Finance Act 1989

138 Groups of companies.U.K.

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

“(b)subsections (1A) to (1D) below apply to determine whether companies forma 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 “principalcompany of the group”) and all its 75 per cent. subsidiaries form agroup and, if any of those subsidiaries have 75 per cent. subsidiaries, thegroup 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 ofthe group) that is not an effective 51 per cent. subsidiary of the principalcompany of the group.

(1B)A company cannot be the principal company of a group if it is itself a 75per 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 beingmembers of the same group by subsection (1A)(b) above, the subsidiary may,where the requirements of subsection (1A) above are satisfied, itself be theprincipal company of another group notwithstanding subsection (1B) aboveunless this subsection enables a further company to be the principal companyof 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 fromthis subsection, a company would be a member of two or more groups (theprincipal company of each group being referred to below as the “headof a group”), it is a member only of that group, if any, of which itwould be a member under one of the following tests (applying earlier tests inpreference to later tests)—

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

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

(c)it is a member of the group the head of which would be beneficiallyentitled to a percentage of any assets of the company available fordistribution to its equity holders on a winding-up that is greater than thepercentage of those assets to which any other head of a group would be soentitled,

(d)it is a member of the group the head of which owns directly or indirectlya percentage of the company’s ordinary share capital that is greater than thepercentage of that capital owned directly or indirectly by any other head ofa group (interpreting this paragraph as if it were included in section838(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. subsidiaryof another company (“the parent”) at any time if and only if—

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

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

(1F)Schedule 18 to the Taxes Act 1988 (group relief: equity holders andprofits or assets available for distribution) shall apply for the purposes ofsubsections (1D) and (1E) above as if the references to subsection (7), orsubsections (7) to (9), of section 413 of that Act were references tosubsections (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” thereshall be substituted the words “member of another group, the first group andthe 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 “amember of a group of companies”, and

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

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

“(3B)Where, apart from subsection (3C) below, a company ceasing to be a memberof a group by reason only of the fact that the principal company of the groupbecomes 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 shallapply.

(3C)The company in question shall not be treated as selling the asset at thattime; 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 samegroup as that company, owns otherwise than as trading stock the asset orproperty to which a chargeable gain has been carried forward from the asseton a replacement of business assets,

the company in question shall be treated for all the purposes of theCapital Gains Tax Act 1979 as if, immediately after itsacquisition of the asset, it had sold and immediately reacquired the asset atthe 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 ofthe other group referred to in subsection (3B) above, and

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

(3E)Any chargeable gain or allowable loss accruing to the company on that saleshall 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 atany time, and

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

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

(6)In section 97 of the M1Inheritance 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 havecome into force on 14th March 1989; but section 278(3E) of the Taxes Act 1970shall have effect where the accounting period in which the company referredto in subsection (3B) of that section ceases to be a member of a group endsafter the day appointed for the purposes of paragraph 4 of Schedule 6 to the M2Finance (No. 2) Act 1987.

(8)Where—

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

(b)in consequence of ceasing to be such a member the company would, apartfrom this subsection, be treated by virtue of section 278(3) of the Taxes Act1970 as selling an asset at any time,

the company in question shall not be treated as selling that asset atthat 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 questionceases at any time (“the relevant time”) to be a member of the groupreferred to in subsection (8)(a) above,

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

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

(10)Where, under any compromise or arrangement agreed to on any date before14th March 1989 in pursuance of section 425 of the M3Companies Act 1985 and sanctioned by the court, one company acquiresat any time, directly or indirectly, an interest in ordinary share capital ofanother company and immediately after that time—

(a)under the old definition the two companies are, by virtue of thatacquisition, 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 thefirst company,

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

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

(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 companyceases for the purposes of the group provisions to be a member of the groupreferred to in subsection (10)(a) above,

the old definition shall apply in relation to the relevant companies forthe purposes of the group provisions and the commencement day in relation tothose 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 M4Companies Act 1985,

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

• “effective 51 per cent. subsidiary” has the meaning given bysection 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 amendedby this section and “the old definition” means that sectionas it had effect on 13th March 1989,

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