Appointment of a receiver – are your clients aware of the potentially significant tax ramifications?

Farnborough Airport Properties Limited: control for group relief purposes where there is an appointment of a receiver over the property of a company.

The appointment of a receiver or other insolvency practitioner to a company in a group can potentially have significant tax ramifications. This can be seen in the Upper Tier Tribunal decision of Farnborough Airport Properties v HMRC Upper Tribunal 4 October 2017. In this case, the First Tier Tribunal had decided that the appointment of a receiver to a subsidiary in a group of companies meant that the company was no longer under the control of its parent company, and therefore ceased to be a member of the group for group relief purposes so that it could no longer surrender tax losses. In this case the receiver had wide-ranging powers: all of the company’s property was put in the hands of the receiver who had the power to carry on the company’s business. There could be a different outcome where a receiver has more limited powers. The case was appealed. The Upper Tribunal dismissed the appeal and found in HMRC’s favour.
 
Tax losses arising in one company can be surrendered to other companies in the same group. However, companies will not be in the same group for this purpose if, inter alia, ‘arrangements’ are in place whereby a person or persons has or could obtain control of one of the companies but not the other. The Upper Tribunal decided that, due to the wide-ranging powers given to the receiver, although the receiver did not have control of the relevant company, the shareholders of the holding company no longer had control over the subsidiary company in receivership. As the shareholders of the holding company still controlled the other companies in the group, once the receiver had been appointed, ‘arrangements’ were in place whereby a person or persons controlled the other companies in the group but not the company in receivership, meaning that the group relief surrenders from the company in receivership to another subsidiary company should be denied.
 
One of the taxpayer’s arguments was that such a decision would give rise to anomalies and cannot be correct. If two companies in the same group are both put into receivership where the receiver has similarly wide-ranging powers, no one would be regarded as having control of either company. Therefore there would be no ‘arrangements’ whereby a person or persons has control of one of the companies but not the other, and the companies would remain in the same group for this purpose. The Upper Tribunal commented on this anomaly saying that it was not before them for decision, but they did not regard any unexpectedly beneficial result for the taxpayer that could so arise as undermining the only sensible interpretation of the provisions as a whole. Therefore it may be possible to surrender losses to another company if both companies are put into receivership.   
 
The taxpayer has applied for permission to appeal to the Court of Appeal.
 
Where tax losses play a significant part in a restructuring strategy, this case illustrates the importance of obtaining tax advice as early as possible and in any case before a receiver or other insolvency practitioner is appointed. Given this decision, it may no longer be possible to make any claims for group relief involving a group member in receivership where the receiver has sufficiently wide-ranging powers.
 
The full decision of the Upper Tribunal can be viewed here.
 
If you would like further details of the relevant tax rules, please contact us.  
 

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