SCHEDULE 18A

Restriction on Set-off of Pre-entry Losses

Section 626A

Application and construction of Schedule

1.

(1) This Schedule shall apply in the case of a company which is or has been a member of a group of companies (in this Schedule referred to as “the relevant group”) in relation to any pre-entry losses of the company.

(2) In this Schedule “pre-entry loss”, in relation to a company, means—

(a) an allowable loss that accrued to the company at a time before it became a member of the relevant group in so far as the loss has not been allowed as a deduction from chargeable gains accruing to the company prior to that time, or

(b) the pre-entry proportion of an allowable loss accruing to the company on the disposal of a pre-entry asset,

and for the purposes of this Schedule the pre-entry proportion of an allowable loss shall be calculated in accordance with paragraph 2.

(3) In this Schedule “pre-entry asset”, in relation to a disposal means, subject to subparagraph (4), an asset which was held ^[2]>by a company at the time immediately before the company became^<[2][2]>at the time immediately before the relevant event occurred in relation to it by a company which is or was^<[2] a member of the relevant group.

^[3]>

(3A) (a) In this paragraph references to the relevant event occurring in relation to a company—

(i) in a case in which—

(I) the company was resident in the State at the time when it became a member of the relevant group, or

(II) the asset was a chargeable asset in relation to the company at that time,

are references to the company becoming a member of that group;

^[8]>

(ia) in a case in which (whether or not paragraph (a)(i)(I) also applies)—

(I) the company is an SE or an SCE resident in the State, and

(II) the asset was transferred to—

(A) the SE as part of the process of its formation by the merger by acquisition of two or more companies in accordance with Articles 2(1) and 17(2)(a) or (b) of the SE Regulation (within the meaning of section 630), or

(B) the SCE as part of the process of its formation by merger in accordance with Article 2 of the SCE Regulation (within the meaning of section 630),

are references to the asset becoming a chargeable asset in relation to the SE or (as the case may be) the SCE or, if at the time of the formation of the SE or (as the case may be) the SCE the asset was a chargeable asset in relation to a company which ceased to exist as part of the process of the formation of the SE or (as the case may be) the SCE, to the asset becoming a chargeable asset in relation to that company;

^<[8]

(ii) in any other case, are references to whichever is the first of—

(I) the company becoming resident in the State, or

(II) the asset becoming a chargeable asset in relation to the company.

(b) For the purposes of paragraph (a), an asset is a “chargeable asset” in relation to a company at any time if, were the asset to be disposed of by the company at that time ^[9]>or, if the company is an SE or an SCE, by reason of the asset having been transferred to the SE or (as the case may be) the SCE on its formation^<[9], any gain accruing to the company would be a chargeable gain.

^<[3]

(4) An asset is not a pre-entry asset in relation to a disposal where—

(a) the company which held the asset at the time ^[4]>the company became a member of the relevant group^<[4][4]>the relevant event occurred in relation to it^<[4] is not the company which makes the disposal, and

(b) since that time the asset has been disposed of otherwise than by a disposal to which section 617 applies,

but, without prejudice to subparagraph (8), where, on a disposal to which section 617 does not apply, an asset would cease to be a pre-entry asset by virtue of this subparagraph and the company making the disposal retains any interest in or over the asset in question, that interest shall be a pre-entry asset for the purposes of this Schedule.

(5) References in this Schedule, in relation to a pre-entry asset, to the relevant time are references to the time when ^[5]>the company by reference to which the asset is a pre-entry asset became a member of the relevant group^<[5][5]>the relevant event occurred in relation to the company by reference to which that asset is a pre-entry asset^<[5] and for the purposes of this Schedule—

(a) where ^[6]>a company has become a member of the relevant group^<[6][6]>a relevant event has occurred in relation to a company^<[6] on more than one occasion, an asset is a pre-entry asset by reference to the company if the asset would be a pre-entry asset by reference to the company in respect of any one of those occasions, and

(b) references in the following provisions of this Schedule to the time when ^[7]>a company became a member of the relevant group^<[7][7]>a relevant event occurred in relation to a company^<[7], in relation to assets held on more than one such occasion as is mentioned in clause (a), are references to the later or latest of those occasions.

(6) Where—

(a) the principal company of a group of companies (in this paragraph referred to as “the first group”) has at any time become a member of another group (in this paragraph referred to as “the second group”) so that the two groups are treated as the same by virtue of subsection (3) ^[10]>or (3A)^<[10]of section 616, and

(b) the second group, together in pursuance of the said subsection (3) with the first group, is the relevant group,

then, except where subparagraph (7) applies, the members of the first group shall be treated for the purposes of this Schedule as having become members of the relevant group at that time, and not by virtue of the said subsection (3) at the times when they became members of the first group.

(7) This subparagraph applies where—

(a) the persons who immediately before the time when the principal company of the first group became a member of the second group owned the shares comprised in the issued share capital of the principal company of the first group are the same as the persons who, immediately after that time, owned the shares comprised in the issued share capital of the principal company of the relevant group, and

(b) the company which is the principal company of the relevant group immediately after that time—

(i) was not the principal company of any group immediately before that time, and

(ii) immediately after that time had assets consisting entirely, or almost entirely, of shares comprised in the issued share capital of the principal company of the first group.

(8) For the purposes of this Schedule—

(a) an asset (in this subparagraph referred to as “the first asset”) acquired or held by a company at any time and an asset (in this subparagraph referred to as “the second asset”) held at a later time by the company (or by any company which is or has been a member of the same group of companies as the company) shall be treated as the same asset if the value of the second asset is derived in whole or in part from the first asset, and

(b) where—

(i) an asset is treated (whether by virtue of clause (a) or otherwise) as the same as an asset held by a company at a later time, and

(ii) the first asset would have been a pre-entry asset in relation to the company,

the second asset shall also be treated as a pre-entry asset in relation to the company,

and clause (a) shall apply in particular where the second asset is a freehold and the first asset is a leasehold the lessee of which acquires the reversion.

(9) In determining for the purposes of this Schedule whether an allowable loss accruing to a company on a disposal under section 719 or section 738(4)(a) is a loss that accrued before the company became a member of the relevant group, the provisions of section 720 or section 738(4)(b), as the case may be, shall be disregarded.

Calculation of pre-entry loss by reference to market value

2.

(1) Where an allowable loss accrues on the disposal by a company of any pre-entry asset, the pre-entry proportion of that loss shall be whichever is the smaller of the amounts mentioned in subparagraph (2).

(2) The amounts referred to in subparagraph (1) are—

(a) the amount of the allowable loss which would have accrued if the asset had been disposed of at the relevant time at its market value at that time, and

(b) the amount of the allowable loss accruing on the disposal mentioned in subparagraph (1).

Gains from which pre-entry losses are to be deductible

3.

(1) Notwithstanding section 78(2) a pre-entry loss that accrued to a company on a disposal before the company became a member of the relevant group shall only be deductible from a chargeable gain accruing to the company where the gain is one accruing—

(a) on a disposal made by the company before the date (in this paragraph referred to as “the entry date”) on which the company became a member of the relevant group and made in the same accounting period in which the entry date falls,

(b) on the disposal of an asset which was held by the company immediately before the entry date, or

(c) on the disposal of an asset which—

(i) was acquired by the company on or after the entry date from a person who was not a member of the relevant group at the time of the acquisition, and

(ii) since its acquisition from the person has not been used or held for any purposes other than those of a trade which was being carried on by the company at the time immediately before the entry date and which continued to be carried on by the company until the disposal.

(2) Notwithstanding section 78(2) the pre-entry proportion of an allowable loss accruing to a company on the disposal of a pre-entry asset shall only be deductible from a chargeable gain accruing to the company where—

(a) the gain is one accruing on a disposal made by the company before the entry date and made in the same accounting period in which the entry date falls and the company is the one (in this subparagraph referred to as “the initial company”) by reference to which the asset on the disposal of which the loss accrues is a pre-entry asset,

(b) the pre-entry asset and the asset on the disposal of which the gain accrues were each held by the same company at a time immediately before the company became a member of the relevant group, or

(c) the gain is one accruing on the disposal of an asset which—

(i) was acquired by the initial company (whether before or after the initial company became a member of the relevant group) from a person who, at the time of the acquisition, was not a member of that group, and

(ii) since its acquisition from the person has not been used or held for any purposes other than those of a trade which was being carried on, immediately before the entry date, by the initial company and which continued to be carried on by the initial company until the disposal.

(3) Where 2 or more companies become members of the relevant group at the same time and those companies were all members of the same group of companies immediately before those companies became members of the relevant group, then—

(a) an asset shall be treated for the purposes of subparagraph (1)(b) as held, immediately before the company became a member of the relevant group, by the company to which the pre-entry loss in question accrued if the company is one of those companies and the asset was in fact so held by another of those companies,

(b) two or more assets shall be treated for the purposes of subparagraph (2)(b) as assets held by the same company immediately before the company became a member of the relevant group wherever they would be so treated if all those companies were treated as a single company, and

(c) the acquisition of an asset shall be treated for the purposes of subparagraphs (1)(c) and (2)(c) asan acquisition by the company to which the pre-entry loss in question accrued if the company is one of those companies and the asset was in fact acquired (whether before or after those companies became members of the relevant group) by another of those companies.

Change of a company’s nature

4.

(1) Where—

(a) within any period of 3 years, a company becomes a member of a group of companies and there is (either earlier or later in that period, or at the same time) a major change in the nature or conduct of a trade carried on by the company, or

(b) at any time after the scale of the activities in a trade carried on by a company has become small or negligible, and before any considerable revival of the trade, the company becomes a member of a group of companies,

the trade carried on before the change mentioned in clause (a), or, as the case may be, the trade mentioned in clause (b), shall be disregarded for the purposes of subparagraphs (1)(c) and (2)(c) of paragraph 3 in relation to any time before the company became a member of the group in question.

(2) In subparagraph (1) the reference to a major change in the nature or conduct of a trade includes a reference to—

(a) a major change in the type of property dealt in, or services or facilities provided, in the trade, or

(b) a major change in customers, markets or outlets of the trade,

and this paragraph shall apply even if the change is the result of a gradual process which began outside the period of 3 years mentioned in subparagraph (1)(a).

(3) Where the operation of this paragraph depends on circumstances or events at a time after the company becomes a member of a group of companies (but not more than 3 years after), an assessment to give effect to this paragraph shall not be out of time if made within 6 years from that time or the latest such time.

Companies changing groups on certain transfers of shares etc.

5. For the purposes of this Schedule, where—

(a) a company which is a member of a group of companies becomes at any time a member of another group of companies as the result of a disposal of shares in or other securities of the company or any other company, and

(b) that disposal is one on which, by virtue of any provision of the Tax Acts or the Capital Gains Tax Acts, neither a gain nor a loss would accrue,

this Schedule shall apply in relation to the losses that accrued to the company before that time and the assets held by the company at that time as if any time when the company was a member of the first group were included in the period during which the company is treated as having been a member of the second group.