THE COURT OF APPEAL HAS CONFIRMED THAT GROUP companies must be 'associated' both at the time of intra-group transfer as well as on exit from the group if the exemption from the exit charge under s179(1) of the Taxation of Chargeable Gains Act (TCGA) 1992 is to apply.
Section 171 TCGA provides that assets can be transferred intra-group at no-gain no-loss, so that there is no charge to corporation tax on chargeable gains. Broadly, when an asset is sold outside the group, a capital gain is calculated by reference to the asset's base cost and the consideration received. Any intra-group consideration paid on previous intra-group transfers is ignored. Section 179 TCGA provides that if assets have been transferred intra-group under s171 (ie at no-gain no-loss), then if the transferee company is sold outside the group within six years of the transfer, an exit charge arises in that company equal to the difference between the base cost in the asset and its market value at the time the asset was transferred to that company. There is an exception to the tax charge if the asset was transferred between associated companies and these associated companies leave the group together (s179(2) TCGA). Companies are 'associated' for these purposes if taken together the companies form a group for capital gains tax purposes.
In Johnston Publishing (North) Ltd v Revenue and Customs Commissioners [2008] the point in issue was whether the companies needed to be associated at the time of the intra-group transfer (which they weren't in Johnston Publishing) or merely at the time the companies left the group (which they were in Johnston Publishing). HMRC argued that the proper construction of s179(2) TCGA is that the association needs to exist both at the time of intra-group transfer and on exit. The Court of Appeal upheld the High Court and Special Commissioners decisions and confirmed that HMRC's construction of s179(2) TCGA was an acceptable one. At the time of writing, it is not known whether the taxpayer will seek leave to appeal to the House of Lords.
Accordingly, when transferring assets intra-group, the question of whether any transferee companies are likely to be sold outside the group should be considered. It may be possible to do some pre-sale planning so that the transferor and transferee are associated at the time of transfer as well as on exit.
By Charlotte Sallabank, partner, Jones Day.
