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Comment: Another Fine Mess. New anti-avoidance rule causes chaos
Those of you who have read our Budget summary – and if not, why not?! – will know that on Budget day, the Government announced a new anti-avoidance rule designed to counter schemes which circumvent the rules which impose a degrouping charge when a company leaves a corporate group holding an asset which it acquired from another group company in the previous six years. The new rule has unintended effects and is causing some collateral damage to commercial transactions.
This is all a bit complicated. The degrouping rules contain an exception (the associated companies exception) which applies when the parties to the intra-group transfer leave the group at the same time. Some time ago an anti-avoidance rule was introduced to prevent corporate groups making use of the associated companies exception in circumstances where the parties to the intra-group transfer left one group (the first group) and joined another connected group (the second group) . That anti-avoidance rule re-imposed the degrouping charge if, having left the first group together with the original transferor, the company holding the asset then left the second group.
The new provision which was announced on Budget day and had immediate effect imposes a degrouping charge not only if the company holding the asset leaves the second group, but also if the first and second groups cease to be connected. This measure was designed to counter a specific avoidance scheme. The problem is that the new rule catches in the cross-fire many commercial transactions such as demergers (other than statutory demergers), joint ventures and strategic investments in corporate groups.
This is all a bit of shame. The degrouping rules are being substantially recast in the Finance Bill 2011 after a long period of consultation. The new provision - on which, of course there has been no consultation - threatens to cast a cloud of uncertainty over this whole area. Let's hope that the mess can be sorted out soon before the collateral damage becomes significant.
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19 April 2011
Author: Tax team
