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When you run a business, you may decide to have a group of companies. Notably, there are tax implications from transactions between group companies, and knowing these are essential to avoid legal consequences. This article will explore the position of two main types of intra-group transfers between companies in the same tax group: income assets and capital assets transfers.
As a business owner, you must be clear on the tax implications for transactions between group companies if you have these as part of your business. Tax implications are legal duties for business owners, so it is essential to get them right.
This article is Part Two of our series on tax law for group reorganisations and intra-company transactions. Part One provided an overview of the critical legal and tax concepts that arise during group reorganisations. This article follows on from that, assuming you have read the former article. If you have not, you may find it helpful to read it before starting on this one.
An Example: ConsultCo
Imagine ConsultCo has three business divisions:
- management consulting, which is its most established and profitable division;
- recruitment consulting; and
- ConsultCo Software Solutions (“CCSS”) provides software solutions to third parties and services to the entire business group’s internal IT and software needs.
Each division is its own subsidiary company, the shares of which are owned by a parent company (“Consult MidCo”), which a holding company owns. CCSS is part-owned by another company called TechCo, which holds 49% of the company; Consult Co owns the rest. The subsidiary company runs CCSS’s operations, of which MidCo owns 80%.
Consult MidCo owns most of the business’ valuable assets, which it either leases or provides on the licence as needed to the group subsidiaries. The exceptions are specific branding and intellectual property rights related to CCSS, which are all owned by CCSS’s HoldCo.
For clarity, below is a structure chart which sets out the group structure and extent of third-party ownership in CCSS.
Tax Groups
In terms of tax implications for transactions between group companies, the law may recognise both companies as the same entity for tax purposes if a company is in the same tax group. If two companies are not part of the same tax group, then any transaction between them will be treated like a transaction with a third party. In most cases, this means your business will have to pay tax.
Whether or not two or more group companies are part of the same tax group depends on the following:
- the kind of transaction in question; and
- the extent of relief or liability the law permits.
Different transactions (or kinds of relief) impose different requirements for group companies to acquire the same tax group status. In other words, the law may recognise ConsultCo Software Solutions Ltd and Consult MidCo Ltd as part of the same tax group for one transaction and not the other, depending on what you transfer.
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Identifying a Tax Group
To determine if two or more companies are part of the same tax group, there are four questions to ask:
- Is ownership direct or indirect?
- Which shareholding threshold applies to the parent company?
- Does the parent company beneficially own the shares in the subsidiary?
- Does it pass the economic ownership test?
Regarding Question 2, the three most essential shareholding thresholds for tax purposes are:
- 51% subsidiary;
- 75% subsidiary; and
- 90% subsidiary.
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Types of Transactions
We can broadly divide intra-group transactions as either being transfers of:
- income assets; or
- capital assets.
In both cases, the default position is that the selling company must pay tax on any money made when it disposes of (i.e. transfers) an asset to another party. The exception is when both companies are in the same tax group.
Income Assets
An income asset is usually any asset your business produces to sell to customers or clients. The simplest example would be the goods a manufacturer produces for its customers.
Group Relief
Group relief is one of the most common income assets businesses transfer between group companies. For legal and taxation purposes, group relief is considered an income asset.
As a general rule of tax law, a company does not pay tax when its losses exceed its gains. Group relief, however, allows a company that has lost money through trading in a particular accounting period (i.e. March 2022 to March 2023) to transfer its losses to another group company.
If Recruitment Consulting Co Ltd (RCCo) lost £50,000 in one accounting year, whereas Management Consulting Co Ltd (MCCo) made £200,000 in profit and they are in the same tax group, RCCo can transfer this income asset — the group relief — to the wider tax group to offset MCCo’s tax liability. The effect is as if MCCo only made a profit of £150,000.
In this case, the law calls RCCo the “surrendering company” and MCCo, the “claimant”.
Eligibility
The surrendering company must either be:
- a 75% subsidiary of the claimant company; or
- both the claimant and subsidiary companies must be 75% subsidiary of a third.
In ConsultCo’s case, RCCO could transfer its group relief to MCCO (and vice versa) because they are a 75% subsidiary, as MidCo owns 100% of shares in both. CCSS HoldCo could not transfer any loss through group relief, though the CCSS subsidiary could because MidCo owns 80% of the shares in the company.
Capital Assets
A capital asset is any significant piece of your business property. Common examples include land, shares, buildings, and equipment.
If they are in the same tax group, transferring a capital asset between one group company to another will be treated as tax neutral. To be part of the same tax group, there must be:
- a principal company (Consult HoldCo Ltd);
- that owns a 75% subsidiary (MidCo); and
- also owns a 75% subsidiary (MCCO, RCCO, and ConsultCo Software Solutions Ltd, but not CCSO HoldCo)… and so on.
In ConsultCo’s case, the recruitment and consulting subsidiaries can move assets freely up to MidCo and HoldCo and directly to one another. CCSO HoldCo is not part of the tax group because it is not 75% of MidCo.
Further Considerations
A group subsidiary will not form part of the tax group for capital assets if the principal’s indirect shareholding is less than 51%.
Therefore, if Management Consulting Co Ltd owned a series of other subsidiaries, as represented in the chart below, MCCo A and MCCo B would be part of the principal company’s (Consult HoldCo) tax group. This is because the principal’s shareholding in MCCo A is indirectly 75% and 56.25% in MCCo B (75% x 75% = 56.25%, which is greater than 51%).
However, MCCo is not part of the tax group because HoldCo’s indirect holding is 42.18%. In this case, MCCo may owe tax if it transfers a capital asset to one of the companies in the tax group.
Degrouping Group Companies
If ConsultCo sold off its management consulting division a year after transferring substantial capital assets to MidCo, by “degrouping” these companies, a tax liability may arise. The law surrounding liability for a degrouping gain or loss is complex, and we recommend seeking legal advice on it.
Intangible Property
If you intend to transfer intellectual property rights or loan relationships to a group company, the law treats these as broadly similar to capital assets. Therefore, provided they are of the same tax group, the transfer is tax neutral. There can, however, be slight variations, so you should always seek proper advice.
Key Takeaways
The law surrounding potential tax liability for intra-group transfers and reorganisations is complex. Generally, provided two group companies are part of the same tax group, the law considers the transaction tax neutral, so no liability arises. What makes up a tax group depends on the kind of transaction in question, and there are different rules for income assets and capital assets.
If you need help with the tax implications of transactions between group companies in the same tax group in England, our experienced corproate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
In the context of an intra-group transfer, companies that are a part of the same tax group do not owe any taxes on the disposal of their assets if they transfer them to another member of the same tax group.
The rules depend on which sort of asset you are transferring.
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