A special commissioner decided that capital losses which were incurred by six taxpayer companies before they became members of the same group could not be set off against chargeable gains made by another company on disposals made after that company and the taxpayers had all become members of a second group.

Facts

Elections were made, under s. 171A of the Taxation of Chargeable Gains Act 1992 (‘TCGA 1992’), that the assets in question should be deemed to have been transferred to the taxpayer companies prior to being disposed of at a gain. The taxpayers filed tax returns for the relevant period. Upon receipt, the Inland Revenue instigated an enquiry and in subsequent correspondence, the Revenue indicated that the losses could not be used to offset the chargeable gains. Amendment notices in respect of all of the taxpayers were issued on 30 January 2006.

The taxpayers appealed to the special commissioners for a ruling on the correct interpretation of the pre-entry loss provisions which were enacted to prevent the buying-in of loss companies by companies about to realise a gain and sought the determination of the special commissioners of the correct construction of TCGA 1992, Sch. 7A.

By TCGA 1992, s. 170(10) where the principal company of a group became a member of another group, the first group and the other group were to be regarded as the same. TCGA 1992, Sch. 7A, para. 1(6) provided that if (a) the principal company of a group of companies (the first group) had at any time become a member of another group (the second group) so that the two groups are treated as the same by virtue of s. 170(10), and (b) the second group, together in pursuance of that subsection with the first group, was the relevant group, then (except where para. 1(7) applied), the members of the first group were to be treated for the purposes of the Schedule as having become members of the relevant group at that time, and not by virtue of that subsection at the times when they became members of the first group.

Issue

Whether the taxpayers’ capital losses could be set off against the chargeable gains of another member of the same group.

Decision

Dr John Avery Jones (dismissing the appeal in principle) said that applying s. 170(10) there was only one group of which the taxpayers were or had been members, the TUK group.

The fundamental definition on which the whole of Sch. 7 was based was that ‘pre-entry loss’ in relation to any company meant any allowable loss that accrued to that company at a time before it became a member of the relevant group.

The draftsman clearly had to make a distinction between: situation 1 where a company realised a loss, joined the first group and the first group joined a second group; and situation 2 where a company joined the first group, realised a loss and the first group joined the second group.

Situation 1 presented no problem. In the deemed world of s. 170(10) it was a case of a loss accruing before the company became a member of the deemed group, for which the definition of pre-entry loss fitted perfectly. Situation 2 was not merely a problem; it was impossible to draft because becoming a member of the second group was not an event recognised as existing in the deemed world of s. 170(10), and so one could not attribute a time to its happening in order to determine whether a loss accrued before it. The draftsman might have been tempted to cancel the effect of s. 170(10) but obviously one could not dispense with part of the definition of what was a group when the question was when a company joined a group. The draftsman therefore had to deal with situation 2 while working within the constraints of the deemed world of s. 170(10).

Where a first group was acquired by a second group, since there was only one group by virtue of s. 170(10), the acquisition of the first group by the second would not affect the date of entry of companies in the first group. In principle therefore a company joined the TUK group when it actually joined the first constituent group to which it belonged. That was changed where para. 1(6) applied. If companies A and B were members of a group of which the principal company was Z, and Z transferred A and B to X on 1 June 2002, A and B became members of the X group on that date, having previously been members of the Z group. Their realised losses would become pre-entry losses of the X group on that date whether or not they were pre-entry losses of the Z group. On the other hand, if A were the principal company of the group consisting of A and B when it was acquired by X, the A/X group was the relevant group for determining whether a loss was a pre-entry loss.

Leaving aside para. 1(6), if A and B had become members of a group by virtue of A acquiring B on 12 March 2000, A and B would join the relevant (A/X) group on 1 March 2000 and not on 1 June 2002 (when X acquired A). If para. 1(6) applied, it treated A and B as joining the group on 1 June 2002 when X acquired A. The first condition for para. 1(6) to apply was if the principal company of a group of companies (‘the first group’), had at any time become a member of another group (‘the second group’) so that the two groups were treated as the same by virtue of subsection (10) of s. 170. That began by regarding the two groups separately and para. (a) was satisfied where s. 170(10) treated them as the same group because the principal company of the first group had become a member of the second group.

The second condition for para. 1(6) to apply was if the second group, together in pursuance of s. 170(10) with the first group, was the relevant group. If losses were pre-entry losses of the A group (the first group) s.170(10) meant that they were pre-entry losses of the X group (the second group) and so para. (b) added nothing. But where in respect of a particular loss the A group [the first group] was not the relevant group the X group [the second group] would be the relevant group because the merged group was not the relevant group. Where the A/X group was not the relevant group para. (b) did not apply and the date of joining the group was the date of joining the constituent group.

Assuming that A and B had always been grouped, A's loss realised on 1 February 1999 was not a pre-entry loss in relation to the A group. When the X group (the second group) acquired the A group (the first group), s. 170(10) treated them as the same group (the A/X group). If para. 1(6) were not there, the loss would not be a pre-entry loss of the A/X group because the A/X group was the same group as the A group and A's loss did not accrue to it before it became a member of the A group, with the result that the use of the loss within the A/X group would be unrestricted. Paragraph 1(6) applied to prevent that result. The X group (the second group) (together with the A group) was the relevant group in relation to A's loss because A's loss was a pre-entry loss in relation to the X group (the second group) even though it was not in relation to the A/X group. The condition in para. 1(6)(b) was met: A and B were deemed to join the X group in relation to those losses on 1 June 2002. By para. 7(3) A's loss could be used against B's gains because they became members of the relevant group (the A/X group) at the same time and A and B were members of the same group of companies immediately before they became members of the relevant group. But the X group companies could not use A's loss because the X group companies would have become members of the A/X group companies at different times and were not grouped with A prior to 1 June 2002.

The function of para. 1(6) was to determine whether there was a pre-entry loss by reference to a relevant group. It updated the time of entry of the first group companies to the relevant group to the extent that losses were not pre-entry losses of the first group but were pre-entry losses of the second group. Without para. 1(6), s. 170(10) would mean that such losses would not become pre-entry losses on the merger with the result that the Schedule would not have effect in relation to them. The deeming went no further than that; it did not affect the operation of s. 170(10) to regard the A and X groups as the same group.

(2006) Sp C 563.
Decision released 9 October 2006.