, but not immediately below, A in the series, A is said to own ordinary share capital of [C] through each body corporate that is between A and [C] in the series…"

Indirect ownership is determined by multiplication: if A owns 80% of the OSC of B, and B owns 70% of the OSC of C, A is taken to own 56% of C (0.8 x 0.7 = 0.56), thus C is a 51% subsidiary of A. But if B owned only 60% of C, A would only own 48% of C.

If P owns 70% of Q, and Q owns 30% of M (indirect = 21%) but P also owns 30% of M (direct = 35%), then P's ownership of M is a mixture/addition of 21% + 30% = 51% subsidiary

Section 1154(6) CTA 2010 - Meaning of Subsidiary "…(6) In this Chapter references to ownership are to be read as references to beneficial ownership."

See WOOD PRESERVATION v PRIOR and Sainsbury v O'Connor on LOSSES notes, but to restate the jurisprudence: Wood said that beneficial ownership is not synonymous with equitable ownership viz. not simply a matter of specific performance under a contract Instead, one must show that one owns "more than the legal shell" or owns the benefits (in a real sense) of the rights which would normally attach to the shares But Sainsbury clarified that this does not mean showing the likelihood of dividends being paid, but the likelihood of receiving payment had dividends been paid, and since Sainsbury's would receive payment, it "retained almost all the rights which would normally attach…"

Comment - Berg (1992 LQR)

The essential reasoning in Sainsbury v O'Connor, in distinguishing Wood Preservation was: i. ii. iii. iv.

In the group relief provisions, beneficial ownership means equitable ownership An equitable interest does not pass to the holder of the option unless exercised The equitable interest cannot be suspended between the grantor and grantee Thus, until the option is exercised, the equitable interest (and thus the beneficial ownership) remains with the grantor i.e. Sainsbury

The problem with the reasoning is in points 2 and 3, which were not based on any examination of how an unexercised option affects the equitable interest in an asset In Southern Railway v Gomm, it was said that the grantor's "estate is taken away from him without his consent… the covenant giving an option must give the other that interest in the land"; in Pritchard v Briggs, the 7

****************************End Of Sample*****************************

Buy the full version of these notes or essay plans and more in our Corporate and Business Tax Law (BCL) Notes.