CG47320 - Anti-gain buying rules in Finance Act 2006
General
Anti avoidance provisions in FA 2006 (called Targeted Anti Avoidance rules, or ‘TAARs’ for short) included additional measures to counter capital loss buying (known as TAAR2).
The legislation was announced in the Chancellor’s Pre Budget Report (“PBR”) on 5 December 2005 and is effective from that date, but see CG47338 for details of commencement.
A statement of principles, draft guidance document and draft legislation were published at PBR. The statement of principles, on which the legislation was based, and final version of the published guidance document can be found at appendix 8.
The intent of the targeted anti-avoidance rule enacted in TCGA92/S184A to S184H is to apply the second of the principles set out in the HMRC statement of 5 December 2005, that in general, a company’s capital losses should only be available against its own capital gains or those of companies that were under the same economic ownership when the loss arose and when the loss is utilised.
The FA 2006 legislation replaces previous anti-gain buying legislation in TCGA92/SCH7AA. Detailed guidance on TCGA92/SCH7AA can be found at CG48200+.
If you identify a case to which you think the gain buying TAAR may apply, you should seek advice from the CG specialist in your area of business. Capital Gains Technical Group should be contacted before contending that the legislation applies.
Section 184B to F of the Taxation of Chargeable Gains Act (TCGA) 1992 will apply whenever there is a change of ownership of a company that occurs directly or indirectly in consequence of, or in connection with arrangements. Where a main purpose of the arrangements is to secure a tax advantage involving the deduction of a capital loss from any chargeable gains, then that loss may not be deducted from the gains.
Where the rules apply any gains arising on assets owned by a company at the time of its change of ownership will only be capable of being franked by capital losses deriving from assets it held before the change. The acquiring company or group will not be able to offset its capital losses against gains arising in its new subsidiary.
Sections 184A to F TCGA 1992 will apply whenever there is a change of ownership of a company (“the relevant company”) that occurs directly or indirectly in consequence of, or in connection with arrangements. Where a main purpose of the arrangements is to secure a tax advantage involving the deduction of a capital loss from any chargeable gains, then that loss may not be deducted from the gains.
Definition of change of ownership
“Change of ownership” means that a company either becomes a member of a group of companies, or ceases to be a member of a group of companies, or becomes subject to different control. The wide definition of “change of ownership” is designed to prevent artificial arrangements under which, for example, a company’s membership of a group changes for tax purposes when the economic reality is that it does not. However HMRC would not normally consider the incorporation of a company or the acquisition from a company formation agent of a newly formed company as amounting to a change of control.
Definition of arrangements
The term “arrangements” is widely drawn to include any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable.
Whether a transaction forms part of a series of transactions, or a scheme, or arrangement is in general a question of fact, but this conclusion will follow in any case where one transaction would not have taken place without another transaction, or would have taken place on different terms without that other transaction. However, it is not necessary that transactions must depend on each other in this way in order that they form part of a scheme or arrangements.
Definition of tax advantage
“Tax advantage” has the meaning given in TCGA92/S184D. There are four legs to this definition, which cover relief, repayments, the amount of a charge and the assessment of corporation tax.
If a tax advantage arises out of a transaction that is part of the arrangements, the legislation asks whether the main purpose or one of the main purposes of the arrangements (referred to as “a main purpose” in this guidance) is to achieve a tax advantage. The purpose of the arrangements is determined by the purpose of the participants in entering into the arrangements. If any participant has a main purpose of achieving a tax advantage, that will constitute a main purpose of the arrangements.
Is a tax advantage a main purpose?
There is no one factor that determines whether the obtaining of a tax advantage is a main purpose of an arrangement. All of the circumstances in which the arrangements were entered into need to be taken into consideration. Such circumstances might include:
- the overall commercial objective (this should be considered from the perspective of not only the individual participants but also from any wider corporate group to which they belong - for these purposes a commercial objective does not include tax motivated reasons);
- whether this objective is one which the parties involved might ordinarily be expected to have, and which is genuinely being sought;
- whether the objective is being fulfilled in a straightforward way or
- whether the introduction of any additional complex or costly steps would have taken place were it not for the tax advantage that could be obtained.
Tax advantage - choice of commerical options
The existence of a tax advantage, such as obtaining a deduction for tax purposes, is not enough in itself to show that the arrangements have a main purpose of obtaining a tax advantage.
Where there is evidence that a group considered two ways to achieve a commercial objective and chose on commercial grounds to pursue one of them, the fact that there was a beneficial difference in tax treatment for the chosen route would not meet the main purpose test. Where the potential tax treatment was a factor in choosing between alternative arrangements, then it would still be necessary that securing a tax advantage was a main purpose to the arrangements. There may be situations where the tax advantage secured through undertaking one arrangement rather than another is so significant that this indicates that achieving a tax advantage was a main purpose. This is unlikely to be the case where the arrangements chosen do not involve additional, complex or costly steps included solely to secure or enhance a tax advantage.
Hence it will be relevant to draw a comparison in order to consider whether, in the absence of the tax considerations:
- the transaction giving rise to the advantage would have taken place at all;
- if so, whether the tax advantage would have been of the same amount; and
- whether the transaction would have been made under the same terms and conditions.
For example, in a case where section 184B of the Taxation of Chargeable Gains Act 1992 may be in point, and the arrangements include the purchase of a company with a crystallised gain or an asset pregnant with a gain, it will be necessary to consider whether that transaction would have proceeded at all if the acquiring company or group had not been in possession of capital losses. If it would, then it would also be necessary to consider, for example, whether the benefit of the capital losses had a significant effect on the terms and conditions of the acquisition.
Effect of the legislation
The effect of TCGA92/S184B in relation to gain buying is that losses may not be set against gains except in certain very limited circumstances. See CG47335 for those exceptions.
Definition of pre-change asset
A “pre-change asset” is defined as an asset owned by the relevant company before the change of ownership. There are specific rules to ensure the continuity of identification of a pre-change asset where gains and losses on such assets are deferred or rolled over by virtue of the application of various other provisions in TCGA 1992.
Asset no longer regarded as a pre-change asset
The guidance in CG47033 - CG47033A also applies, as suitably modified, for the purposes of the gain buying provisions in TCGA92/S184B.
Time of loss accrual and company to which tax advantage arises
TCGA92/S184B takes effect whether or not the gain arises before, at the same time as or after the change of ownership, and whether or not there is an allowable loss which can be set against the gain at that time. The tax advantage can arise to the company that has changed hands, or to another company, thus preventing the rules being circumvented, for example by the transfer of assets within a group of companies.
Limited exception to the rule for gain assets held before change of ownership
Between 5 December 2005 and 21 March 2007, TCGA92/S184B to F did not prevent the set off of a loss on an asset disposed of by the company which changed ownership provided the asset that gave rise to the gain was disposed of before the change of ownership, or the asset was owned by the company before the change of ownership and disposed of subsequently.
The exception was removed by S32 Finance Act 2007.
Interaction of legislation with pre-existing losses
In the unlikely event that an identification issue arises in relation to the set off of earlier losses where some are not caught by TCGA92/S184B but others are, then the set off may be effected in the manner most beneficial to the taxpayer.
In cases of doubt please submit your case to Capital Gains Technical Group.
Example
Group A owns all of the share capital of company B Ltd that in turn owns a business with substantial intangible property. The intangible property does not qualify for amortisation relief under FA02/SCH29 as it was held by B Ltd prior to 1 April 2002. If A sells the share capital in B Ltd it would realise a substantial gain covered by the substantial shareholding exemption. Company C Ltd wishes to buy the business of B Ltd but not B Ltd itself, as C Ltd wishes to obtain the amortisation relief made available when intangible property is acquired after 1 April 2002.
Group A sells its share capital in B Ltd to company X Ltd, which has substantial capital losses available. A has thus made a gain that is exempt under the substantial shareholdings rules. X Ltd then arranges for the sale of the business of B Ltd including the intangible property to C Ltd, hoping that its losses can be deducted from the gain arising.
This is clear example of gain buying that would not have been prevented by TCGA92/SCH7AA, which applied up to 5 December 2005. The second principle in the HMRC statement (see Appendix 8) has been contravened. X Ltd only becomes a participant in the scheme because it has surplus capital losses that it is willing to make available using TCGA92/S171A. The intended result is that the capital losses of X Ltd will be used to reduce the gain that arises when the trade of B Ltd is sold from Group A to C Ltd. There has clearly been a qualifying change of ownership as defined by TCGA92/S184C. A gain has arisen to company B on the disposal of a pre-change asset. The change in ownership has occurred in connection with arrangements the main purpose of which is to secure a tax advantage. TCGA92/S184B provides that the gain may not be franked by a loss.
Commencement
The provisions in TCGA92/S184A to F apply where a tax advantage arises on or after 5 December 2005. This can include situations where a loss arose prior to 5 December, but where the gain that it might otherwise have reduced arises on or after that date.
As explained in CG47334, TCGA92/S184B to F take effect whether or not the gain arises before, at the same time as or after the change of ownership, and whether or not there is an allowable loss which can be set against the gain at that time