CTM80165 - Groups: group relief: arrangements: transfer of company to another group

ICTA88/S410, ICTA88/S410 (5)

Even though two companies otherwise satisfy the conditions for group relief at any time, the conditions are deemed not to be satisfied if certain 'arrangements' are in existence at that time. These arrangements are specified in ICTA88/S410 (1)(b)(i) to (iii)) and are described in CTM80175 onwards.

Here is an example of the type of arrangements to which the provision applies.

Example

A loss-making company attaches one of its subsidiaries to a profitable group:

• for long enough for that second group to benefit from the subsidiary's capital allowances on a major investment project,

but

• with a prior arrangement or undertaking that the subsidiary will then revert to the original (and real) parent.

However ICTA88/S410 applies in every case where arrangements exist. This includes the uncomplicated case where there is a simple sale of a subsidiary (whether or not any avoidance motive is present), which results in the subsidiary:

• leaving one group, and
• joining another or coming under different control.

The term 'arrangements' means arrangements of any kind whether in writing or not. Therefore the legislation covers both arrangements which are:

• binding on the parties,

and

• less formal in character and not necessarily binding.

Arrangements may be a matter of specific agreement or inherent in the capital structure of a company. Examples of inherent arrangements are where:

• the majority of the voting rights in a company is held other than by the purported parent, or
• where such majority control, though not at present so held, can be acquired through the exercise of conversion rights attaching to the company's loan or debenture stock.

See the judgement of Lord Bridge of Harwich in Pilkington Bros Ltd v CIR 55TC705 for the wide meaning given to the term 'arrangements' in this context.

The definition of 'control' for the purposes of ICTA88/S410 is in ICTA88/S840. The test is whether a person is able to secure that the affairs of the company, including the business of the company as managed by its Board, are conducted in accordance with his wishes. Usually shareholders cannot dictate to or overrule the Board on management matters entrusted to the Board. So a necessary element of control is the ability to determine the composition of the Board, or failing that, to appoint directors who have the power to impose their decisions on directors appointed by any other shareholder.

The voting rights shareholders can exercise in general meetings will normally include the right to vote on the appointment and removal of directors. However, it is not safe to assume that possession of the majority of voting rights will bring automatic control of the Board. In Irving v Tesco Stores (Holdings) Ltd 58TC1, the claimant did not have Boardroom control of the surrendering company because:

• more than half of the directors were to be appointed by the minority shareholder and could not be removed without his consent, and
• the directors appointed by the claimant could not impose their decision on the directors appointed by the minority shareholder.