Corporation tax for ATX-UK

Part 2 of 4

This is the Finance Act 2023 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2024 to 31 March 2025. Candidates sitting ATX-UK after 31 March 2025 should refer to the Finance Act 2024 version of this article (to be published on the ACCA website in 2025).

In Part 1 GF Ltd was formed and began trading. In this part, GF Ltd will acquire an additional business. Once you have read about the company’s plans, stop and think about the possible tax implications before reading on.

Expansion via acquisition

In February 2023 Fay identified TP Ltd, a member of a large group of companies, as a possible acquisition.  It was agreed (for commercial reasons) that the trade and assets of TP Ltd, rather than the shares, would be acquired.

On 1 April 2023, GF Ltd formed WA Ltd, a wholly owned subsidiary. On the same day, WA Ltd acquired the trade and assets of TP Ltd. TP Ltd had trading losses of £65,000 and capital losses of £18,000 available to carry forward as at 31 March 2023.

The results of the two companies for the year ended 31 March 2024 were as follows.

On 1 December 2023 GF Ltd made a loan of £14,000 to Lamar, one of the passive investors in the company.

The tax implications arising out of this expansion via acquisition are:

• The capital losses of TP Ltd will remain with TP Ltd. TP Ltd has sold its trade and assets to WA Ltd and capital losses always remain with a company when it sells its trade. TP Ltd can use its capital losses to relieve any chargeable gains arising on the assets sold to WA Ltd.
  
  
• The trading losses of TP Ltd will also remain with TP Ltd and will not be transferred with the trade. Where a company sells its trade to an unconnected company, any trading losses remain with the vendor company. TP Ltd may be able to offset the losses against any capital allowance balancing charges and any remaining chargeable gains arising on the sale.
  
  
  • Note: It is possible for trading losses to be transferred to the purchaser when a company sells its trade to another company, but only when certain conditions are satisfied. Broadly, the same persons must beneficially own at least 75% of the business both before and after the sale. These conditions would have been satisfied if TP Ltd had formed a subsidiary, Newco, sold its trade to Newco, and then sold Newco to GF Ltd.
    
    TP Ltd is the legal and beneficial owner of its trade prior to the sale. If the trade had been sold to Newco, TP Ltd would no longer be the legal owner of the trade but would still be the beneficial owner as it owns Newco, which in turn owns the trade. In such circumstances the trading losses would be transferred to Newco together with the trade. This would enable Newco to use the trading losses in the future.
    
    However, because there would have been a change in the ownership of Newco (it would have been sold by TP Ltd to GF Ltd), if there is a major change in the nature or conduct of Newco’s trade within a period of five years beginning no more than three years before the acquisition by GF Ltd, it would not be possible for the losses to be carried forward beyond the date of the change of ownership of Newco.
     
• There are now two companies in the GF Ltd group. Accordingly, the limits used to determine the rate(s) of corporation tax payable and the need to pay quarterly instalments of corporation tax must be divided by two.
  
  
• The corporation tax liability of the group for the year ended 31 March 2024 is computed as follows:

From a tax point of view, consideration could have been given to GFL acquiring the trade of TPL without the use of a separate subsidiary.  This would have resulted in a single company with taxable total profits of £240,000 (£140,000 + £100,000) and a slightly higher tax liability, as set out below.

The decision as to whether or not to use a separate subsidiary would also need to take account of commercial and legal issues particularly in view of the relatively modest reduction in the total tax liability.

• GF Ltd is a close company and has made a loan to a participator, Lamar. Accordingly, GF Ltd should have paid HM Revenue & Customs (HMRC) £4,725 (33.75% x £14,000) by 1 January 2025 (ie nine months and one day after the end of the accounting period). GF Ltd would not have had to make any payment if Lamar had worked full time for the company as the loan does not exceed £15,000 and Lamar does not own more than 5% of GF Ltd.
• HMRC will repay the £4,725 to GF Ltd following either the repayment of the loan by Lamar or the waiver of the loan by GF Ltd. The repayment will not be made until nine months  and one day after the end of the accounting period in which the loan is repaid or waived.

Conclusion

• Where a company acquires the trade of another company, capital losses remain with the vendor company. Trading losses will also remain with the vendor company unless the two companies are under common ownership.
• Where a trade is transferred to a company in circumstances such that the conditions necessary for trading losses to be transferred with the trade are satisfied, any subsequent sale of the company will be a change in ownership. This may restrict the use of the losses transferred.
• As mentioned in part 1 of this article, it is always important to identify whether or not a company is a close company. It is then necessary to consider the facts of the situation in order to determine which, if any, of the implications of a company being close are relevant.

In the remaining parts of this article we will look at the implications of GF Ltd expanding overseas.

The corporation tax issues relating to groups are considered in two further articles:

• Corporation tax – Group relief for ATX-UK
• Corporation tax – Groups and chargeable gains for ATX-UK

Written by a member of the ATX-UK examining team

The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.