Annex 1: Minor changes in the law Change 26: Group relief: equity holder’s share of profits or assets referable to UK trade: section 181
This change simplifies the calculation of the percentage of profits or assets to which an equity holder is entitled in cases involving non-UK resident companies.
The basic rule for all companies is that the percentage of profits to which an equity holder is entitled is calculated by reference to a company’s total profits (paragraph 2 of Schedule 18 to ICTA, rewritten in section 165). If the company has no profits it would be impossible to say what the percentage is. So, in cases where the company has no profits, the calculation is made by reference to £100 total profits.
There is a similar basic rule in paragraph 3 of Schedule 18 to ICTA, rewritten in section 166, for assets to which an equity holder is entitled in a winding up.
Paragraph 5F of Schedule 18 to ICTA deals with non-UK resident companies in which an equity holder’s entitlements may be related to a company’s “UK trade”. Sub-paragraph (7) caters for the possibility that the profits or assets referable to the UK trade are less than £100. The calculation is done on the assumption that the profits or assets referable to the UK trade are £100.
In accordance with the assumption in paragraph 5F(7)(c) of Schedule 18 to ICTA, the total profits or assets (adjusted if necessary in accordance with paragraph 2 or 3 of the Schedule) cannot be less than £100. Section 181 rewrites paragraph 5F(7) of Schedule 18 so that, if the profits or assets referable to the UK trade are between nil and £100, the actual amount is used in the calculation.
The change affects only Assumptions 2 and 3. Assumption 4 (rewriting paragraph 5F(7)(c) of Schedule 18 to ICTA) retains the reference to £100.
In cases where the non-UK resident company’s profits or assets referable to its UK trade are more than zero but less than £100 this change may alter the percentage calculated (particularly if those profits or assets are small). But it is unlikely to result in a change to the conclusion about the extent of an equity holder’s stake in a company.
This change is in principle and in practice adverse to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.