CTM06280 - Corporation Tax: company reconstructions: relevant liabilities restriction - examples

The following examples below illustrate the operation of the relevant liabilities restriction imposed by CTA10/S945 and outlined at CTM06250.

Example 1: transfer of a whole trade

Company A is in financial trouble after sustaining heavy losses and agrees to sell its business to company C.

Company C is unwilling to take over the bank loan and the creditors. So it is arranged that Company A sets up a wholly owned subsidiary, Company B, and transfers to it its leasehold premises, plant, goodwill, stock and employees for £450,000, which is left on loan account. Company A retains its cash on hand and at bank and the debtors. The unused CTA10/S45 carry forward losses at that date are £1,200,000.

Two weeks after company B began to carry on the trade company C buys its shares for £1 and enables company B to repay the loan of £450,000.

Company A's balance sheet on the day it ceased to carry on the trade stood as below.

Assets £ Liabilities £

Tangible assets

£100,000

Creditors

£ 1,500,000

Stocks

£250,000

Bank loan

£ 500,000

Debtors

£500,000

Share capital

£ 10,000

Cash

£ 5,000

Profit & loss a/c

£(1,155,000)

Total

£855,000

Total

£ 855,000

Relevant liabilities restriction

Liabilities/ Assets retained

£

£

Creditors

£1,500,000

Bank loan

£ 500,000

£2,000,000

Less Assets retained

Debtors

£ 500,000

Cash

£ 5,000

£ 505,000

£1,495,000

Less consideration

£ 450,000

£1,045,000

Company B is only entitled to losses of £155,000, that is, £1,200,000 minus £1,045,000.

Example 2:  transfer of a part trade

The facts are as in Example 1 but company A only wishes to sell part of its trade to company C.

Company C is unwilling to take over the bank loan and the creditors.  It is arranged that company A sets up a wholly owned subsidiary, company B, and transfers to it the plant, stock and employees relating to the part trade transferred, and the leases for the premises the part-trade occupies.  Company A does not transfer any of the debtors, cash balances or liabilities.  The sale price is £300,000.  The unused CTA10/S45 carry forward losses of the part trade transferred at the date of transfer are £800,000.

Two weeks after company B began to carry on the trade, company C buys its shares for £1.

It is agreed that the following assets and liabilities should be apportioned to the transferred part trade:

Assets and Liabilities £

Creditors

£900,000

Bank loan

£350,000

Cash

£ 2,000

Debtors

£200,000

Relevant liabilities restriction

Liabilities/Assets retained

£

£

Creditors

£900,000

Bank loan

£350,000

£1,250,000

Less assets retained

Debtors

£200,000

Cash

£ 2,000

£ 202,000

£1,048, 000

Less consideration

£ 300,000

£ 748,000

Company B is only entitled to losses of £52,000, that is, £800,000 minus £748,000.

The remaining losses of £748,000 do not revert to company A but are cancelled.