Finance Act 1980

Section 117.

SCHEDULE 18 Demergers

PART I Relief From Advance Corporation Tax and Income Tax

Exemption from provisions applying to company distributions

1 (1) References in the Corporation Tax Acts to distributions of a company shall not apply to any distribution which is an exempt distribution by virtue of this Part of this Schedule.

(2) A distribution is an exempt distribution if it falls within paragraph 2 below and the conditions specified in this Part of this Schedule are satisfied.

Relevant distributions

2 (1) The following distributions fall within this paragraph—

(a) a distribution consisting of the transfer to all or any of its members by a company (" the distributing company ") of shares in one or more companies which are its 75 per cent, subsidiaries;

(b) a distribution consisting of the transfer by a company (" the distributing company") to one or more other companies (" the transferee company or companies") of—

(i) a trade or trades; or

(ii) shares in one or more companies which are 75 per cent, subsidiaries of the distributing company, and the issue of shares by the transferee company or companies to all or any of the members of the distributing company.

(2) References in this Schedule to a relevant company are to the distributing company, to each subsidiary whose shares are transferred as mentioned in sub-paragraph (1)(a) or (b)(ii) above and to each transferee company mentioned in sub-paragraph (1)(b) above.

Conditions

3 Each relevant company must be resident in the United Kingdom at the time of the distribution.

4 The distributing company must at the time of the distribution be either a trading company or a member of a trading group and each subsidiary whose shares are transferred as mentioned in paragraph 2(1)(a) or (b)(ii) above must at that time be either a trading company or the holding company of a trading group.

5 (1) in a case within paragraph 2(1)(a) above—

(a) the shares must not be redeemable, must constitute the whole or substantially the whole of the distributing company's holding of the ordinary share capital of the subsidiary and must confer the whole or substantially the whole of the distributing company's voting rights in the subsidiary; and

(b) subject to sub-paragraph (2) and paragraph 8(b) below, the distributing company must after the distribution be either a trading company or the holding company of a trading group.

(2) Sub-paragraph (1)(b) above does not apply if the transfer relates to two or more 75 per cent, subsidiaries of the distributing company and that company is dissolved without there having been after the distribution any net assets of the company available for distribution in a winding up or otherwise.

6 (1) In a case within paragraph 2(1)(b) above—

(a) if a trade is transferred the distributing company must either not retain any interest or retain only a minor interest in that trade ;

(b) if shares in a subsidiary are transferred those shares must constitute the whole or substantially the whole of the distributing company's holding of the ordinary share capital of the subsidiary and must confer the whole or substantially the whole of the distributing company's voting rights in the subsidiary;

(c) the only or main activity of the transferee company or each transferee company after the distribution must be the carrying on of the trade or the holding of the shares transferred to it;

(d) the shares issued by the transferee company or each transferee company must not be redeemable, must constitute the whole or substantially the whole of its issued ordinary share capital and must confer the whole or substantially the whole of the voting rights in that company ; and

(e) subject to sub-paragraph (2) and paragraph 8(b) below, the distributing company must after the distribution be either a trading company or the holding company of a trading group.

(2) Sub-paragraph (1)(e) above does not apply if there are two or more transferee companies each of which has a trade or shares in a separate 75 per cent, subsidiary of the distributing company transferred to it and the distributing company is dissolved without there having been after the distribution any net assets of the company available for distribution in a winding up or otherwise.

7 (1) The distribution must be made wholly or mainly for the purpose of benefiting some or all of the trading activities which before the distribution are carried on by a single company or group and after the distribution will be carried on by two or more companies or groups.

(2) The distribution must not form part of a scheme or arrangements the main purpose or one of the main purposes of which is—

(a) the avoidance of tax ; or

(b) without prejudice to paragraph (a) above, the making of a chargeable payment as defined in paragraph 13 below or what would be such a payment if any of the companies mentioned in that paragraph were an unquoted company; or

(c) the acquisition by any person or persons other than members of the distributing company of control of that company, of any other relevant company or of any company which belongs to the same group as any such company; or

(d) the cessation of a trade or its sale after the distribution.

8 Where the distributing company is a 75 per cent, subsidiary of another company—

(a) the group (or, if more than one, the largest group) to which the distributing company belongs at the time of the distribution must be a trading group ;

(b) paragraphs 5(1)(b) and 6(1)(e) above shall not apply; and

(c) the distribution must be followed by one or more other distributions falling within paragraph 2(1)(a) or (b)(ii) above which satisfy the conditions of this Part of this Schedule and result in members of the holding company of the group (or, if more than one, the largest group) to which the distributing company belonged at the time of the distribution becoming members of—

(i) the transferee company or each transferee company to which a trade was transferred by the distributing company ; or

(ii) the subsidiary or each subsidiary whose shares were transferred by the distributing company; or

(iii) a company (other than that holding company) of which the company or companies mentioned in subparagraph (i) or (ii) above are 75 per cent, subsidiaries.

PART II Relief From Tax in Respect of Capital Gains

9 Where a company makes an exempt distribution which falls within paragraph 2(1)(a) above

(a) the distribution shall not be a capital distribution for the purposes of section 72 of the [1979 c. 14.] Capital Gains Tax Act 1979 (disposal on receipt of capital distribution); and

(b) sections 77 to 81 of that Act shall, with the necessary modifications, apply as if that company and the subsidiary whose shares are transferred were the same company and the distribution were a reorganisation of its share capital.

10 Subject to paragraph 15 below, neither section 278 nor section 279 of the Taxes Act (charge of tax where company ceases to be a member of a group) shall apply in a case where a company ceases to be a member of a group by reason only of an exempt distribution.

PART III Relief from Development Land Tax

11 Subject to paragraph 16 below, section 21 of the [1976 c. 24.] Development Land Tax Act 1976 (chargeable disposal where company ceases to be a member of a group) shall not apply where a company ceases to be a member of a group by reason only of an exempt distribution.

PART IV Relief from Stamp Duty

12 (1) A document executed solely for the purpose of effecting an exempt distribution shall not be chargeable with stamp duty under the heading " Conveyance or Transfer on Sale " in Schedule 1 to the [1891 c. 39.] Stamp Act 1891 or under section 74 of the [1910 c. 8.] Finance (1909-1910) Act 1910.

(2) Stamp duty shall not be chargeable on any document under section 47(5) of the [1973 c. 51.] Finance Act 1973 or Article 8(5) of the [S.I. 1973/1323.] Finance (Miscellaneous Provisions) (Northern Ireland) Order 1973 if it relates to a chargeable transaction carried out solely for effecting an exempt distribution.

(3) A document in respect of which stamp duty is not chargeable by virtue of this paragraph shall not be treated as duly stamped unless it is stamped in accordance with section 12 of the said Act of 1891 with a stamp denoting that it is not chargeable with duty.

PART V Prevention of Tax Avoidance

Chargeable payments

13 (1) For the purposes of this Schedule a chargeable payment is any payment made otherwise than for bona fide commercial reasons or forming part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax, being a payment which—

(a) a company concerned in an exempt distribution makes directly or indirectly to a member of that company or of any other company concerned in that distribution ; and

(b) is made in connection with, or with any transaction affecting, the shares of that or any such company; and

(c) is not a distribution or exempt distribution or made to another company which belongs to the same group as the company making the payment.

(2) Where a company concerned in an exempt distribution is an unquoted company sub-paragraph (1)(a) above shall have effect as if any reference to the making of a payment by, or to a member of, a company concerned in the exempt distribution included a reference to the making of a payment by or to any other person in pursuance of a scheme or arrangements made with the unquoted company or, if the unquoted company is—

(a) under the control of five or fewer persons ; and

(b) not under the control of (and only of) a company which is not itself under the control of five or fewer persons,

with any of the persons referred to in paragraph (a) above.

(3) References in this paragraph to a company concerned in an exempt distribution are to any relevant company and to any other company which was connected with any such company for the whole or any part of the period beginning with the exempt distribution and ending with the making of the payment which is in question under this paragraph.

(4) For the purposes of sub-paragraph (3) above and of this subparagraph a company shall be deemed to have been connected in the period referred to in that sub-paragraph with each company to which a company connected with it was connected in that period.

(5) References in this paragraph to a payment include references to a transfer of money's worth including the assumption of a liability.

Tax on chargeable payments

14 If within five years after the making of an exempt distribution there is a chargeable payment—

(a) the amount or value of the payment shall be treated as income chargeable to tax under Case VI of Schedule D ; and

(b) unless the payment is a transfer of money's worth, section 53 of the Taxes Act (deduction of income tax at source) shall apply to the payment as if it were an annual sum payable otherwise than out of profits or gains charged to income tax ;

(c) the payment shall be regarded as a distribution for the purposes of sections 248(2) and 251(2) of the Taxes Act (disallowance of deductions) and paragraphs 5(6) and 10(1) of Schedule 16 to the [1972 c. 41.] Finance Act 1972 (close companies); and

(d) the payment shall not (if it otherwise would be) be treated as a repayment of capital for the purposes of section 234 or 235 of the Taxes Act.

Re-instatement of charge in respect of capital gains

15 Paragraph 10 above does not apply if within five years after the making of the exempt distribution there is chargeable payment; and the time for making an assessment under section 278 or 279 of the Taxes Act by virtue of this paragraph shall not expire before the end of three years after the making of the chargeable payment.

Re-instatement of development land tax charge

16 Paragraph 11 above does not apply if within five years after the making of the exempt distribution there is a chargeable payment; and the time for making an assessment under section 21 of the [1976 c. 24.] Development Land Tax Act 1976 by virtue of this paragraph shall not expire before the end of three years after the making of the chargeable payment.

PART VI Administration

Clearance procedure

17 (1) A distribution shall be treated as an exempt distribution in any case in which, before the distribution is made, the Board have, on the application of the distributing company, notified that company that the Board are satisfied that it will be such a distribution.

(2) A payment shall not be treated as a chargeable payment in any case in which, before the payment is made, the Board have, on the application of the person intending to make it, notified him that they are satisfied that it will be made for bona fide commercial reasons and will not form part of any scheme or arrangements the main purpose or one of the main purposes of which is the avoidance of tax.

(3) A company which becomes or ceases to be connected with another company may make an application under sub-paragraph (2) above as respects any payments that may be made by it at any time after becoming or ceasing to be so connected (whether or not there is any present intention to make any payments) and where a notification is given by the Board on such an application no payment to which the notification relates shall be treated as a chargeable payment by reason only of the company being or having been connected with the other company.

(4) References in sub-paragraphs (2) and (3) above to a payment shall be construed as in paragraph 13 above.

18 (1) Any application under paragraph 17 above shall be in writing and shall contain particulars of the relevant transactions and the Board may, within thirty days of the receipt of the application or of any further particulars previously required under this sub-paragraph, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision ; and if any such notice is not complied with within thirty days or such longer period as the Board may allow, the Board need not proceed further on the application.

(2) The Board shall notify their decision to the applicant within thirty days of receiving the application or, if they give a notice under sub-paragraph (1) above, within thirty days of the notice being complied with.

(3) If the Board notify the applicant that they are not satisfied as mentioned in paragraph 17 above or do not notify their decision to the applicant within the time required by sub-paragraph (2) above, the applicant may within thirty days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subparagraph (1) above, to the Special Commissioners ; and in that event any notification by the Special Commissioners shall have effect for the purposes of paragraph 17 above as if it were a notification by the Board.

(4) If any particulars furnished under this paragraph do not fully and accurately disclose all facts and circumstances material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in paragraph 17 above shall be void.

Returns

19 Where a company makes an exempt distribution it shall within thirty days after the distribution make a return to the inspector giving particulars of the distribution and of the circumstances by reason of which it is exempt

20 (1) Where within five years after the making of an exempt distribution a person makes a chargeable payment which consists of a transfer of money's worth, he shall within thirty days after the transfer make a return to the inspector giving particulars—

(a) of the transaction effecting the transfer;

(b) of the name and address of the recipient or each recipient and the value of what is transferred to him or each of them; and

(c) if the transfer is accompanied by a chargeable payment consisting of a payment of money, of that payment.

(2) Subject to sub-paragraph (3) below, where within five years after the making of an exempt distribution a person makes a payment or a transfer of money's worth which would be a chargeable payment but for the fact that it is made for bona fide commercial reasons and does not form part of any such scheme or arrangements as are mentioned in paragraph 13(1) above, the person making the payment or transfer shall within thirty days after the payment or transfer make a return to the inspector giving particulars—

(a) in the case of a transfer, of the transaction by which it is effected;

(b) of the name and address of the recipient or each recipient and the amount of the payment made, or the value of what is transferred, to him or each of them; and

(c) of the circumstances by reason of which the payment or transfer is not a chargeable payment.

(3) Sub-paragraph (2) above does not apply where the payment or transfer is one in relation to which a notification under paragraph 17(3) above has effect.

Power to obtain information

21 Where a distribution falling within paragraph 2 above has been made and the inspector has reason to believe that it may form part of any such scheme or arrangements as are mentioned in sub-paragraph (2) of paragraph 7 above, he may by a notice in writing require any relevant company or any person controlling any such company to furnish him within such time, not being less than thirty days, as may be specified in the notice with—

(a) a declaration in writing stating whether or not, according to information which the company or that person has or can reasonably obtain, any such scheme or arrangements exist or have existed;

(b) such other information as the inspector may reasonably require for the purposes of that sub-paragraph and the company or that person has or can reasonably obtain.

22 (1) If the inspector has reason to believe that a person has not delivered an account or made a return which he is required to deliver or make by virtue of paragraph 14(b) or 20 above in respect of any payment or transfer, the inspector may by notice in writing require that person to furnish him within such time, not being less than thirty days, as may be specified in the notice with such information relating to the payment or transfer as the inspector may reasonably require for the purposes of Part V of this Schedule.

(2) If the inspector has reason to believe that a payment or transfer has been made within five years after the making of an exempt distribution and that the payment or transfer is a chargeable payment by reason of the existence of any such scheme or arrangements as are mentioned in paragraph 13(2) above, he may by notice in writing require the person making the payment or transfer or, if that person is a company, any person controlling it to furnish him within such time, not being less than thirty days, as may be specified in the notice with—

(a) a declaration in writing stating whether or not, according to information which that person has, or can reasonably obtain, any such scheme or arrangements exist or have existed;

(b) such other information as the inspector may reasonably require for the purposes of Part V of this Schedule and that person has or can reasonably obtain.

(3) Any recipient of a chargeable payment and any person on whose behalf such a payment is received shall, if so required by the inspector, state whether the payment received by him or on his behalf is received on behalf of any person other than himself and, if so, the name and address of that person.

PART VII Interpretation

23 (1) In this Schedule—

• " chargeable payment" has the meaning given in paragraph 13 above ;

• " control" shall be construed in accordance with section 302(2) to (6) of the Taxes Act;

• " distributing company " has the meaning given in paragraph 2 above ;

• " exempt distribution " means a distribution which is exempt by virtue of paragraph 1 above;

• "group", except in paragraph 7(2)(c), means a company which has one or more 75 per cent, subsidiaries together with that or those subsidiaries and in paragraph 7(2)(c) means a company which has one or more 51 per cent, subsidiaries together with that or those subsidiaries;

• "holding company" means a company whose business (disregarding any trade carried on by it) consists wholly or mainly in the holding of shares or securities of one or more companies which are its 75 per cent, subsidiaries ;

• " member ", where the reference is to a member of a company, does not, except in paragraph 13(1)(a), include a person who is a member otherwise than by virtue of holding shares forming part of the company's ordinary share capital;

• " relevant company " has the meaning given in paragraph 2(2) above;

• " shares " includes stock ;

• " tax ", where the reference is to avoidance of tax, includes stamp duty ;

• " trade " (except in sub-paragraph (3) below) does not include dealing in shares, securities, land, trades or commodity futures and " trading activities" shall be construed accordingly ;

• " trading company " means a company whose business consists wholly or mainly of the carrying on of a trade or trades ;

• " trading group " means a group the business of whose members, taken together, consists wholly or mainly in the carrying on of a trade or trades;

• " unquoted company " means a company which does not satisfy the condition that its shares or some class thereof (disregarding debenture or loan stock, preferred shares or preferred stock) are listed in the Official List of The Exchange and are dealt in on The Stock Exchange regularly or from time to time, so however that this definition does not apply to a company under the control of (and only of) one or more companies to which this definition does not apply.

(2) In determining for the purposes of paragraphs 2 to 6 above whether a company whose shares are transferred by the distributing company is a 75 per cent, subsidiary of the distributing company there shall be disregarded any share capital of the first-mentioned company which is owned indirectly by the distributing company.

(3) In determining for the purposes of this Schedule whether one company is a 75 per cent, subsidiary of another, the other company shall be treated as not being the owner of—

(a) any share capital which it owns directly in a body corporate if a profit on a sale of the shares would be treated as a trading receipt of its trade ; or

(b) any share capital which it owns indirectly and which is owned directly by a body corporate for which a profit on the sale of the shares would be a trading receipt.

(4) Section 533 of the Taxes Act (meaning of connected persons) applies for the purposes of this Schedule.

(5) This Schedule, so far as it relates to income tax, shall be construed as one with the Income Tax Acts, so far as it relates to corporation tax, shall be construed as one with the Corporation Tax Acts, and, so far as it relates to capital gains tax, shall be construed as one with the [1979 c. 14.] Capital Gains Tax Act 1979.