Policy paper

Deferral of Corporation Tax payments on EU group asset transfers

Updated 11 March 2020

Who is likely to be affected

Companies that are members of multinational groups transferring assets to a group member elsewhere in the European Economic Area (EEA).

General description of the measure

This measure adds an option to existing legislation governing when Corporation Tax payments must be made in respect of profits or gains, that are charged to tax on certain transfers of assets to a member of the same group of companies, that is resident in another European Union (EU) or EEA state.

The measure provides that the UK taxpayer company can apply to pay that tax over a period of up to 5 years.

The deferred payments are subject to interest at the same rate as late paid Corporation Tax.

Policy objective

The government has decided to introduce this change following a recent decision of the UK First-tier Tax Tribunal which is currently subject to appeal. This change is intended to remove uncertainty over the compatibility with EU law of the UK rules, for taxing gains realised on the transfer of assets within a group of companies.

Background to the measure

The changes brought about by this measure are to remove uncertainty as to the compatibility of the UK rules for taxing transfers of assets between 2 group companies.

Under existing law, where such a transfer takes place between 2 companies within the charge to Corporation Tax, this is generally treated as not giving rise to an immediate tax charge on the transferor.

There are group asset transfer rules covering assets dealt with under the Taxation of Chargeable Gains Act 1992, and equivalent provisions for intangible fixed assets, loan relationships and derivative contracts in the Corporation Tax Act 2009 (CTA 2009).

Where the transfer is from a company within the charge to Corporation Tax, to a member of the group that is outside the charge to Corporation Tax, then the transfer is treated as taking place at market value for tax purposes, and any profit or gain is taxable on the transferor for the accounting period in which the transfer occurs.

A recent case before the First-tier Tribunal considered the compatibility with EU law, of the group asset transfer rules in section 171 Taxation of Chargeable Gains Act 1992, where a UK company transferred assets to a parent company based in the Netherlands.

It has found that the difference in treatment between a purely domestic transfer, and one to a group company in a different EU or EEA state, was a restriction of the Netherlands parent company’s right to freedom of establishment which could not be justified, unless the UK company was given the option to pay the extra tax over 5 years.

In the absence of such an option, the judge concluded that the transfer to the Netherlands company should be treated in the same way as a domestic transfer.

Whilst the case remains subject to appeal, the decision of the Tribunal has created a degree of uncertainty as to whether and when such transfers will be subject to Corporation Tax in the UK. This measure removes that uncertainty.

Consequently, companies undertaking group asset transfers similar to that in the case have the option to defer payment of tax to the extent it that is affected by the judgment.

There has been no prior consultation on the changes brought about by the measure, which were announced in a Written Ministerial Statement on 11 July 2019 with immediate effect.

Detailed proposal

Operative date

From 11 July 2019, companies may apply with immediate to effect, to defer payment of up to the amount of Corporation Tax on profits or gains attributable to affected group asset transfers, for which the due and payable date given by section 59D of the Taxes Management Act 1970 has not yet passed.

The same rule applies whether or not the company is a large or very large company, that usually pays its Corporation Tax under the quarterly instalment provisions. In effect this means that Corporation Tax on group asset transfers during accounting periods that ended on or after 10 October 2018, can be the subject of an application for deferred payment.

Current law

The current law providing for the treatment of domestic group asset transfers is found in:

• Chapter 1, Part VI Taxation of Chargeable Gains Act 1992 (CT on chargeable gains)
• Chapter 4, Part 5, Corporation Tax Act 2009 (Loan relationships)
• Chapter 5, Part 7, Corporation Tax Act 2009 (Derivative contracts)
• Chapter 9, Part 8, Corporation Tax Act 2009 (Intangible fixed assets)

CT payment dates, and current rules for deferred payment of certain Corporation Tax charges affected by EU law are set out in:

• Part VA Taxes Management Act 1970 (payment of tax)
• Schedule 3ZB Taxes Management Act 1970 (CT Exit charge payment plans)

Proposed revisions

The measure adapts the existing provisions in Schedule 3ZB Taxes Management Act 1970, for the deferred payment of exit charges incurred by a company that migrates from the UK to a relevant EEA state, so that an equivalent payment plan can be entered into in relation to Corporation Tax attributable to group asset transfers within the EU or EEA.

These adapted rules are set out in a new Schedule 3ZC to the Taxes Management Act 1970.

There are 4 main conditions that must be satisfied for companies to apply for deferral of Corporation Tax payments on a group transfer of assets:

a) there is a transfer of an asset or liability from either:

i. a company resident in the UK, or

ii. a non-resident company that carries on a trade in the UK through a permanent establishment (PE), and the asset is used or held for the purposes of the trade of the PE

b) that transfer is to another member of the group that is resident outside the UK in an EU state, or a relevant EEA state

c) the only reason that the transfer is not treated as tax neutral by one of the group transfer provisions, is that the transferee company is not within the charge to Corporation Tax in respect of the asset or liability

d) at the time of the transfer, there is a relationship between the transferor and transferee companies, that means there has been an exercise of rights to freedom of establishment under either Article 49 of the Treaty for the Functioning of the European Union, or Article 31 of the EEA Agreement

There are rules to determine the amount of tax for which payment can be deferred, limiting the qualifying tax to the amount that is attributable to relevant group asset transfers.

Once the payment plan application has been accepted by HMRC, payment of qualifying tax is subject to the similar rules as for exit charges under the provisions of Schedule 3ZB Taxes Management Act.

One exception is that there is an additional circumstance which causes the deferred tax to become payable in full, which is if the transferor and transferee companies cease to be members of the same group of companies.

The new Schedule 3ZC, contains a provision that allows for the withdrawal of the deferred payment option.

This may be used if the Treasury determines that immediate payment of Corporation Tax, under these circumstances would not be a breach of any company’s enforceable rights under the Treaty for the Functioning of the European Union, for example, following a final judgement to that effect by a UK court, or after the UK leaves the EU, this provision is deemed no longer necessary.

Summary of impacts

Exchequer impact (£m)

2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025

The final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at Budget 2019.

Economic impact

The measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

This measure will have no impact on individuals or households. The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will have a negligible impact on companies, less than 1,000 companies a year are estimated to be eligible to apply to defer the payment of Corporation Tax, on the profits from group asset transfers within the EEA.

These would incur one-off familiarisation costs. Only a few of these companies that opt to take up this option will also have ongoing costs, which will include making an application to HMRC and providing an annual report during the deferral period.

This measure is not expected to impact civil society organisations.

Operational impact (£m) (HMRC or other)

There will be negligible operational impact to HMRC for this change.

Other impacts

This will have no impact on Climate and Fuel Poverty targets, nor on Air Quality targets.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through regular communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact Phil Donlan on telephone: 03000 585504 or email: Philip.donlan@hmrc.gov.uk.