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HMRC internal manual

Company Taxation Manual

Corporation Tax: company reconstructions: relevant liabilities restriction - examples

The following examples below illustrate the operation of the relevant liabilities restriction imposed by CTA10/S945 and outlined at CTM06250.

Example 1: transfer of a whole trade

Company A is in financial trouble after sustaining heavy losses and agrees to sell its business to Company C.

Company C is unwilling to take over the bank loan and the creditors. So it is arranged that Company A sets up a wholly owned subsidiary, Company B, and transfers to it its leasehold premises, plant, goodwill, stock and employees for £450,000, which is left on loan account. Company A retains its cash on hand and at bank and the debtors. The unused CTA10/S45 carry forward losses at that date are £1,200,000.

Two weeks after Company B began to carry on the trade; Company C buys its shares for £1 and enables Company B to repay the loan of £450,000.

Company A’s balance sheet on the day it ceased to carry on the trade stood as below.

### Assets     ### Liabilities  
         
Tangible assets £100,000   Creditors £ 1,500,000
Stocks £250,000   Bank loan £ 500,000
Debtors £500,000   Share capital £ 10,000
Cash £ 5,000   Profit & loss a/c £(1,155,000)
Total £855,000   Total £ 855,000

Relevant liabilities restriction

Liabilities retained    
     
Creditors £1,500,000  
Bank loan £ 500,000 £2,000,000
Less Assets retained    
Debtors £ 500,000  
Cash £ 5,000 £ 505,000
    £1,495,000
Less consideration   £ 450,000
    £1,045,000

Company C is only entitled to losses of £155,000, that is, £1,200,000 minus £1,045,000.

 

Example 2 transfer of a part trade

The facts are as in Example 1 but Company A only wishes to sell part of its trade to Company C.

Company C is unwilling to take over the bank loan and the creditors. It is arranged that Company A sets up a wholly owned subsidiary, Company B, and transfers to it the plant, stock and employees relating to the part trade transferred, and the leases for the premises the part-trade occupies. Company A does not transfer any of the debtors, cash balances or liabilities. The sale price is £300,000. The unused CTA10/S45 carry forward losses at the date of transfer are £800,000.

Two weeks after Company B began to carry on the trade, Company C buys its shares for £1.

It is agreed that the following assets and liabilities should be apportioned to the transferred part trade:

Creditors £900,000
   
Bank loan £350,000
Cash £ 2,000
Debtors £200,000

Relevant liabilities restriction

Liabilities retained    
     
Creditors £900,000  
Bank loan £350,000 £1,250,000
Less assets retained    
Debtors £200,000  
Cash £ 2,000 £ 202,000
    £1,048, 000
Less consideration   £ 300,000
    £ 748,000

Company C only entitled to losses of £52,000, that is, £800,000 minus £748,000.

The remaining losses of £748,000 do not revert to Company A but are cancelled.