Corporate members: transfers of business
Section 343 ICTA 1988
ICTA88/S343 provides, broadly, that when a trade passes from one company to another one in common ownership, losses in the first company can be carried forward into the second company. Guidance on this legislation can be found in the Company Taxation Manual at CTM06060 (LLM10000). Its application to general insurance companies is explained at GIM4000+ of the General Insurance Manual (LLM10000).
A particular difficulty used to arise when a group containing a number of corporate members decides to merge its activities into a smaller number of members. If syndicates in which those members have participated have made losses, those losses could be stranded following the merger. This was because the three year accounting system used by Lloyd’s syndicates (LLM2020 and LLM2030) creates difficulties in applying the rule that requires the predecessor to cease carrying on the trade and the successor to begin carrying it on at a particular point in time, which cannot be identified under this system. This consequence could be ameliorated prior to the repeal of FA00/S107 (4) by FA07/SCH11/PARA4, because this provision allowed the group containing the insurance company some flexibility in realising the loss, potentially allowing it to be group relieved.
Corporate Group A plc is not itself a Lloyd’s member, but owns 6 companies, called Corporate Member A Ltd, Corporate Member B Ltd, up to Corporate Member F Ltd. All of these companies, A to F were members of syndicates for the 1999, 2000 and 2001 syndicates, and all of these syndicates made losses.
The parent company decides to reduce the number of corporate members. A new company is formed, Big Corporate Member Ltd (BCM). That company becomes a member of Lloyd’s during 2001, and starts to underwrite on 1 January 2002, taking over all of the syndicate capacity from Corporate Members A to F.
Losses are declared over the next few years, as the 1999, 2000 and 2001 syndicates close, and these losses are allowable to set against other income, if any, in Corporate Members A to F, or for surrender elsewhere in the Group.
However, they will not be available to carry forward and set against profits made by BCM, since BCM has not succeeded to the trade carried on by Corporate Members A to F. If the losses cannot be surrendered as group relief, they will only be available to carry forward and set against post cessation receipts of A to F.
This is because ICTA88/S343 provides for one company to carry forward losses from another if it succeeds to its trade. BCM has not succeeded to the trade of A to F, since they continued trading after BCM had commenced, and therefore continued with their own trades. BCM started a new trade of its own, and A to F would not in fact be treated as ceasing for tax purposes until the time some years later when their Lloyd’s Deposits were released.
In addition, the losses were generated by activities which were left behind with A to F Ltd, not activities which were taken over by BCM Ltd.
Section 227B FA 1994
This problem is tackled by FA94/S227B, which was added by FA07/S43 where the predecessor’s final underwriting year (calendar year) is 2007 or later. See LLM4245.