Corporate members: restriction of group relief
The scheme of group relief depends for its integrity on the fact that losses and other amounts available for relief can only be surrendered against profits of a corresponding period. And as soon as arrangements for transfer of a company to another group or consortium come into existence, an accounting period is treated as coming to an end (ICTA88/S410). This provision, coupled with the disallowance of trading losses in certain circumstances where there is a change in ownership of a company (ICTA88/S768) broadly ensure that the potential tax benefit attaching to trading losses remains with the economic undertaking or group which gave rise to them; in other words they prevent the losses being sold to an economically unconnected concern.
However, prior to the enactment of FA94/S227A by FA07/S33 the unique feature of Lloyd’s 3-year accounting (LLM2200 and LLM2210) was an exception. The effect of this is that a loss in year 1 does not become tax effective until year 4, providing ample time for a loss making Lloyd’s corporate member that is leaving the market to be sold to a group with no economic interest in it other than the benefit of the tax losses. The company can join the new group in, say, year 3, in time for the losses, which are by then established, to become effective in year 4. The concern is focused on companies leaving the Lloyd’s market, because if they are loss making companies that are continuing, it is presumed that any acquiring group is content to be exposed to continuing insurance risk, which may justify the benefit of relief.
The legislation operates by creating a ‘group relief continuity condition’, which, in addition to the normal requirement for the claimant and surrendering companies to be in group relationship for the surrender period, also requires the Lloyd’s corporate member (as surrendering company) and the claimant company to meet the usual group or consortium relationship conditions (ICTA88/S402 (2) or (3)) for the period
- beginning with the last day of the last active underwriting year of the corporate member, and
- ending with the first day of the first underwriting year in which the losses of the last active underwriting year are declared (under the declaration basis - see LLM4060).
The reference to ‘first underwriting year’ ensures that, where the surrendering company goes into run-off, and so declares in several years, it is the first of these that is counted. The effect of this is to require the group or consortium relationship to be maintained from the end of the year in which the loss was actually sustained until the end of the claim period. This prevents the use of foresight as described above.
‘Last active underwriting year’ means the last underwriting year (calendar year) in which significant underwriting activities take place. This prevents the legislation being avoided by continuing the trade in an attenuated form.
The legislation applies where the required group or consortium relationship between the claimant and surrendering companies is first created on or after 21 March 2007.