Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Company Taxation Manual

From
HM Revenue & Customs
Updated
, see all updates

Groups & consortia: groups - entitlement to profits or assets available for distribution: introduction

ICTA88/SCH18

This chapter contain guidance on ICTA88/SCH18 and the introduction outlines its contents. You should take no action on the basis of this introduction: you must read the relevant guidance.

Qualifying tests for group relief

There are qualifying tests for claimant and surrendering companies for group relief purposes (see CTM80150). The tests determine whether a subsidiary is a 75% subsidiary of its parent company. A subsidiary must pass all the tests to qualify as a 75% subsidiary. If it is not a 75% subsidiary, then it cannot claim or surrender group relief.

The tests concern:

  • the parent company’s holding of ordinary share capital - the parent must hold at least 75% of the subsidiary company’s ordinary share capital (CTM80155),
  • ‘arrangements’ affecting the control of the companies (ICTA88/S410) (CTM80165 onwards), and
  • beneficial entitlement to profits and assets (ICTA88/S413 (7)) outlined at CTM80155.

Beneficial entitlement tests

The provisions of ICTA88/SCH18 apply to determine whether the beneficial entitlement tests are satisfied. These provisions concern:

  • what persons are the equityholders of the subsidiary company (CTM81025 to CTM81030), 
  • the profitsof the subsidiary company which are available for distribution to those equity holders (CTM81035), 
  • the assetsof the subsidiary company which would be available for distribution to those equity holders on a winding-up (CTM81040), 
  • the percentagesof the profitsand assetsabove to which the parent company is beneficially entitled.

These rules are considered in detail in this chapter.

For the purpose of group relief, the appropriate percentage of profits and assets is 75%. But the ICTA88/SCH18 rules are also used for other tests in the Taxes Acts, where the percentage may be different. Schedule 18 provides the detailed rules for the beneficial entitlement tests in ICTA88/S413 (7).

Schedule 18 prevents entitlements to profits, and entitlement to assets available for distribution on a winding-up, being manipulated to let a subsidiary surrender group relief to another company which is in the same group, where the parent company has the appearance of being its parent, but is not its true economic parent. The ‘apparent’ parent may group itself artificially with a subsidiary, in an attempt to receive group relief which the true economic parent cannot take advantage of. The company selling group relief and the company buying it will share the benefit of the tax saved between them. There are examples in the guidance of how ICTA88/SCH18 prevents group relief being allowed or surrendered in these circumstances.

Definitions

ICTA88/SCH18 defines some terms, such as ‘equity holders’ and ‘profits and assets available for distribution’, with cross-references to other terms in Schedule 18.

Definitions for ICTA88/SCH18 of the following terms used in the ordinary share capital holding test and the beneficial entitlement tests are in CTM81010:

  • connected persons,
  • equity holders,
  • equity holders as such,
  • fixed rate preference shares (but see CTM81015 for exceptions),
  • indirect shareholdings etc,
  • loan creditor,
  • new consideration,
  • ordinary shares,
  • normal commercial loan (but see CTM81015 for exceptions),
  • securities.

In this guidance any reference to relevant accounting period means:

  • for parent-subsidiary relationships, the accounting period current at the date of test,
  • for consortium member-company relationships, the accounting period in relation to which the share in the consortium falls to be determined.

Applying the tests

You may need to apply the definitions above to define a group under the CG legislation. In that case you have to consider different dates for the amended definitions, and there is guidance on this at CTM81015.

One condition, or test, of a normal commercial loan is whether it depends on the results of the company’s business. This is the ‘business results dependency test’. Guidance on modifications of this test is at CTM81020.

For persons treated as equity holders see CTM81025, and for the treatment of a bank as an equity holder see CTM81030.

Once you have established what persons are the equity holders of a subsidiary company, you then go on to consider the beneficial entitlement tests. For guidance on:

  • the amount of profits, see CTM81035
  • working out the percentage of a company’s profits to which an equity holder is entitled, see CTM81045
  • working out the percentage of a company’s assets to which an equity holder is entitled, see CTM81050
  • the amount of assets available for distribution on a winding-up, see CTM81040.

Rights attaching to shares and securities

Both the ‘profits test’ and the ‘assets test’ depend on the rights that attach to shares or securities. These become more complex if these rights are limited or vary, or if there are option rights. Shares with limited rights are shares whose entitlements to profits and/or assets are limited by reference to a specified amount or amounts. Shares with varying rights are shares whose entitlements vary for different accounting periods. Cases may involve consideration of such rights either alone or in combination.

For guidance on how to deal with:

  • shares with limited rights and varying rights, see CTM81060 to CTM81080,
  • option rights, see CTM81090 onwards,
  • cases where there are both:
    • shares with rights which are limited by reference to a specified amount or amounts, and
    • shares with rights which vary for different accounting periods, see CTM81080

 

  • cases where these three possibilities are present:
    • shares with rights which are limited by reference to a specified amount or amounts, and
    • shares with rights which vary for different accounting periods, and
    • option rights, see CTM81105