CORPORATE TAX Jones Day CORPORATE TAX Jones Day Simplifying capital IN THE 2007 PRE-BUDGET REPORT THE capital gains rules for groups in the three government indicated that it was committed areas outlined below. gains taxation to simplifying tax legislation, particularly in the areas of VAT, anti-avoidance and Capital losses after a change of ownership corporation tax for related companies. ‘Capital loss buying’ is a term used to The government has now published a describe any scheme in which a company consultation document, ‘Simplifi cation is acquired by a new group primarily for Review: capital gains rules of companies the purpose of securing access to its – a discussion document’, in relation to capital losses, whether these are realised simplifying certain aspects of the existing or latent. capital gains rules for groups of companies. Following the introduction of the three BACKGROUND Targeted Anti-Avoidance Rules (the TAARs) The initial discussions between the in December 2005, the government believes government and businesses focused on that some of the existing legislation outlining criteria that should be included pre-dating the TAARs, which focuses on within the capital gains rules for companies. capital loss buying (ie Schedule 7A to the A general consensus was reached in which Taxation and Chargeable Gains Act (TCGA) it was agreed that: 1992), can now be repealed. Following the simplifi cation review, the remaining rules ■ capital profi ts should be subject to would only be required to address the taxation; ‘streaming’ of losses acquired in the context of commercially driven acquisitions, where ■ a group should typically be viewed as obtaining a tax advantage is not one of the a single entity, with its capital profi ts main motivations. taxed on a realisation basis; The government has identifi ed the following ■ symmetry of treatment should options to simplify the current capital loss apply between gains and losses buying rules: and intra-group transfers should generally be tax neutral; and a) repeal only those parts of Schedule 7A to the TCGA 1992 that are no longer ■ gains and losses should be based on required following the introduction of the economic profi t or loss arising for the second TAAR (s184D, TCGA 1992); a group. b) align the change of ownership rules The proposals outlined in this article have retained within Schedule 7A with the been guided by the policy themes referred approach of the second TAAR; to above. In addition, the government has confi rmed that any reforms arising from c) repeal the loss-buying rules in Schedule this review will be consistent with the 7A and introduce a permissive rule requirement that the underlying policy and that allows realised capital losses to anti-avoidance functions of the existing be carried forward without restriction regime are to be preserved. in cases where the losses relate to a trade or business that continues in a PROPOSED CHANGES recognisable form; or Following initial consultation and dialogue with businesses and representative bodies d) repeal the loss-buying rules contained in the government proposes to simplify the Schedule 7A without replacement. ‘The underlying policy and anti-avoidance functions of the existing regime must be preserved in any reforms arising from the simplifi cation review.’ Ian Reid, associate, Jones Day E-mail: ireid@jonesday.com 2 The In-House Lawyer September 2009
CORPORATE TAX Jones Day The government currently favours either option b) or c). Since the introduction of ‘The degrouping charge ensures that if a company leaves a the second TAAR, it has become apparent that the old loss-buying rules are no longer group, holding an asset acquired via a tax-neutral transfer needed to fulfi l an anti-loss-buying function. Alternatively, those rules could focus on the from a group member within the past six years, any gain streaming of losses realised in a company before a change of ownership. Stakeholders or loss deferred at the time of the transfer is cystallised.’ have also expressed a strong preference for avoiding the complexity of any time-apportionment or market-value elections. The government is also conscious between the value-shifting rules and The government considers that adopting that a permissive rule should reduce the the depreciatory-transaction rules. The option 1) would not be suffj cient. Additional administrative compliance burden. government has recognised the need to rules would be needed to ensure that address the current position and simplify an adjustment would result following a Option a) would still leave in place many these rules. transaction that would be within the current of the mechanical and complex rules, value-shifting rule at s31 of TCGA 1992 but including the time apportionment and Any new rule addressing value shifting would not within s176 of TCGA 1992. the market-value provisions. In the need to apply to a transaction that results government’s view, it would be unduly in an understated gain or an overstated loss. Due to the potential diffj culties that option burdensome for companies to establish The rule would be required to negate the 1) would involve, the government’s current the pre- and post-entry elements of the efg ect of transactions reducing the value view is that option 2) is the more viable. loss, and therefore this option is not the of a company in a group in circumstances The author agrees that it makes sense preferred one. where the economic value taken out of the for option 2) to be adopted on the basis shares remains in the group. No adjustment that the current value-shifting rules are Option d) is not considered viable in the would be appropriate where the movement overly complex and are in urgent need of government’s view on the basis that the of value represents income or gains already simplifi cation. However, as always, the devil rules within Schedule 7A are relevant for taxed within the group. is in the detail and it will be particularly the purposes of restricting the use of losses interesting to see how the government following a change in ownership of the The government has confi rmed that the drafts a set of ‘simple’ rules to apply to core legislation in s30 of TCGA 1992 should transactions that result in an understated company in question, and thus in performing the required streaming function. be retained, given its wider application: for gain or an overstated loss. example, to transactions involving companies In the author’s view, option c) would be that take place outside a group context. During the initial discussions, numerous the preferred option on the basis that it The government considers that it should stakeholders raised the concern that in the would best achieve the objectives of the be possible to prevent s30 applying in absence of any time limit to the depreciatory simplifi cation process without having a circumstances where a reduction in value is transactions rules, a signifi cant compliance negative impact on the underlying policy caused by either the payment of a dividend cost is imposed on companies seeking to and anti-avoidance functions of the current or the transfer of an asset within a group. ensure that the rules do not catch previous tax regime. Under this option the complex transactions. Unfortunately, the government mechanical rules contained in paragraph The government has identifi ed the is concerned that by introducing a time 7 of Schedule 7 can be repealed and following three options to simplify the limit to s176 – option 3) – commercially replaced with provisions that clearly set out current value-shifting rules: driven transactions that did not result in any when and in which circumstances capital economic loss could nonetheless produce losses can be utilised by groups. Under 1) extend the existing depreciatory allowable tax losses. this option it is likely that there would be transaction rules to allow for an no requirement to time-apportion losses adjustment to gains on shares Degrouping charges realised after a change of ownership on (including the creation of a gain); The degrouping charge ensures that if a the disposal of pre-entry assets that company leaves a group, holding an asset would signifi cantly reduce compliance and 2) retain the existing depreciatory acquired via a tax-neutral transfer from a administration costs incurred by businesses. transaction legislation and create a new group member within the past six years, value-shifting rule dealing with groups any gain or loss deferred at the time of the Value shifting and of companies; or transfer is cystallised. depreciatory transactions The value-shifting rules have been 3) in addition to the above, align the time During discussions, stakeholders reluctantly identifi ed as particularly complex and limit for adjustments between the two agreed that some form of degrouping therefore a priority for simplifi cation. sets of rules to six years (to match the charge is necessary to protect the tax Furthermore, there is clearly some overlap present provision in s31 of TCGA 1992). system. Without such a charge it would be September 2009 The In-House Lawyer 3
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