CFM96621 - Interest restriction: alternative calculation: group-EBITDA (chargeable gains) election: practical application

TIOPA10/S422

When applying the assumptions at CFM96620 in the calculation of relevant gains and losses, it is necessary to consider the practical implications of this tax fiction.

This is particularly the case where the tax rules afford a degree of discretion, for example, through claims and elections. In such cases, reasonable assumptions should be made as to which claims and elections would be affected, and these should be applied consistently. For example, where a group has made a disposal outside of the UK which would be eligible for roll-over relief into new assets under the UK tax rules, it would be reasonable to assume that a roll-over relief claim could be made in respect of this gain.

Indirect disposals (Condition B)

Where a member of the group disposes of shares in another member, it may be necessary to adopt a pragmatic approach in calculating the relevant gains and losses on the underlying assets.

There may be cases where no apportionment of proceeds has taken place, and the sale of a consolidated subsidiary is simply treated as a disposal of a single discontinued operation for consideration equal to the price paid for the shares. One practical approach in calculating the effect of the group-EBITDA (chargeable gains) election at S422 could be to determine the relevant gains and losses by reference to the underlying assets reflected in the consolidated balance sheet prior to sale. The proceeds of disposal of the subsidiary should be allocated across the underlying assets to calculate the amount to be included. The proceeds to be allocated should include the consideration received (for example, cash and the value of any other consideration received such as shares) plus the value of liabilities held by the subsidiary immediately prior to the disposal that were assumed by the buyer. The proceeds may be allocated across the underlying assets by any reasonable method of apportionment.

There may be relevant assets that are unlikely to have given rise to any significant gain or loss under UK tax rules, and so it should be possible to concentrate on those underlying relevant assets that might be expected to have given rise to a chargeable gain or loss. Reasonable assumptions should be made as to the claims and elections that would apply to these relevant assets.

Where underlying relevant assets were held by the group member before the company became a member of the group, for the purposes of the tax fiction, it is reasonable when considering acquisition cost that the company was deemed to acquire these assets at fair value on the date of the group’s acquisition of the company.

Stepped disposals

A scenario may arise where a member of a group is disposed of in stages. In such a case, there will be a point whereby the company is re-categorised from a subsidiary to an associate.

For example, a group has a 55% investment in a subsidiary (fully consolidated), which is partially disposed of, say 10%, to become a 45% investment. In the group accounts, all of the assets of the subsidiary are therefore disposed of, but then the investment is recognised in the accounts as an investment in an associate.

Only the relevant percentage of the original cost should be taken into account, as there is economically only a partial disposal of the asset, such that in this example only 10% of the original cost should be used.

In relation to subsequent disposals of the now associate, if a further 10% were sold, reducing the investment from 45% to 35%, the relevant asset would be the shares in the associate (this is not a member of the group so there is no need to look to the underlying assets held by the associate). The recalculated profits (or relevant gain, in the case of S422) would be calculated by reference to the proceeds received for the 10% share sale and the original cost of acquiring/owning the 10% of the shares (including capital injections/contributions etc).