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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Administration: losses: targeted rules to prevent the contrived creation of capital losses by companies - example 4

Losses sometimes arise on the occasion of the liquidation of a group company.

The liquidation of a subsidiary company that had suffered a real economic loss, say on thefailure of a construction project joint venture, would be unlikely to be caught by thelegislation. The existence of a bona fide commercial activity, the involvement of agenuine unconnected party in the venture, and explicit mention of the demise of theventure in the parent company’s published accounts would indicate that arrangementsto secure a tax advantage were not a main purpose. The resultant loss would not bedisallowed by TCGA92/S8 as amended in FA 2006, (TCGA92/S16A with effect from 6 December2006 – see CG40241) even if the company chose to liquidate the company at the sametime as a chargeable gain arose elsewhere in the group, in order that advantage could betaken of section 171A in the manner in which it was intended to be used.

On the other hand, where a group has knowingly taken steps to ensure that the loss on theliquidation of a subsidiary is not representative of a genuine commercial loss, perhaps byusing the type of transactions that are mentioned in example 1, it is likely that thearrangements would be caught.

The same principles would apply in the event that a group decides to have a subsidiarycompany struck off, rather than to carry out the full liquidation process.