Delectable Degrouping

NIGEL POPPLEWELL FTII offers some observations on degrouping charges.

THE NUMBER OF degrouping charges has proliferated alarmingly following the Finance Act 2002. The phrase 'degrouping charge' is simple shorthand for a charge or claw back which crystallises in a company which leaves a group. Prior to the Finance Act 2002, the classic example was the deemed disposal and reacquisition of a capital asset under section 179, Taxation of Chargeable Gains Act 1992. Other examples included the charge arising when a company becomes non-resident under section 185, Taxation of Chargeable Gains Act 1992, and the VAT charge under section 43(2B), VAT Act 1994 (although strictly speaking that charge accrues not to the degrouping company, but to the representative member).

New charges

Now, however, there are stamp duty degrouping charges (or withdrawals), as well as a charge under the intangibles legislation in section 84 of, and Schedules 29 and 30 to, the Finance Act 2002.

An unwelcome feature of these charges is the imposition of secondary liability for failure to pay (usually a company in the degrouping company's former group). On the other hand, two welcome reliefs have been added. The first allows competent companies to make an election pursuant to which degrouping charges are deemed to accrue to a company within the vendor's group, rather than the target company. This, however, applies only to charges under section 179, Taxation of Chargeable Gains Act 1992 and also the intangibles legislation. It does not apply to reallocated stamp duty degrouping charges.

The second relief permits deemed gains to be rolled over. Again, this relief does not apply to stamp duty degrouping charges, merely to those accruing under section 179, Taxation of Chargeable Gains Act 1992, or paragraph 58 of Schedule 29 to the Finance Act 2002. It applies not only to the deemed disposal and reacquisition in the target company, but also to any gains reallocated pursuant to an election referred to above.

Timing of accrual

Inland Revenue practice before the enactment of the Finance Act 2002 was to deny rollover relief to gains arising on a degrouping. It is thus unlikely that practitioners will have had to consider the interaction between the date on which the gain is deemed to have been accrued, and the 12-month/three-year reinvestment time required by section 152, Taxation of Chargeable Gains Act 1992.

It is, however, worth noting that the time of accrual for section 152 purposes is not the time that the target company leaves the group. Furthermore, the provisions on timing for rolling over a degrouping charge under section 179 are different from those relating to rolling over the equivalent charge under the intangibles legislation.

For section 179 purposes, roll-over is under section 152. Under section 152(3), rollover relief applies where the new assets are purchased in the period beginning 12 months before and ending three years after:

'… the disposal of, or of the interest in, the old assets or at such earlier or later time as the Board may by notice allow'.

Schedule 7AB to the Taxation of Chargeable Gains Act 1992 amends this so that the 12-months/three-year period ends/starts at the 'time of accrual'.

This is not the date on which a target company leaves the group. Under section 179(3), the degrouping company is treated as having disposed and reacquired the asset 'immediately after its acquisition of the asset'. Thus if a company degroups in March 2003 having had an asset transferred to it in June 2000, the deemed disposal and reacquisition is treated as having taken place in June 2000, at the market value at that time. (Section 179(6) is ignored for the purposes of this article.)

However, this is different from the time the chargeable gain, or an allowable loss, is treated as accruing to the degrouping company. This is determined by section 179(4) and is the later of:

(a) the beginning of the accounting period in which the target company degroups; and

(b) the deemed disposal and reacquisition.

Thus, if the degrouping company has a calendar year accounting period, and, as above, degroups in March 2003, the chargeable gain will be deemed to have accrued on 1 January 2003. If, instead of the asset having been transferred to it in June 2000, it was transferred in February 2003, then the chargeable gain would accrue at that time.

Thus the three-year reinvestment period runs from January or February 2003, rather than March, and reinvestment in March 2006 may be too late, subject to the Board's discretion.

Intangibles legislation

This is in contrast to relevant time under the intangibles legislation in Schedule 29 to the Finance Act 2002. Part 7 of that Schedule allows rollover relief where a gain is realised, and subsequently reinvested. I say subsequently, but it is a 12-year-before/three-year-after régime similar to that under section 152. A degrouping charge under paragraph 58 can be rolled over under Part 7 (see paragraph 65).

The time provision in Part 7 relates to the date of realisation of the old asset and, by paragraph 65, this is deemed to be the date on which the degrouping takes place. In other words, there is no look back to either of the beginning of the accounting period in which the degrouping takes place or, (if later) the date of the intergroup transfer.

As mentioned above, it is also possible to roll over a reallocated degrouping charge under both the Taxation of Chargeable Gains Act 1992 and Finance Act 2002.

A section 179 degrouping charge is reallocated pursuant to section 179A. Section 179B(3) and (4) does not amend the time at which the chargeable gain is treated as accruing. It does not change a time of accrual which is still 'section 179(4) time'. It is therefore still necessary to look back.

For intangibles, this provision is in paragraph 67 of Schedule 29 to the Finance Act 2002. This does not modify the date of realisation either, so the principles set out above apply. It simply deems the deemed realisation to have been made by the company to whom the degrouping charge has been reallocated, rather than the target company.

Flexibility

Finally, the timing is the same even if the degrouping charge is to be rolled over by another group member. This is possible under section 175, Taxation of Chargeable Gains Act 1992 (as regards the section 179 degrouping charge itself and if reallocated under section 179A), and, seemingly, in respect of an intangibles degrouping charge under paragraph 56 of Schedule 29 to the Finance Act 2002 (as regards the paragraph 58 degrouping charge itself and if reallocated under paragraph 66 (see paragraph 67)).

Nigel Popplewell is a partner at Burges Salmon, and can be contacted on 0117 902 2782.

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