LLM4250 – Corporate members: restriction of group relief
The scheme of group relief depends for its integrity on the
fact that losses and other amounts available for relief can only be
surrendered against profits of a corresponding period. And as soon
as arrangements for transfer of a company to another group or
consortium come into existence, an accounting period is treated as
coming to an end (ICTA88/S410). This provision, coupled with the
disallowance of trading losses in certain circumstances where there
is a change in ownership of a company (ICTA88/S768) broadly ensure
that the potential tax benefit attaching to trading losses remains
with the economic undertaking or group which gave rise to them; in
other words they prevent the losses being sold to an economically
unconnected concern.
However, prior to the enactment of FA94/S227A by FA07/S33 the
unique feature of Lloyd’s 3- year accounting (
LLM2200 and
LLM2210) was an exception. The effect of
this is that a loss in year 1 does not become tax effective until
year 4, providing ample time for a loss making Lloyd’s
corporate member that is leaving the market to be sold to a group
with no economic interest in it other than the benefit of the tax
losses. The company can join the new group in, say, year 3, in time
for the losses, which are by then established, to become effective
in year 4. The concern is focused on companies leaving the
Lloyd’s market, because if they are loss making companies
that are continuing, it is presumed that any acquiring group is
content to be exposed to continuing insurance risk, which may
justify the benefit of relief.
The legislation operates by creating a ‘group relief
continuity condition’, which, in addition to the normal
requirement for the claimant and surrendering companies to be in
group relationship for the surrender period, also requires the
Lloyd’s corporate member (as surrendering company) and the
claimant company to meet the usual group or consortium relationship
conditions (ICTA88/S402 (2) or (3)) for the period
- beginning with the last day of the last active underwriting year of the corporate member, and
- ending with the first day of the first underwriting year in which the losses of the last active underwriting year are declared (under the declaration basis – see LLM4060).
The reference to ‘first underwriting year’ ensures
that, where the surrendering company goes into run-off, and so
declares in several years, it is the first of these that is
counted. The effect of this is to require the group or consortium
relationship to be maintained from the end of the year in which the
loss was actually sustained until the end of the claim period. This
prevents the use of foresight as described above.
‘Last active underwriting year’ means the last
underwriting year (calendar year) in which significant underwriting
activities take place. This prevents the legislation being avoided
by continuing the trade in an attenuated form.
The legislation applies where the required group or
consortium relationship between the claimant and surrendering
companies is first created on or after 21 March 2007.
