400 Company reconstructions without change of ownership

Summary

This section enables the right to capital allowances (and liability to balancing charges), relief for losses, and relief for deemed borrowing cost and total spare capacity arising from interest limitation rules to be transferred from one company to another where a trading company ceases to carry on a trade and, following the cessation, another company carries on the trade. Such a transfer is allowed only where there is substantial common identity in the ownership of the trade both before and after the change (to the extent of not less than 75 per cent). Where the conditions of the section are fulfilled, the successor company in effect steps into the shoes of the predecessor for the purposes of capital allowances, balancing charges and losses.

Details

Ownership tests

(1)(a) A trade carried on by 2 or more persons (for example, by companies in partnership) is treated as belonging to such persons in the shares in which they are entitled to the profits of the trade.

(1)(b) A trade or interest in a trade belonging to a trustee (other than for charitable or public purposes) is treated as belonging to the person for the time being entitled to the income under the trust.

(1)(c), (2) & (3) A trade or interest in a trade belonging to a company is – where the result of so doing is that the 75 per cent test is satisfied (see below) – to be treated as belonging to —

• the persons owning the ordinary share capital of the company in proportion to their holdings of that capital, or
• where the company is a subsidiary company, its parent company or the persons owning the ordinary share capital of the parent company in proportion to their holdings of that capital.

Further, any ordinary share capital owned by a company may be regarded for the purposes of the 75 per cent test as owned by a person or body of persons controlling that company. For this purpose, control is defined widely to include the actual ownership of shares, the possession of voting power and power, by virtue of the company’s articles of association or other document regulating the company, to ensure the company conducts its affairs in accordance with the controller’s wishes.

(4) In determining whether and to what extent a trade belongs at different times to the same persons, relatives (as defined) and persons from time to time entitled to the income under any trust are treated as a single person.

Application

(5) Where a company ceases to carry on a trade and another company begins to carry on that trade, the Corporation Tax Acts are to have effect as regards the right to capital allowances and losses in accordance with this section where certain conditions are satisfied. These conditions are —

• the same persons must own at least a 75 per cent share in the trade at some time within 1 year before the change and at any time within 2 years after the change, and
• the trade must, between those times have been carried on by a company or companies within the charge to corporation tax (this condition would not be satisfied if, for example, at any time between those times the trade was carried on by an individual or a partnership of individuals).

The section applies where the activities of the predecessor company’s trade are merged in activities constituting the trade of the successor company.

Capital allowances

(6) The capital allowances and charges which could have been made to or on the predecessor company if it had continued to trade are to be made to or on the successor company, that is, as though the change in ownership had not taken place. The sale or transfer of the assets by the predecessor company to the successor company does not give rise to any allowance or charge.

Terminal loss relief

(7) The predecessor company is not entitled to terminal loss relief under section 397 except in the circumstances described below.

The successor company is entitled to carry forward, against the profits of the trade so long as the successor continues to carry the trade on, any trading losses of the predecessor company for which the predecessor company has not obtained relief against total profits under section 396(2).

(9) Where the successor ceases to carry on the trade within 4 years after the succession, and the successor’s income is not sufficient to absorb the full “terminal loss” relief under section 397, the unabsorbed balance of the relief may be given to the predecessor against its income from the trade.

Where the successor ceases to carry on the trade within one year after the succession, the predecessor will be entitled to “terminal loss” relief for any loss which it incurred when it was carrying on the trade. This secures that the predecessor gets the relief for its own loss incurred within the 12 months before trading finally ends (as well as for the successor’s loss as so provided).

The “but” clause ensures that, in any event, the period over which the relief can be given will not extend back further than 4 years from the date on which the trade actually ceases.

Treatment of deemed borrowing cost and total spare capacity

(7A) An amount of deemed borrowing costs or total spare capacity, as defined in Part 35D, carried forward under sections 835AAD or 835AAE by the predecessor company will be available for use by the successor company where there is a transfer of a trade without a change of ownership to which the provisions of section 400 apply. Where subsection (7A) applies the predecessor is not entitled to relief in respect of the deemed borrowing costs or total spare capacity.

Treatment of securities

(8) Securities held as trading stock are to be treated as if sold by the predecessor to the successor at market value for the purposes of section 748 (which deals with “bond-washing”). The effect of this is to ensure that the bond-washing provisions apply to the predecessor and the successor on the basis that the latter acquired the securities from the former at market value.

Multiple transfers

(10) Where a trade is transferred from one company to another and the 75 per cent ownership test within the period taken for comparison in subsection (1)(a) is not satisfied but within 2 years a third company takes over the trade, then (provided that the ownership test in relation to the first and the third companies is satisfied) both changes are governed by this section so that the reliefs for losses forward and capital allowances run right through for the benefit of both successors. Similarly, the relief for terminal losses on a cessation by the third company will run back for the benefit of the second and first companies; but relief for terminal loss is not to be given on cessation of trading by the second company on transfer to the third.

Parts of trades

(11) Where the successor carries on the activities of the transferred trade as part of a larger trade or where the predecessor transfers part only of the trade, both the trade incorporated as part of a larger trade and the part of a trade transferred may be regarded as a separate trade for the purposes of the application of this section.

(12) Where a part of a trade is to be treated as a separate trade for this purpose, any necessary apportionments of receipts and expenses are to be made.

(13)(a)&(b) Where in relation to an apportionment made under subsection (12), it appears at the time of the apportionment, that it is material to the liability to tax of 2 or more companies and there is disagreement as to the basis of apportionment, the inspector shall issue in writing a notice of determination in respect of the apportionment.

A company aggrieved by an apportionment made under this subsection may appeal the apportionment by notice in writing to the Appeal Commissioners. An appeal must be made within 30 days of the date of the notice of apportionment. The Appeal Commissioners will hear and determine an appeal in the manner provided for in Part 40A of the Direct Tax Acts.

(13) The Appeal Commissioners may determine any question concerning any such apportionment. All the companies concerned are entitled to appear and be heard by the Appeal Commissioners or to make representations in writing to them.

Claims

(14) Any relief obtainable under the section by way of discharge or repayment of tax is to be given on the making of a claim.

Relevant Date: Finance Act 2021