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We act for a number of small close limited companies where a group structure exists consisting of a non-trading holding company and a wholly owned trading subsidiary. This structure has usually been achieved by inserting a holding company above the trading company, by way of a share exchange mechanism. This has been followed by hiving-up the property, occupied and used for the purposes of the subsidiary's trade, to the holding company, in order to safeguard its future.
We act for a number of small close limited companies where a group structure exists consisting of a non-trading holding company and a wholly owned trading subsidiary. This structure has usually been achieved by inserting a holding company above the trading company, by way of a share exchange mechanism. This has been followed by hiving-up the property, occupied and used for the purposes of the subsidiary's trade, to the holding company, in order to safeguard its future.
The criterion for excluding the holding company from counting as an associated company for small companies relief purposes, contained in Statement of Practice SP5/94, has been met with the exception that the holding company holds the property occupied and used for the purposes of the subsidiary company trade. In most cases, no rent passes between the companies for use of the properties.
Presumably in cases where a rent passes between the companies, it would be difficult to resist any contention that the holding company is carrying on a business. However, the position where no rent passes, with the subsidiary trading company meeting all overheads on the property in the capacity of tenant, is unclear, and we would like to submit returns with some degree of certainty.
Readers' views would be appreciated.
(Query T15,972) - Reorganiser.
The small companies rate of corporation tax available under section 13, Taxes Act 1988 is denied to a close investment-holding company as defined in section 13A. An associated company which has not carried on any trade or business at any time in the accounting periods concerned is disregarded. Similar remarks apply to the starting rate made available by section 13AA of the Act.
Statement of Practice SP5/94 cannot restrict the statutory scope of the above disregard, although the Revenue is free to adopt a more lenient stance. So, does the holding of properties for the subsidiary companies amount to the carrying on of a trade or business? The latter expression has a much wider possible meaning than trade.
Typical of business is the making of investments (from which the principal part of the company's income is derived), an activity which identifies an investment company for the purposes of section 130, Taxes Act 1988 and accordingly opens up the chance to enjoy relief for management expenses under section 75 of the Act. However, the courts have attached a purposive tag to this test, as in Cook v Medway Housing Society Ltd [1997] STC 90, and it is arguable that the companies with which 'Reorganiser' is concerned lack the profit-seeking motive characteristic of business.
The matter is worth pursuing at a higher level in accordance with the Revenue leaflet Code of Practice 10, concerning statements of practice. - M.C.N.
Under section 13(4), Taxes Act 1988 a company that has not carried on any trade or business will not be an associated company for small companies rates of tax. There could be some doubt where a company holds shares in a subsidiary. Is there a business?
Statement of Practice SP 5/94 is a helpful statement. It defines one example of when the Inland Revenue will treat a holding company as not carrying on a trade. The Revenue's criteria are not alternatives. They must all be met. One criterion is that the holding company must have no assets other than shares in a subsidiary. This seems to be a sensible approach. If the Inland Revenue is content to ignore the shares in a subsidiary and those are the only assets, the holding company will be treated as carrying on no business. If it has any other assets, the Inland Revenue reserves its right to review the situation.
The Inland Revenue manuals point out that receipt of income generally constitutes a business. The manuals also point out that tax cases have confirmed that a company does not have to receive income to be carrying on a business. In the Revenue's view, the holding of assets, especially if they are capable of producing income or gains, may be evidence of a business. Is the holding of the property the carrying on of a business? In the eyes of the Revenue it probably is, and I would probably agree.
The subsidiary company is occupying the property under a tenancy or a licence. That tenancy or licence can be turned into one that produces income. Furthermore, the property is held by the holding company to safeguard the holding company's future. Also, the property could be sold for profit. There may not be a trade but there seems to be a business of sorts.
If 'Reorganiser' wants certainty, the return should be sent in treating the holding company as an associated company. If 'Reorganiser' wants the minimum of tax but protection, submit the return with sufficient explanation for the Inland Revenue to be aware of the situation. - J.W.G.
