Finance Act 1989

138 Groups of companies.

(1) In section 272 of the Taxes Act 1970 (groups of companies: definitions) in subsection (1), for paragraphs (b) and (c) there shall be substituted—

“(b) subsections (1A) to (1D) below apply to determine whether companies form a group and, where they do, which is the principal company of the group;”.

(2) After that subsection there shall be inserted—

“(1A) Subject to subsections (1B) to (1D) below—

(a) a company (referred to below in this Chapter as the “principal company of the group”) and all its 75 per cent. subsidiaries form a group and, if any of those subsidiaries have 75 per cent. subsidiaries, the group includes them and their 75 per cent. subsidiaries, and so on, but

(b) a group does not include any company (other than the principal company of the group) that is not an effective 51 per cent. subsidiary of the principal company of the group.

(1B) A company cannot be the principal company of a group if it is itself a 75 per cent. subsidiary of another company.

(1C) Where a company (“the subsidiary”) is a 75 per cent. subsidiary of another company but those companies are prevented from being members of the same group by subsection (1A)(b) above, the subsidiary may, where the requirements of subsection (1A) above are satisfied, itself be the principal company of another group notwithstanding subsection (1B) above unless this subsection enables a further company to be the principal company of a group of which the subsidiary would be a member.

(1D) A company cannot be a member of more than one group; but where, apart from this subsection, a company would be a member of two or more groups (the principal company of each group being referred to below as the “head of a group”), it is a member only of that group, if any, of which it would be a member under one of the following tests (applying earlier tests in preference to later tests)—

(a) it is a member of the group it would be a member of if, in applying subsection (1A)(b) above, there were left out of account any amount to which a head of a group is or would be beneficially entitled of any profits available for distribution to equity holders of a head of another group or of any assets of a head of another group available for distribution to its equity holders on a winding-up,

(b) it is a member of the group the head of which is beneficially entitled to a percentage of profits available for distribution to equity holders of the company that is greater than the percentage of those profits to which any other head of a group is so entitled,

(c) it is a member of the group the head of which would be beneficially entitled to a percentage of any assets of the company available for distribution to its equity holders on a winding-up that is greater than the percentage of those assets to which any other head of a group would be so entitled,

(d) it is a member of the group the head of which owns directly or indirectly a percentage of the company’s ordinary share capital that is greater than the percentage of that capital owned directly or indirectly by any other head of a group (interpreting this paragraph as if it were included in section 838(1)(a) of the Taxes Act 1988).

(1E) For the purposes referred to in subsection (1) above, a company (“the subsidiary”) is an effective 51 per cent. subsidiary of another company (“the parent”) at any time if and only if—

(a) the parent is beneficially entitled to more than 50 per cent. of any profits available for distribution to equity holders of the subsidiary; and

(b) the parent would be beneficially entitled to more than 50 per cent. of any assets of the subsidiary available for distribution to its equity holders on a winding-up.

(1F) Schedule 18 to the Taxes Act 1988 (group relief: equity holders and profits or assets available for distribution) shall apply for the purposes of subsections (1D) and (1E) above as if the references to subsection (7), or subsections (7) to (9), of section 413 of that Act were references to subsections (1D) and (1E) above and as if, in paragraph 1(4), the words from “but” to the end and paragraph 7(1)(b) were omitted.”

(3) In subsection (3) of that section for the words from “75 per cent. subsidiary of another company” to “is the principal company” there shall be substituted the words “member of another group, the first group and the other group shall be regarded as the same”.

(4) In subsection (4) of that section—

(a) for the words “a company” there shall be substituted the words “a member of a group of companies”, and

(b) for the words from “that company, or” to the end there shall be substituted the words “that or any other company ceasing to be a member of the group”.

(5) In section 278 of that Act (deemed disposal of certain assets held by company leaving group) after subsection (3A) there shall be inserted—

“(3B) Where, apart from subsection (3C) below, a company ceasing to be a member of a group by reason only of the fact that the principal company of the group becomes a member of another group would be treated by virtue of subsection (3) above as selling an asset at any time, subsections (3C) to (3E) below shall apply.

(3C) The company in question shall not be treated as selling the asset at that time; but if—

(a) within six years of that time the company in question ceases at any time (“the relevant time”) to satisfy the following conditions, and

(b) at the relevant time, the company in question, or a company in the same group as that company, owns otherwise than as trading stock the asset or property to which a chargeable gain has been carried forward from the asset on a replacement of business assets,

the company in question shall be treated for all the purposes of the [1979 c. 14.] Capital Gains Tax Act 1979 as if, immediately after its acquisition of the asset, it had sold and immediately reacquired the asset at the value that, at the time of acquisition, was its market value.

(3D) Those conditions are—

(a) that the company is a 75 per cent. subsidiary of one or more members of the other group referred to in subsection (3B) above, and

(b) that the company is an effective 51 per cent. subsidiary of one or more of those members.

(3E) Any chargeable gain or allowable loss accruing to the company on that sale shall be treated as accruing at the relevant time.

(3F) Where—

(a) by virtue of this section a company is treated as having sold an asset at any time, and

(b) if at that time the company had in fact sold the asset at market value at that time, then, by virtue of section 26 of that Act, any allowable loss or chargeable gain accruing on the disposal would have been calculated as if the consideration for the disposal were increased by an amount,

subsections (3) and (3C) above shall have effect as if the market value at that time had been that amount greater.”

(6) In section 97 of the [1984 c. 51.] Inheritance Tax Act 1984 (transfers within group etc.)—

(a) for the words “principal member” and “principal member's”, wherever appearing, there shall be substituted “principal company” and “principal company's” respectively,

(b) for subsection (2)(a) there shall be substituted—

“(a) section 272 of the Taxes Act 1970 (groups of companies: definitions) applies as for the purposes of sections 273 to 281 of that Act”, and

(c) the words from “and in this section” in subsection (2) to the end shall be omitted.

(7) Subject to the following provisions, this section shall be deemed to have come into force on 14th March 1989; but section 278(3E) of the Taxes Act 1970 shall have effect where the accounting period in which the company referred to in subsection (3B) of that section ceases to be a member of a group ends after the day appointed for the purposes of paragraph 4 of Schedule 6 to the [1987 c. 51.] Finance (No. 2) Act 1987.

(8) Where—

(a) at the beginning of the commencement day a company ceases for the purposes of the group provisions to be a member of a group by reason only of the substitution for the old definition of the new definition, and

(b) in consequence of ceasing to be such a member the company would, apart from this subsection, be treated by virtue of section 278(3) of the Taxes Act 1970 as selling an asset at any time,

the company in question shall not be treated as selling that asset at that time unless the conditions in subsection (9) below become satisfied, assuming for that purpose that the old definition applies.

(9) Those conditions are—

(a) that for the purposes of section 278 of that Act the company in question ceases at any time (“the relevant time”) to be a member of the group referred to in subsection (8)(a) above,

(b) that, at the relevant time, the company in question, or an associated company also leaving that group at that time, owns otherwise than as trading stock the asset or property to which a chargeable gain has been carried forward from the asset on a replacement of business assets, and

(c) that the time of acquisition referred to in section 278(1) of that Act fell within the period of six years ending with the relevant time.

(10) Where, under any compromise or arrangement agreed to on any date before 14th March 1989 in pursuance of section 425 of the [1985 c. 6.] Companies Act 1985 and sanctioned by the court, one company acquires at any time, directly or indirectly, an interest in ordinary share capital of another company and immediately after that time—

(a) under the old definition the two companies are, by virtue of that acquisition, members of a group for the purposes of the group provisions, but

(b) the second company is not an effective 51 per cent. subsidiary of the first company,

subsection (11) below applies; and in that subsection those companies and any other members of the group are referred to as “relevant companies”.

(11) In respect of the period beginning with the time of acquisition and ending with—

(a) the expiry of the six months beginning with the date of the agreement, or

(b) if earlier, the date when, under the old definition, the other company ceases for the purposes of the group provisions to be a member of the group referred to in subsection (10)(a) above,

the old definition shall apply in relation to the relevant companies for the purposes of the group provisions and the commencement day in relation to those companies is the day following the end of that period.

(12) In subsections (8) to (11) above—

• “arrangement” has the same meaning as in section 425 of the [1985 c. 6.] Companies Act 1985,

• “commencement day”, subject to subsection (11) above, is 14th March 1989,

• “effective 51 per cent. subsidiary” has the meaning given by section 272(1E) of the Taxes Act 1970,

• “group provisions” means sections 273 to 281 of that Act, and

• “the new definition” means section 272 of that Act as amended by this section and “the old definition” means that section as it had effect on 13th March 1989,

and section 278(4) of that Act shall apply for the purposes of those subsections.