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  • Deferral of corporation tax payments on EU group asset transfers

Deferral of corporation tax payments on EU group asset transfers

12 July 2019

Transfers of assets between two group companies within the charge to UK tax generally take place without an immediate charge to tax. However, where the transfer is to a member of the group outside the charge to UK tax, the transfer is treated as taking place at market value and any profit or loss is taxable in the accounting period in which the transfer takes place.

In a recent decision of the UK First–tier Tax Tribunal (FTT), Gallaher v HMRC [2019] UKFTT 207, the FTT decided that denying relief under the provisions of section 171 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) for an intra-group transfer from a UK subsidiary to its EU parent was a restriction on the EU parent's right to freedom of establishment which could not be justified.

In the absence of provision for the tax to be paid in instalments, this restriction went further than was proportionate to achieve the objective of securing the balanced allocation of taxing powers between member states and the charge to tax was disapplied.

Although the decision is subject to appeal, the Government will introduce changes to the legislation to remove the uncertainty over the compatibility of the UK rules with EU law.

Companies undertaking transfers to EU or EEA group companies will now have the option to defer payment of tax over a period of five years. The provisions for entering into a corporation tax payment plan will be included in Schedule 3ZC of TMA 1970 and will be similar to rules as for exit charges incurred by a company that migrates to a relevant EEA state.

From 11 July 2019, companies may apply to defer payment of tax on profits or gains attributable to group transfers where the due and payable date has not yet expired. In effect, this means that group asset transfers during accounting periods ended on or after 10 October 2018 can be the subject of an application for deferral.

The deferred payment option will applicable to group transfers:

  • Of chargeable assets, intangible fixed assets, loan relationships and derivative contract provisions
  • From either a UK company resident in the UK, or a non-resident company that carries on a trade in the UK through a permanent establishment (PE)
  • To another EU/EEA resident member of the group, and
  • Where the only reason that the transfer is not treated as tax neutral is that the transferee company is not within the charge to Corporation Tax in respect of the asset or liability.

The amount of tax that may be deferred will be limited to the tax chargeable on the asset transfer and will be payable in six equal annual instalments commencing nine months after the end of the accounting period in which the asset transfer took place. The tax deferred will be subject to interest as if the corporation tax payment plan had not been entered into. The tax will also become payable immediately if certain events occur, including the transferor and transferee companies cease to be members of the same group.