Does the appointment of a receiver break a group for group relief purposes?

Mon 16 Oct 2017

Generally the appointment of a receiver of a company does not have any direct corporation tax consequences. The tax accounting period continues as normal and the company retains beneficial ownership of its assets.  A receiver can have extensive powers to manage the company’s affairs, however, and for group relief purposes it will be necessary to consider if the shareholders still retain the power to manage the company according to their wishes.

The questions concerning whether the appointment of a LPA receiver over a property company’s property portfolio broke a group for group relief purposes, were argued before the Upper Tribunal (UT) in the Farnborough Airport Properties Limited case.  The facts of the case were that Farnborough and another group company had claimed group relief totalling £10.5 million from a member of the group relief group ‘PH2L’.  However, the group relief claim was rejected by HMRC on the basis that the appointment of a receiver over PH2L assets constituted ‘arrangements’ which meant that the shareholders of Farnborough no longer controlled it (see CTA 2010 s154(3) ‘effect 2’, which applies where persons other than the shareholders obtain control of one company but not the other in a group of companies).

The receiver’s powers were conferred under the terms of the debenture, which included the power the manage PH2L’s business in place of its board of directors. The question was whether these powers meant that the receivers had control over PH2L. ‘Control’ is defined for the purposes of the Corporation Tax Acts at CTA 2010 s1124, as being where one company secures that the affairs of another company are conducted in accordance with its wishes by means of the holding of shares/ voting rights or through powers conferred by the Articles or other document regulating that or any other body corporate.

The UT agreed with the taxpayer that the debenture was not a document regulating PH2L, as it was not akin to the articles of the company, and that the FTT had erred on this point. However, that was not the end of the story because it was then necessary to establish whether the group relief group was broken because of ‘arrangements’ where control of a company is lost (CTA 2010 s154).

The UT considered that ‘control’ for CTA10 s.154 purposes in the context of effect 2 (CTA 2010 s.154(3)) would have had to specify ‘constitutional control’ if that was what the draftsman had meant by control. As it did not, it was then necessary to consider who had practical control over the company’s affairs, and as the powers of the receivers were so extensive; the UT considered the shareholders no longer had ‘power to secure that the affairs’ of PH2L were ‘conducted in accordance with their wishes’.  As a result, group relief was not available.

It will be interesting to see if this case is appealed further. In the meantime it is necessary to interpret ‘control’ for the purpose of CTA 2010 s.154 group relief provisions more widely than specified in CTA 2010 s.1124.

Whilst this case concerned group relief, loss of control has repercussions for other areas of tax, such that transfer pricing (TIOPA s.148, participation condition) and loan relationship “connected party” relationship (CTA 2009 part 5 chapter 6 and s.466), may also be broken.

To discuss the corporation tax aspects of administrations, insolvencies, and reorganisations, please get in touch with a member of the Mazars corporate tax team.