A special commissioner decided that a chargeable gain accrued to a company under s. 179 of the Taxation of Chargeable Gains Act 1992 (‘TCGA 1992’) when it left a group in respect of assets previously acquired from another company by way of an intra-group transfer, since exemption from the degrouping charge in s. 179(2) was not available to companies associated when they left the group but not at the time of the intra-group transfer.

Facts

The taxpayer was a private limited company, incorporated and registered in England and Wales and resident in the UK. It had been acquired as an off-the-shelf company and became a member of a group (‘the UNM group’) within the meaning of TCGA 1992, s.170. In a series of transactions and agreements, another member of the group (‘UPN Ltd’) transferred shares in its ‘operating subsidiaries’ to the taxpayer. At that stage the taxpayer and UPN were not associated. However, by the time it was sold to another group (‘YPG’), the taxpayer owned the transferor company as its subsidiary and they had become associated companies within s. 179(10).

Between 2000 and 2004, the UNM Group and HMRC entered into correspondence which, inter alia, related to the sale of the taxpayer to the YPG Group and which in particular raised the issue of whether a charge under s. 179 would arise on the taxpayer, in respect of the operating subsidiaries it had acquired from UPN when both companies were members of the UNM Group. HMRC indicated that they considered such a charge did arise and that they would accordingly be making an assessment on the taxpayer with £280 million as the provisional figure for the deemed gain. The taxpayer appealed.

Issue

Whether, in order to qualify for exemption from the capital gains degrouping charge imposed under TGCA 1992, s. 179(3), it was necessary that associated companies should have been associated not only at the time of leaving the group but also at the time of the previous intra-group transfer.

Decision

The special commissioner (Mr John Clark) (dismissing the appeal) said that the issue in the present case was purely one of statutory construction. The effect of s. 179(2) was to provide an exemption from the anti avoidance degrouping charge under s. 179(3). In construing TCGA 1992, s. 179(2), it was necessary to look at the context. Section 1799 was a provision aimed at counteracting avoidance. It was introduced to prevent groups of companies from taking inappropriate advantage of the intra-group transfer exemption contained in s. 171. The issue was as to the extent of that exemption. An occasion of charge arose under s. 179 in respect of the taxpayer's ownership of the shares in UPN Ltd when the taxpayer left the group; that was a consequence of that intra-group transfer having taken place within the previous six years. The result of the previous substantial dividend payment was that no actual gain arose.

The simple case of a transfer of an asset from one group member to another, followed by the latter leaving the group, clearly fell within the s. 179 charging provisions; the asset had been transferred without any liability falling on the transferor, so that in the absence of s. 179, the tax charge in respect of the asset would be deferred until the transferee disposed of it. The s. 179 charge fell on the transferee; it had no effect on any normal tax charge falling on the company selling the transferee.

In a case where the transferor and transferee, although members of the overall group, were not associated members at the time of the intra-group transfer, the disposal of the asset was protected as an intra-group disposal because both companies were members of the overall group. If a sub-group was created or enlarged by putting those two companies into it after the intra group transfer had taken place, that transfer had inflated the value of the sub-group. It followed that, if the language of s. 179(2) was capable of being so construed, it should afford protection from the s. 179 charge in a case where the transferor and transferee were associated at the time of the intra-group transfer, but should not provide such protection where the associated company status only began at some point after the intra-group transfer had taken place.

It was necessary to construe s. 179(2) in the context of the scheme underlying the legislation, which was that a charge was imposed by s. 179(1) and (3), and that a limited exemption from that charge was provided by s.179(2) in circumstances where transactions had taken place within a ‘sub-group’, and the latter entity then left the group. To permit exemption in circumstances where the value of the sub-group had been inflated by a transfer from elsewhere within the group, followed by the addition of the transferor to the sub-group and the subsequent cesser of the sub-group's membership of the main group, appeared to be inconsistent with the whole purpose of the charge imposed by s. 179. For that purpose there was no difference between an intra-group transfer to a single company unit, which subsequently left the group, and an intra-group transfer to what started as a single company unit, but was then expanded to a multi-company unit, which in turn left the group. The latter situation was entirely different from one in which an intra-group transfer had taken place within a unit consisting of a sub-group, and the latter then left the main group. Section 179(2) was to be construed as applying only in that limited circumstance, and not where the association arose only after the intra-group transfer.

The taxpayer contended that if it were to dispose of any of the operating subsidiaries, that would trigger a charge to corporation tax on chargeable gains which would fully take into account any increase in value while the operating subsidiaries were owned by members of the UNM Group. That contention ignored two important aspects of the s. 179 charge. The first was that the s. 179 charge was additional to the normal capital gains charge arising on the group member which disposed of the sub-group containing the associated companies. The second was that it was imposed on the company leaving the group at the time when it did so, but by reference to the value of the asset at the time of the intra-group acquisition. That was a deliberate acceleration of liability to prevent the charge from being deferred until the company under its new ownership ultimately disposed of the asset in question.

Effectively at least some element of the gain referable to the assets held by the intra-group transferee was being taxed twice, albeit in the hands of different companies. That might be regarded as a normal consequence of the corporate structure, under which there were two assets, namely the asset held by the subsidiary, and the shares held by the parent in that subsidiary. The special element introduced by s. 179 was that the liability for the gain previously accrued on the asset acquired by the subsidiary was accelerated. It appeared to be an intended result of the section that the subsidiary leaving the group suffered a charge to tax on a deemed gain without being provided with resources in the form of consideration which would enable it to pay the tax falling due. The effect was to deter avoidance by penalising the transferee at the point when it left the group. Given the penal nature of the section, it was appropriate to construe strictly the exemption contained in s. 179(2). The eventual liability to tax which would arise when (if ever) the taxpayer eventually disposed of shares in the operating subsidiaries was no justification for construing s. 179(2) to produce the result for which the taxpayer contended.

(2006) Sp C 564.
Decision released 9 October 2006.