Capital allowance rich companies - change of ownership
The measure
Further to HMRC's Technical Note of 21 July 2009 introducing a change of law with immediate effect, the relevant draft legislation has now been produced: the measures target the buying of a company where the tax written down value of the relevant plant/machinery exceeds the balance sheet value.
The legislation applies where there is a "qualifying change" of ownership of a company; where the company has a "relevant excess of allowances"; where the qualifying change has an "unallowable purpose". The legislation also applies to changes in consortia and partnerships.
The legislation only applies if the company has an overall excess of allowances taking into account all relevant plant or machinery pools, and targets the way in which the purchaser may utilise these. By including an unallowable purpose test it is intended that the legislation should not apply to restrict the way in which surplus capital allowances may be utilised in the acquiring group for "normal commercial arrangements".
Where there is a "relevant excess" of allowances, which is calculated for each pool, and the unallowable purpose test is met then the legislation applies to limit the way in which the relevant excess can be utilised. In broad terms, the way in which a loss attributable to an excess allowance may be utilised is restricted by reference to the profits of the activity carried on prior to the change of ownership.
The measure can apply to any company with plant or machinery capital allowances pools in excess of balance sheet values and although there is an "unallowable purpose" test this is not entirely straightforward. The change of ownership has an unallowable purpose if the main, or one of the main purposes, "of any person in being concerned in the change arrangements" is to obtain a relevant tax advantage (whether for that or any other person). "Being concerned in the change arrangements" includes being a party to relevant arrangements or facilitating or directing the making of any such arrangements.
In calculating the amount of balance sheet value for fixtures, where the net book value of the land includes an amount in respect of the fixtures, the book value for the fixture is determined on a just and reasonable basis.
Who will be affected?
An acquiring group intending to access the benefit of allowances in the company acquired; or a change in profit-sharing arrangements or the introduction of a new partner in a partnership intending to benefit from allowances.
When?
The rules apply where the change of ownership occurs on or after 21 July 2009, although certain of the detailed features of the calculations only apply on or after 9th December 2009.
One of the factors that HMRC may focus on when considering whether a tax avoidance purpose is present is the amount paid for the acquired company relative to the book value of the plant and machinery - albeit that all relevant factors will be taken into account - whereas it is not unusual to value future capital allowances in excess of book value in a commercially motivated arrangement.
Existing legislation (Sch 10 FA 2006) already targets a change of ownership of a leasing company with a deferred tax liability ie the mirror scenario where tax written down value is less than book value.
However Sch 10 targets the "seller" by crystallising the deferred tax liability, with corresponding tax relief on the following day (which can not be carried back to the period before the change in ownership). Furthermore Sch 10 only applies where the relevant entity carries on a "business of leasing plant or machinery" so in this respect the latent allowances rules have a wider application as they can apply to any trade.
Furthermore, unlike Sch 10, these rules can apply where there is no principal company for instance where the ultimate owner of the company to be sold is an individual.
The requirement to disregard any activity carried on by the company which was not carried on by the company prior to the change in ownership, for the purposes of restricting the excess allowances that may be claimed in the company going forward, will presumably require some apportionment of total results.
Although the primary target may be purchasers of a company with unclaimed allowances principally for the purpose of accessing those allowances, any acquirer will need to consider the legislation and determine whether they meet the "main purpose" test.
In practice these rules will need to be considered whenever there is a relevant excess of allowances and a change of ownership is contemplated.
