CFM98693 - Interest restriction: administration: UK group company: interaction with "loss-buying" rules in CTA10/PT14

CTA10/S679 TIOPA10/S379

CTA10/PT14, "Change in Company Ownership" contains extensive rules that may restrict relief for losses brought forward and other analogous reliefs where there has been a change in company ownership. The rules are designed to counter 'loss-buying', but there is no purpose test; the triggers for application of the various rules are mechanical.

The various chapters of PT14 deal with restrictions to the carry-forward of trade losses in CTA10/S672-676, see CTM06300+, and with other similar restrictions to carried forward reliefs.

The rules most likely to interact with reactivations of tax interest are in Chapter 3 of PT14. The main guidance on these provisions is found at CTM08700+.

The rules in CTA10/PT14/CH3 could apply to disallow relief for reactivated tax-interest in the following scenario:

  • A company carries on investment business. The CIR leads to a tax-interest disallowance in the company. The tax-interest in question is identified, either by the application of the default rules in TIOPA10/S377(2) or by election under S377(3), as an amount of non-trading loan relationship debits.
  • The amount of the debits was determined on an amortised cost basis of accounting.
  • At some point there is a change of ownership of the company within the meaning of CTA10/S719. (It is probable that this would mean that the company became a member of a different CIR group, but it is conceivable that this might not be the case.)
  • An event or events cause one of the conditions A to C in CTA10/S677 to be satisfied. In particular, this can be the case where there has been a significant increase in the amount of the company’s capital as set out in CTA10/S688-691 - condition A. It should be noted that the definition of capital is broad and can include debt in issue, such as redeemable loan capital.

Other trigger events are:

  • a major change in the nature or conduct of the business carried on by the company within the period of 8 years beginning 3 years before the change in ownership (condition B); or
  • where the change in ownership follows a period in which the scale of activities of the business had become small or negligible (condition C).

The effect of the application of CTA10/PT14/CH3 is that “relevant non-trading debits”  may not be able to be brought into account in periods after the change in ownership. A "relevant non-trading debit" is defined in CTA10/S730 and can include an amount that is determined on an amortised cost basis of accounting and relates to an amount that accrued before the change in ownership of the company – S730(5).

An amount that is reactivated by TIOPA10/S379(3) is treated as a tax-interest amount of the accounting period in which the reactivation arises. It is not stated to be a new or different tax-interest amount from that identified in (i) TIOPA10/S377, which identifies tax-interest amounts that have been disallowed (CFM98660), or (ii) TIOPA10/S380, which identifies amounts that are reactivated (CFM98690). The overall effect of these two sections is to identify tax-interest amounts that are reactivated and amounts that have previously been disallowed. As a result, amounts that have previously been disallowed are reactivated, keeping the same character.

But for the application of CTA10/CPT14, the effect of TIOPA10/S379 might be to bring into account a tax-interest amount that originally arose in an earlier period (and relates to an amount that accrued before the change in ownership of a company) and was an amount that was determined on an amortised cost basis of accounting. Such an amount could be a 'relevant non-trading debit' as defined in CTA10/S730(5). However, the reactivated disallowed tax-interest amounts meeting this description may then be prevented from being deductible by CTA10/S679, which restricts the debits to be brought into account for the purposes of CTA09/PT 5 in respect of the company's loan relationships.

In such a situation, from a practical perspective, the group need not reactivate the interest in a way that ‘uses’ excess interest allowances only to disallow the interest, since this would result in an effective double disallowance of interest. Instead, the effect should be as if CTA10/PT14 extinguishes/reduces the appropriate amount of the carry forward CIR disallowances.