Santa came early this year in the shape of a press release by HMRC, “Two New Tax Proposals for 2009” – at least I thought so. Unfortunately, when you read the press release, it is rather less exciting than you might expect. The changes relate to the definition of ordinary share capital for determining the existence of a 75-percent subsidiary for group relief purposes, and to the computation of profits in foreign currency.
It is not unusual for preference shares to be issued without a fixed entitlement to dividend, even though they have no votes or any other rights of participation. This will cause them to be regarded as ordinary shares and this interferes significantly with the determination of who should be entitled to group relief – or, alternatively, provides opportunities for group relief to be claimed in an unexpected manner.
In effect from 1 January 2008, it is proposed that preference shares that would qualify as fixed rate preference shares if it were not for the existence of right to pay a lower dividend (or no dividend) in certain defined circumstances will be treated as fixed rate preference shares for group relief purposes. An election will be available to enable the change to apply to new share issues only.
This change seems to relate only to group relief and the definitions within Schedule 18 Taxes Act 1988 and not to the capital gains tax provisions in Section 171 TCGA 1992, whereby assets transferred between members of a 75-percent group are treated as taking place on a no-gain/no- loss basis.
The second proposed amendment is to allow companies to compute their profits or losses in the currency of the territory where the company operates. Fluctuations in exchange rates mean that the requirement for companies to convert the profits or losses of an accounting period into sterling at the average rate for the period can create difficulty. For example, where a loss arises, it must be carried forward in sterling and offset against future profits. However, foreign currency fluctuations may mean that the measure of foreign profits in the future could be different – and the press release quaintly says that both the taxpayer and the Exchequer are exposed to the exchange risk.
Accordingly, it is proposed that any unused losses at the start of accounting periods beginning on or after 1 January 2008 be converted into their functional currency at the start of the period and carried forward in that currency.