A loss-making company cannot surrender losses to other companies in its group once a receiver is appointed over the loss-making company's property.

The Law

Ordinarily, companies that are members of the same group can surrender losses to one another. For these purposes, one company ("A") will be a member of the same group as another company ("B") where A owns at least 75 percent of the share capital of B, or where a third company owns 75 percent of the share capital of both A and B. However, in UK tax legislation, section 154(3) of the Corporation Tax Act 2010 ("CTA 2010") prevents A from surrendering losses to B where "arrangements" exist under which a person has or could obtain "control" of A but not B.

The term "arrangements" is defined broadly by section 156 CTA 2010 as meaning "arrangements of any kind". "Control" is defined by section 1124 CTA 2010 as the power of a person to secure that the affairs of a company are conducted in accordance with that person's wishes. Section 1124 further states that such control could be exercised by means of holding shares, possessing voting power in relation to that company or another company, or as a result of any powers conferred by the articles of association or any other document regulating that company or another company.

The Facts

In the case of Farnborough Airport Properties Limited, the same company owned at least 75 percent of the share capital of both the loss-making company (the "Loss Maker") and the other companies in its group (the "Taxpayers"). Therefore, the Loss Maker and the Taxpayers would ordinarily be considered to be members of the same group. A receiver was appointed over all of the Loss Maker's property under a deed of debenture (the "Deed"). The Deed authorised the receiver to do all such things as may be necessary for the realisation of the assets of the Loss Maker and to carry on the business of the Loss Maker. The UK tax authorities (HMRC) argued that the appointment of the receiver triggered section 154(3).

The Decision

The First-tier Tax Tribunal (the "FTT") decided to interpret the term "arrangements" widely, so it held that the appointment of the receiver did indeed constitute "arrangements" for the purposes of s. 154(3). In addition, the FTT held that the extent of the receiver's powers under the Deed meant that it could secure that the Loss Maker's affairs were conducted in accordance with its wishes, as all of the Loss Maker's property was put into the receiver's hands and the receiver could carry on the business of the Loss Maker. The FTT therefore held that receiver exercised "control" over the Loss Maker. As the receiver exercised no such "control" over the Taxpayers, the FTT concluded that section 154(3) applied and the Loss Maker could not surrender its losses to the Taxpayers.

Commentary

The receiver's powers under the Deed were important to the FTT's decision. If a receiver was appointed over a particular asset and had no power to affect the running of the business, it would be more difficult for HMRC to argue that section 153(3) applied.

The Taxpayers might appeal against the decision. It could be argued that even though the receiver had extensive powers, it could not secure that the Loss Maker's affairs were conducted in accordance with its wishes, since the receiver was acting on behalf of the lender and thus was not completely free to manage the Loss Maker as it wished. In addition, section 1124 identifies three means by which "control" might be exercised, and the receiver's powers derived from none of them.

Unless the decision is successfully appealed against, it is likely to lend support to HMRC's existing view that a company in administration, administrative receivership and certain types of receivership is unable to benefit from group relief.