Revenue Note for Guidance

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Revenue Note for Guidance

412 Qualification for entitlement to group relief

Summary

The abuse of group relief is prevented by providing that the relief is not available unless the parent company not only satisfies the requirement of holding 75 per cent (or 90 per cent in the case of a parent company owned by a consortium) of the ordinary share capital of the subsidiary but also satisfies 2 other tests. These tests are that the parent company be beneficially entitled to not less than —

  • 75 per cent (or 90 per cent for consortium relief purposes) of the profits available for distribution to equity holders, and
  • 75 per cent (or 90 per cent for consortium relief purposes) of the assets available for distribution to equity holders on a winding-up.

The reason for these tests is that the ordinary issued share capital might be nominal only in value when compared with the total capital of a company and these nominal shares held by the “parent” company could, in the absence of this provision, give rise to a claim to group relief even though the major proportion of “capital” in the “subsidiary” company was held by a company totally unconnected with the “parent” or “subsidiary” company. In this way, the benefit of losses and capital allowances unabsorbed could be transferred for a consideration, from one group of companies or (consortium) to another unconnected company or group of companies.

Details

Entitlement to group relief

(1) Group relief is not available unless a company not only satisfies the 75 per cent holding test but is also beneficially entitled to 75 per cent of the profits available for distribution to equity holders and to a like share of the assets available for distribution on the winding up of the company.

Entitlement to consortium relief

(2) Where a member of a consortium is entitled to differing percentages of the ordinary share capital, profits and assets of the surrendering company, it can claim relief by reference to the lowest of these percentages only.

(3) Tests similar to those which apply in the case of group relief apply where the company owned by a consortium is a holding company having a holding of 90 per cent in a trading subsidiary which surrenders losses to the consortium members. The 90 per cent percentage test in such a case applies not only to ordinary share capital but also to profits available for distribution and to assets available on winding up.

There is a provision for averaging where any of these percentages fluctuate during an accounting period.

Example

Company A holds 75% of the issued shares of company B. An unconnected company X holds the balance of the shares in B Ltd. By reference to the share test of ownership, A and B Ltd form a group and B Ltd could claim a set-off of any loss incurred by A Ltd. However X Ltd, in addition to owning 25% of the shares of B Ltd has, by reason of independent transactions with B Ltd, a majority material interest in that company so that if B Ltd were to be wound up 75% of the distribution on the winding up would not pass to A Ltd. If group relief were to be allowed in such instance, the benefit would accrue to X Ltd (that is, the benefit of the loss relief would pass outside the “group”). The section prevents this by providing that group relief is only available where the parent company not only satisfies the requirement of holding 75% of the ordinary share capital of the subsidiary but is also beneficially entitled to 75% of the profits available for distribution to equity holders and to 75% of the assets available to equity holders on a winding up of the subsidiary.

Relevant Date: Finance Act 2019