CTM06210 - Corporation Tax: company reconstructions: avoidance

CTA2010/S941 does not lay down a minimum period throughout which the predecessor and successor companies must be in common ownership (see CTM06010). Parties who are otherwise unconnected for tax purposes can exploit this feature. They arrange for the trade to appear to be in common ownership before and after its transfer from one company to another.

The procedure such parties normally adopt is as follows:

1. The trading company acquires a non-trading subsidiary.
2. The trading company transfers the trade to the non-trading subsidiary, and claims that the conditions of Section 941 are satisfied.
3. The trading company then sells the shares in that subsidiary to the new owners.

If these arrangements succeed the predecessor avoids balancing charges on the assets sold to the subsidiary, and the new owners acquire the predecessor's unused CTA2010/S45 losses along with the trade. A case where there may be exploitation of Section 941 can normally be identified by the sale of the subsidiary shortly after the transfer of the trade - often on the same day or within a matter of days or weeks.

The primary counter to exploitation is the relevant liabilities restriction under Section 945(- see CTM06250. If it is evident from the accounts and computations that:

• the amount of losses remaining after the application of this restriction,

• the amount of balancing charge which would arise taking into account market values of assets

are significant, it should be considered whether the conditions of Section 941 were properly satisfied. A critical test here is whether the subsidiary to which the loss-making trade was transferred began to carry on the trade before the predecessor company lost the beneficial ownership of the subsidiary's shares. If not, if the trade transfer took place at the same time as or after the share sale, Section 941 will not apply because the successor company will not be able to demonstrate that it commenced to carry on the trade at a time at which it was in common ownership with the predecessor company.

In such cases you should:

• Find out the sequence of events and the precise date and timing of each step.
• Get copies of any agreements for the transfer of both the trade and the shares.
• Obtain the files for both the predecessor and successor companies

and then seek further advice from CTIAA (Technical).

In some cases it may not be possible to ascertain whether the remaining losses are significant without obtaining additional information from the company. In such cases enquiries about the amount of the relevant liabilities restriction should be made at the same time as the request for copies of the agreements referred to above. However, care should be taken not to give the impression that it has been accepted that Section 938 does apply. Rather, the basis of the approach should be that it is necessary to quantify the losses which may transfer if, after examining the agreements and obtaining any additional information which may be necessary, you are able to satisfy yourself that the conditions for Section 938 to apply were genuinely met.

The ‘new approach’ brought out in the judgement of Lord Wilberforce in W T Ramsay Ltd v CIR 54TC101 at page 187 is not usually appropriate in these Section 938 exploitation cases. In its letter of 20 September 1985 the Board made the following comments.

It should also be considered whether the transferred losses should be cancelled under Section 674, whether or not a challenge over the conditions of Section 938 is made. There is guidance on Section 673 at CTM06300onwards.

There is guidance at CTM06400 on the situation where:

• a trade (or a part of a trade) is transferred under Section 938,
• the provisions of Section 944 and Section 948 apply, and
• there has been an earlier change of ownership of the predecessor company.