Read the original guidance here:
HMRC SDLT: SDLTM23035 – Reliefs: Group, Arrangements

Guidance on Group Relief in Acquisition Transactions

This article explains the rules regarding group relief as they apply to transactions that are part of preparations for an acquisition, specifically those following section 75 of the Finance Act 1986, known as acquisition relief. Understanding this guidance is important to ensure the correct use of group relief in these situations.

What is Group Relief?

Group relief allows companies within the same group to share certain tax benefits. This is particularly useful during corporate transactions, where it can ease the financial burden of taxes. When HMRC refers to ‘group relief’, it deals with the ability to offset losses from one group company against profits from another, effectively reducing the overall tax liability.

Importance of Acquisition Relief

Acquisition relief under the Finance Act 1986 helps in situations where a company is acquiring another. This can often involve complex arrangements, and it’s critical to understand how these can impact the availability of group relief.

Types of Arrangements Affecting Group Relief

Concerns have been raised that certain arrangements made in advance of an acquisition could limit or deny the availability of group relief. HMRC identifies two specific types of arrangements to be vigilant about:

• Control Arrangements: These involve situations where a person could gain control over the acquiring company (the transferee) but does not gain control over the company being acquired (the transferor). This is outlined in paragraph 2(1) of Schedule 7 of the Finance Act 2003.
• De-Grouping Arrangements: This occurs when both the transferor and transferee cease to be part of the same group. For instance, if the transferee stops being a 75% subsidiary of the transferor or of another company, these arrangements apply as per paragraph 2(2)(b) of Schedule 7.

How Acquisition Relief Works

In many acquisition scenarios, both a change of control and a de-grouping event will take place at the same time. This dual impact can influence the overall decision on group relief applicability.

Understanding the Proviso About Control Arrangements

The legislation has a specific statement, or proviso, associated with Control Arrangements, meaning that arrangements made explicitly for the purpose of acquiring a company under section 75 of the Finance Act 1986 are not considered ‘control’ arrangements that would prevent group relief from being applied. Simply put, if these arrangements are part of preparing for an acquisition, they won’t block group relief.

De-Grouping Arrangements Lack a Similar Proviso

Unlike control arrangements, de-grouping arrangements do not have a similar exemption. However, when examining paragraph 2 as a whole, it seems logical that the same exemption allowing group relief should also apply to de-grouping arrangements. Without this understanding, the absence of such a provision in paragraph 2(2)(b) would render it practically meaningless. There is broad acceptance of this interpretation: arrangements made with a view to acquisitions under section 75 should also not be treated as ‘de-grouping’ arrangements that deny group relief.

Practical Examples

To clarify these concepts, let’s look at some examples:

• Example 1 – Control Arrangements: Imagine Company A is planning to acquire Company B. In the process of doing this, certain arrangements are made that would allow a third party to potentially control Company B while Company A does not gain control of Company B. Even if these arrangements are in place, since they were created specifically for the acquisition process, they do not count as arrangements that prevent group relief.
• Example 2 – De-Grouping Arrangements: Now consider the same companies, Company A and Company B. Suppose that as a result of the acquisition, Company B stops being a 75% subsidiary of Company A. Common sense suggests that, despite the cessation of this subsidiary relationship, the arrangements made with the intention of the acquisition should not be seen as de-grouping arrangements that deny group relief. This works because the intention was linked to acquisition relief.

Conclusion Points to Remember

• Group relief allows internal tax relief within company groups.
• Transactions made in advance of an acquisition can impact group relief.
• Control arrangements should not deny group relief if they are part of acquisition preparations.
• De-grouping arrangements do not have a specific exemption; however, they are generally accepted to not deny group relief if linked to acquisitions.

This guidance provides valuable context and clarity on how the rules operate in real-world scenarios involving acquisitions and group relief. Organisations should stay informed and ensure they consider these principles when planning acquisitions.