What are the Annual Investment Allowance, Consortium Relief, and De-grouping Charge on Companies along with Pre-Entry Capital Losses after Forming a Limited UK Company

01 Nov

This blog will emphasize on the allocation of annual investment allowance between the group companies and the companies that are under common control. It will also throw light on the arrangements that are made in order to leave a group, further explaining the consortium relief, the charge of de-grouping on the company that decides to leave the group, and the capital losses on a pre-entry.

The companies that are in group are still recognized as distinct entities having their own liabilities to tax but the tax law gives recognition to the close relationship that exists in between the group companies. The companies are allowed to share their past assets and losses under some specific conditions without the chargeable gains.

The consortium companies are defined as the companies that are under the control of several different companies. These companies are also permitted to share their assets, however, there is a restriction to the rules in order to get the recognition to shares of ownership of the companies that have the control.

Allowance of Annual Investment

Only a single annual investment allowance, or the AIA can be acquired by a companies’ group and its allocation can be done between the companies in the way that is best suitable. The same rule is applicable to the companies that come under the common control.

How are the Annual Investment Income Allocated Between Group companies?

A group that is used for the purpose of allocation is defined with respect to the parent undertaking. A company is recognized as the parent undertaking of another company, that is the subsidiary undertaking, under the following conditions:

  • In the case if it is the undertaking’s member and has the authority to remove or appoint its board of directors in majority, or
  • The undertaking company is the only member of control and undertaking, and is in agreement with other members or shareholders, a majority of rights of voting in the undertaking, or
  • It is the holder of the rights of voting in majority in the undertaking, or
  • It holds the authority, provided by the control contract or the articles, to have a major influence over the undertaking.

It is mandatory for the parent undertaking company to meet one of the conditions mentioned above at the termination of the chargeable period of account of the subsidiary company that terminates in the financial year that is under consideration.

In order to make the allocation of the annual investment allowance, or the AIA, the following parameters provide relevance:

  • In case of the company earning some profit, the rate of corporation tax that is to be paid by the company. It can be used best to the extent that the company makes the payment of the corporation tax at a marginal rate of about 23.75%, then against the companies that are making the payment on a main rate of 23% and finally against the company formation London or UK that is making the payment of at the small profits rate of 20%.
  • The nature of the expense occurred, such as main pool or special rate pool that is more efficient with respect to tax in order to set against the special rate pool due to lower subsequent WDA
  • How the loss can be relieved if a company formation London or UK suffers a loss, the AIA will be responsible for the creation or the increment of the loss

Annual Investment Allowance Between the Companies that are Under Common Control

A single annual investment allowance can be authorized to the companies that are under control and this allocation of allowance can be done by the companies in the best suitable manner.

The companies are considered to be under control in the case if the same person controls them and if they have some relation with each other.

By the term, “control”, it is meant that a person has the right or the power to make sure that the conductance of the company’s affairs is done according to the person’s wishes or desires. This can be accomplished by the voting rights or the holding of shares or in the form of any resulting powers in the constitution of the company or the powers of another body.

The companies are said to be in relation with one another in the case if either their activities are relevant or they share the same premises.

The same conditions are applicable in the case of considering on the allocation of the allowance for annual investment between the companies that are said to be under common control as in the case of the companies that are within a group.

Arrangements Made in Order to Leave a Group

Any period that has the arrangements in action for either the claimant company or the company that surrenders to leave the group, there is no availability of group relief for the companies in such a period. If it is mandatory to acquire a relief, the division of losses and profits is done on the basis of time.

A proper definition of the term “arrangements” is not available, but in a normal practice, the HMRC provide an acceptance to the negotiations in order to make the sale of an England company register. These negotiations, however, are not considered as the arrangements till the acceptance of an offer, even if it is conditional or is subject to contract. If the approval of the shareholder is needed in order to make a sale, there is no existence of arrangements unless an approval is provided.

Consortium-Owned Company and Consortium Relief

Some scope for the relief of loss can be found within a consortium. A company is said to be a consortium-owned company or a company owned by consortium if the member companies of the consortium own 75% or more of its capital of ordinary share and none of the companies has a holding of less than 5% and every member of consortium can acquire at least 5% of any available profits in order to distribute them among the holders of equity of the company and at least 5% of any assets that are available as a result of winding up.

Suppose you register limited company UK, say X Ltd as the consortium-owned company and then you register limited company UK, three in number, A Ltd, B Ltd and C ltd as the consortium members. Then the relief of consortium is a relief of loss whose availability can be detected where:

  • The company that surrenders is a company of trade and is a 90% subsidiary of a holding company that is possessed by a consortium and is not a 75% subsidiary of a company incorporation UK and the consortium members also includes the claimant company incorporation UK or the company that makes a claim.
  • The company that surrenders is a company of trade that is possessed by a consortium and is not a 75% subsidiary of some other company and the consortium includes the company that claims or the claimant company
  • The company that surrenders or the surrendering company is supposedly a holding company and is possessed by a consortium, also it is not a 75% subsidiary of another company and the company that claims happens to be the member of the consortium.

A company of trade or a trading company is defined as a company that is entirely or partly running a business of trade. A holding company can be defined as the one that has its business based entirely on holding the shares in companies that are companies of trade.

A company that is owned by consortium can suffer the losses according to the amount of stakes of the consortium’s members. Hence, if a member is the owner of 20% shares of the company then up to about 20% of the losses of the company can be given in to that member. Consortium relief is provided by the company that receives the loss subtracting it from the net sum of profits.

The flow of relief can also be found in a downward manner. The surrendering of losses can be done by a member of consortium to set against its share of the profits from the consortium-owned company. Hence, a member who has a stake of 25% in the consortium owned company, is in the position to surrender the losses in order to cover up to 25% of the profits of the company.

On the other hand, in a normal manner, a company that surrenders can surrender the group relief without the compulsion of consideration of any claim for the possible present period relief of loss. It should be noted that a loss that is made by a company owned by consortium, should be decremented with the help of any claims for the potential relief of loss against the present period profits and not the profits from the preceding periods prior to its surrendering in the form of consortium relief.

As a general practice, the losses cannot be surrendered to or from a person not residing in UK, despite of the fact that the establishment of a consortium can be done by making the use of companies that do not reside in the UK.

Charge of De-Grouping Upon a Company Leaves a Group

A charge of de-grouping occurs in the case if a company leaves a group within the duration of six years since the asset was acquired from another member of the group.

The occurrence of a charge is possible in the case of a company leaving a group while it is the owner of one or more assets shifted to it by the means of another group member within the period of preceding six years according to the provisions. The company that departs or leaves the group, is considered to have the assets sold and instantly acquired again at the time of acquisition of the assets at their previous cost in the market. The resultant loss or gain is sometimes considered as the charge of de-grouping, whose computation is done with the allowance of indexation up to the date of no loss or no gain transfer. This loss is subtracted from or the gain is added to the consideration that is acquired by the company that makes the sale during the calculation of the loss or gain when the departing company disposes of the shares.

Any relief or exemption is applicable to the disposal of shares in the same way as an exemption of substantial shareholding, also applicable to the parameter of gain on the disposal of the share that is related to the charge of de-grouping.

Losses of Pre-Entry Capital

There are certain restrictions that are applicable to the utilization of losses of pre-entry within capital gains groups.

A company that possesses the capital losses brought forward might be acquired by a group. In the case of such pre-entry losses, their use is restrained.

Suppose that a company, say X, joins a group, say G, then the capital or the pre-entry losses of X are the losses that are made on disposals prior to X joining G. the pre-entry losses of X, that are subject to the usual rule against carrying back of losses of capital, may be set against the gains applicable to assets of which X made a disposal before it joined G, X already had before joining G, or X obtained after it joined G from someone outside the group, G and which have not been brought to use prior to acquisition to fulfill the purposes of any business or trade that X was running right before it joined G and either was carried on by another group or continued to carry it on itself, till the gains arose from the disposals.

The pre-entry losses, either from the present period or brought forward are used to the maximum extent prior to any other losses in a single accounting period.

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