Policy paper

Statement of Practice 13 (1980)

Published 14 October 1980

Statement of Practice 13 (1980)

Exempt distribution

This expression, wherever it appears in TA 1988 ss 213–218, refers only to what would otherwise have been a distribution for the purposes of the Corporation Tax Acts. It does not, for example, apply to a distribution in a winding up.

TA 1988 s 213(3)(b)(i)

To satisfy s 213(3)(b)(i), a trade (or trades) must be transferred. HM Revenue and Customs (HMRC) will regard this as satisfied where what is received by the transferee company is a trade. What passes from one company to another will be a parcel of assets comprising what is needed for the carrying on of that trade. The same trade may previously have been carried on as such by the distributing company; but this is not essential. What is transferred may have been part only of a trade carried on by that company, for example, the retail end of a combined manufacturing/retailing trade. Or again the assets being transferred may be being brought together for the first time from one or more trades carried on by the distributing company or in the group of which it is a member; assets may even be included which were not previously used in a trade or held by a trading company, eg property may have been held in a property investment company. What matters is that there should be a division of trading activities and that assets transferred should be transferred to be used in a trade by the transferee company and should be so used. Relief will not be denied solely because some minor asset linked with a trading asset, for example a flat above a shop, is also transferred.

TA 1988 s 213(6)(a), (8)(b), (d) ‘ordinary shares’

Relief under s 213(2) is given to a distribution to ordinary shareholders only insofar as it is of shares forming part of ordinary share capital (as defined in s 832) which are transferred or issued. Relief on that distribution will not be denied solely because concurrently there is a transfer or issue, of a kind that does not qualify for relief, of other shares or securities to ordinary shareholders or of shares or securities of any description to preference shareholders (and whether or not that other transfer or issue involves a taxable distribution). Similarly, the words ‘substantially the whole’ will be regarded as satisfied even where the shareholders give some consideration. However, these other circumstances will be taken into account in judging whether all the conditions, in particular those of s 213(10), (11), are satisfied

TA 1988 s 213(6)(a), (8)(b), (d) ‘substantially the whole’

In the context of these particular provisions, ‘substantially the whole’ is taken to mean around 90% or more.

TA 1988 s 213(8)(a) ‘interest… in that trade’

The legislation does not define this expression. In HMRC’s view, it must be given a wide meaning. A company would clearly retain an interest in a trade if it carried it on jointly or otherwise had a right to the profits or assets or to any of them. But other circumstances could exist in which it could be said to have an interest, for example, if it was or was entitled to be a main supplier or customer, or possibly as a consequence of the two companies having common management. In these kinds of case, HMRC would not normally argue that the interest was other than a ‘minor interest’ unless the interest effectively gave control of the trade or of its assets, or a material influence on the profits or on their destination. More generally, it will not always be possible to quantify an interest in a trade; but where this can be done, ‘minor’ is the opposite of ‘substantially the whole’, ie around ten% or less.

TA 1988 s 213(6)(b), (8)(c), (e) ‘after’

In HMRC’s view, these provisions require that the company should be bona fide trading after the distribution but in this context they do not regard after’ as meaning ‘for ever after’. If there were any intention that the conditions would cease to be satisfied at some later time, the application of s 213(10), (11) would need to be considered.

TA 1988 s 213(11)(c)

The concurrent sale of another company in the same group as a subsidiary being demerged is not necessarily a bar to relief. It would be so, for example, if that were a main purpose of a scheme or arrangement of which the distribution formed a part.

TA 1988 s 213(11)(d) ‘after’

‘After’ in this context clearly means ‘at any time after’.

TA 1988 s 215

Advice on the method of application under s 215(1) and on the information to be included in it is contained in the Annex to this Statement. Where, exceptionally, it is not possible to explain the purposes of a demerger adequately in writing, HMRC will invite applicants to an interview. If they have to refuse clearance under these provisions, they will normally state the main reason for doing so.

All general enquiries on the demerger legislation should be directed to:

Business Tax Division (Demergers)
New Wing
Somerset House
London
WC2R 1LB

and not to local inspectors.

Particular enquiries on the Capital Gains aspect should however, be directed to:

Capital and Savings Division
Capital Gains Clearance Section
Sapphire House
550 Streetsbrook Road
Solihull
West Midlands
B91 1QU

TA 1988 s 216(1)

This subsection requires a company making an exempt distribution to make a return giving particulars, inter alia, ‘of the circumstances by reason of which it is exempt’. In many cases a clearance notification will previously have been given by the Commissioners for HMRC under s 215(1). Where the distribution is precisely that for which a clearance application was made, all relevant circumstances being as disclosed in that application, it will suffice to refer to the notification and to confirm that that is so.

TA 1988 s 768

Section 768 provides, broadly, that where within any 3 year period there is both a change in the ownership of a company and a major change in the nature or conduct of a trade carried on by it, then relief cannot be obtained against profits arising after the change of ownership for losses incurred before the change.

The object of the demergers legislation is to make it easier for trading activities to be split (which may involve a change in ownership of a company within the meaning of the section) so that some part of them at least may be managed more dynamically (which may involve a major change in the nature or conduct of the trade). In the meantime, if full details are given, HMRC will consider sympathetically the application of the section where the reason for s 768 applying is that the ownership of a trade being demerged under these provisions is passing from a company to its shareholders, the underlying ownership of the trade being unchanged (eg the shareholders after the distribution own directly the interests in a company which previously they owned indirectly through the company which made the distribution).

Note Concession C11 provides that a distributing company will not be regarded as failing to meet s 213(7) or (9) merely because it retains, after the distribution, sufficient funds to meet the cost of liquidation and to cover the amount of the share capital remaining, depending on the amount of that remaining share capital. The full text of Concession C11 may be found (in the Extra-statutory Concessions section of this work, ante).

Annex

Applications for clearance under section 215(1)

Procedure

Application for clearance under TA 1988 s 215 should be sent to if not market sensitive:

Clearance & Counteraction Team
1st floor
22 Kingsway
London
WC2B 6NR

If market sensitive:

Ray Mcgann
5th floor
22 Kingsway
London
WC2B 6NR

Applications under TA 1988 s 215 and one or both of TCGA 1992 ss 138, 139 or TA 1988 s 703 can be sent to the same address with a copy of the application and all supporting documents for each clearance sought. Applications will then be forwarded to the relevant offices. Alternatively the other applications may be made directly to:

HMRC
Capital and Savings
Capital Gains Clearance Section
Sapphire House
550 Streetsbrook Road
Solihull
West Midlands
B91 1QU

And

HMRC
Special Investigations Section
5th Floor
22 Kingsway
London
WC2B 6NR

respectively.

Form of application

To assist companies in preparing clearance applications under s 215(1) and to facilitate their consideration by the Commissioners for HMRC, an outline of the basic information needed is given below. It is not an exhaustive statement and each applicant in giving the particulars of the relevant transactions required by s 215(5) must fully and accurately disclose all facts and circumstances material for the decision of the Commissioners for HMRC (s 215(8)).

This advice refers only to applications under s 215(1). Where a single application is made under that and other provisions, eg TCGA 1992 s 138, it should open by stating clearly the provisions under which it is made and should be expanded to include any additional information needed for the application(s) under the other provision(s).

It will be helpful if applications follow the order of items below, each item being expanded as necessary and further information being added at the end.

1. Companies

The name of each ‘relevant company’ (section 213(3)) showing:

• (a) whether it is a ‘distributing’, ‘subsidiary’ or ‘transferee’ company
• (b) its tax district and reference
• (c) whether it is resident in the UK
• (d) status, ie, ‘holding company’ or ‘trading company’ within the section 218(1) definition or some other type of company eg, investment company or holding or trading company not within the definition

2. Groups

Where appropriate a statement or diagram showing the shareholding interest of each group company in other group companies. A group for this purpose is the largest 51% group (as defined in section 218(1)) to which the distributing company belongs.

3. Purpose and benefits

A statement of the reasons for the demerger, the trading activities to be divided, the trading benefits expected and any other benefits expected to accrue whether or not to the company concerned.

If this can be stated more easily after giving a detailed description of the proposed transactions this item may be included in the application after item 4.

4. Transactions

A detailed description of all the proposed transactions including:

• (a) share capital
  • particulars (class, amount and voting rights) of all share capital of the companies in paragraph 1 above, issued (or to be issued) in the course of the demerger showing the shares to be transferred and/or issued (or exchanged) in the demerger and to which shareholders (or classes of shareholders) or companies - particulars of any changes to be made in shareholders’ rights or loan capital arrangements in connection with the demerger should also be given
• (b) transfer of trade (as distinct from a trading subsidiary)
  • particulars of the transfer including all trading and other assets and liabilities to be transferred and retained (approximate statements of affairs for the distributing and transferee companies before and after the demerger would be helpful) - particulars of any interest in the trade to be retained by the distributing company or its group should also be given
• (c) prior transactions
  • particulars of any prior transactions or rearrangements within a group in preparation for the demerger The description should make it clear why it is considered that all the relevant conditions of section 213(3) to (10) and (12) are satisfied.

5. Section 213(11) conditions

Confirmation, together with all relevant information, that the distribution is not part of a scheme etc within section 213(11). A statement should also be given of the circumstances, if any, in which it is envisaged that control of a ‘relevant company’ (listed in paragraph 1 above) might be acquired by someone other than members of the ‘distributing company’ or a trade carried on by 1 of those companies before or after the demerger might cease or be sold. (Such circumstances might of course exist but not as part of a scheme or arrangement or otherwise to cause any of the qualifying conditions to be failed.)

6. Balance sheet and profit and loss account

The latest available balance sheets and profit and loss accounts of the existing companies in paragraph 1 above and in the case of a group the consolidated balance sheet and profit and loss account with a note of any material relevant changes between the balance sheet date and the proposed demerger (the latest balance sheet etc available may of course be later than the last sent to the appropriate HMRC office).

Extra-statutory concession C11

Demergers: TA 1988 s 213(7), (9).

Note: the text of this statement is as shown in IR 131 (August 2003).