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Chapter CTM81121

Document Cited in Related
Vincent
Published date16 April 2016
Record NumberCTM81121

CTA10/PART 5/Ch6

Background to example 1

The background to the example is that Company X is the true economic parent of Company Z. Company Z is undertaking a five year investment programme expected to give rise to trade losses. So this creates the possibility that Company Z will be able to surrender group relief to Company X.

However Company X has no taxable profits, and is unlikely to have future taxable profits. If it were not for CTA10/PART 5/Ch6, a company with ample profits could group itself artificially with Company Z and purchase the relief for a fee. Assume that there is such a company, which has ample profits, and that it is called Company Y. After five years Company Z becomes profitable and starts paying dividends. Matters are arranged so that when Company Z pays dividends, Company X, which is the true parent, receives them.

Facts of example 1

Company X holds 100 £1 ordinary shares in Company Z.

The ordinary shares carry normal equity rights to share in profits.

Company Y holds 300 £1 participating preference shares in Company Z.

Each participating preference share is entitled to 1p of every £100 of profits distributed.

Under CTA10/S1119, participating preference shares count as ordinary shares, however small the participation right may be. This means Company Y holds 75% of the issued ordinary share capital of Company Z. So Company Y and...

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