Part 2 of 4
This is the Finance Act 2020 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2021 to 31 March 2022. Candidates sitting ATX-UK after 31 March 2022 should refer to the Finance Act 2021 version of this article (to be published on the ACCA website in 2022).
In Part 1 GF Ltd was formed and began trading. In this part, GF Ltd will acquire an additional business. Once you have read about the company’s plans, stop and think about the possible tax implications before reading on.
In February 2020 Fay identified TP Ltd, a member of a large group of companies, as a possible acquisition. It was agreed (for commercial reasons) that the trade and assets of TP Ltd, rather than the shares, would be acquired.
On 1 April 2020, GF Ltd formed WA Ltd, a wholly owned subsidiary. On the same day, WA Ltd acquired the trade and assets of TP Ltd. TP Ltd had trading losses of £65,000 and capital losses of £18,000 available to carry forward as at 31 March 2020.
The results of the two companies for the year ended 31 March 2021 were as follows.
|GFL||Taxable total profits||£200,000|
On 1 December 2020 GF Ltd made a loan of £14,000 to Lamar, one of the passive investors in the company.
The tax implications arising out of this expansion via acquisition are:
It is possible for trading losses to be transferred to the purchaser when a company sells its trade to another company, but only when certain conditions are satisfied. Broadly, the same persons must beneficially own at least 75% of the business both before and after the sale. These conditions would have been satisfied if TP Ltd had formed a subsidiary, Newco, sold its trade to Newco, and then sold Newco to GF Ltd.
TP Ltd is the legal and beneficial owner of its trade prior to the sale. If the trade had been sold to Newco, TP Ltd would no longer be the legal owner of the trade but would still be the beneficial owner as it owns Newco, which in turn owns the trade. In such circumstances the trading losses would be transferred to Newco together with the trade. This would enable Newco to use the trading losses in the future.
However, because there would have been a change in the ownership of Newco (it would have been sold by TP Ltd to GF Ltd), if there is a major change in the nature or conduct of Newco’s trade within a period of five years beginning no more than three years before the acquisition by GF Ltd, it would not be possible for the losses to be carried forward beyond the date of the change of ownership of Newco.
In the remaining parts of this article we will look at the implications of GF Ltd expanding overseas.
The corporation tax issues relating to groups are considered in two further articles:
Written by a member of the ATX-UK examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.