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HMRC internal manual

Employment Related Securities Manual

Securities with Artificially Enhanced Value

Dependent subsidiary pre-16 April 2003 - company’s business during period of account

For a subsidiary to qualify as an independent subsidiary, both of the following two conditions must first be satisfied during the period of account.

Condition 1 – company’s business outside group

Per FA88/S86 (1)(a), the whole, or substantially the whole, of the company’s business must be carried on with persons who are not members of the same group. Business has a very wide meaning here and is not limited to simple trading transactions. Even if business carried on with other members of the group is done on arms length terms it still counts as group business. The meaning of ‘substantially the whole’ is deliberately not limited by a particular percentage, so that a reasonable decision can be taken on whether or not the condition is met, based on the ordinary meaning of the words in the individual case. However to pass this test we would expect at least 90 per cent of the business to be carried on outside the group.

A subsidiary may have a subsidiary company or companies of its own. Business between a subsidiary and its own subsidiaries does not normally count as business carried on with other members of the group. But it will so count where any member of the subgroup carries on the whole, or substantially the whole, of its business with other members of the main group during the period of account taken as a whole.

FA88/S86 (2) enables a subsidiary which stands at the head of a subgroup to be an independent subsidiary, but only where value is not being shifted between the main group and the ‘independent’ subgroup.

Condition 2 – intra-group transactions

Per FA88/S86 (1)(b), there must either be no increase in the value of the company as a result of ‘intra-group transactions’, or any increase must not exceed 5 per cent of the value of the company at the beginning of the period. If the period of account is less than or more than a year a proportionately greater or smaller percentage is taken.

Per FA88/S86 (3), ‘intra-group transactions’ are transactions carried out between companies in the same group which are not on the terms that would be expected to be agreed by persons who were acting at arms length. A payment for group relief is, however, not to be regarded as an ‘intra-group transaction’.

See ERSM61040 for the two further conditions that need to be satisfied after the period of account.