subject: Groups of Companies in UK Part I [print this page] Groups of Companies in UK Part I Groups of Companies in UK Part I
Various areas of tax legislation include specific provisions for groups of companies. All groups include a parent and one or more subsidiaries. The definition of a group (and extent of ownership of the subsidiary required) varies according to the area of legislation concerned and the aim of this section is to define the terms group and consortium, and highlight the areas of legislation which are affected.
Factors of ownership
In determining ownership, three things may be considered (either together or individually): share capital, entitlement to distributable profits and entitlement to assets on winding up.
Share capital
In determining whether companies form part of a group, the main consideration is ownership of ordinary share capital.Ordinary share capital is defined by exclusion and includes all shares other than those termed "restricted preference" shares. A restricted preference share is a share that has no right of conversion to a share other than a further relevant preference share (or shares in a quoted parent company) and has no right to a premium on redemption other than one that a similar listed share may have. It should also carry no right to a dividend.However, it can carry a right to a dividend where the dividend is no more than a reasonable commercial return on the shares, and either is a:- fixed amount or fixed percentage of the nominal value of the shares; or- percentage of nominal value based on RPI or similar index.Further there can be no option for the company to reduce or not pay the dividend attaching to the shares except where:- paying the dividend in full would put the company in severe financial difficulty; or- reducing or eliminating the payment is necessary due to regulatory advice or constraints.Ownership of share capital in this situation means beneficial ownership. This means that where a company cannot actually take the benefit of the shares it owns, it ceases to have beneficial ownership. Beneficial ownership does not cease where the company has granted an option over shares which may or may not be taken up. Where, however, another person has a specifically enforceable right to acquire the shares, ownership ceases to be beneficial.
Distributable profits
The entitlement of equity holders to distributable profits is often a factor determining corporate ownership.Equity holders include owners of ordinary shares and loan creditors (with the exception of loan creditors holding normal commercial loans). A normal commercial loan is one which:a. is not convertible into shares or securities; andb. does not charge interest at a rate which:- depends on the company's results;- depends on the value of the company's assets; or- exceeds a normal commercial return on the loan.It is however acceptable for the interest rate to reduce as the company's results improve and it becomes less of a risk.Distributable profits are the commercial profits (i.e. accounts figure), not the profit calculated for corporation tax purposes. The amount is before equity distributions but after fixed rate preference dividends and commercial loan interest. Prior year adjustments are also excluded. If there is no commercial profit, a notional profit of 100 is used.When determining the distributable profits for any company that is not resident in the UK, the profits for the accounting period are computed as though the company were UK resident throughout the period.
Assets on winding up
The entitlement to assets on a winding up is calculated as if, on a notional winding up, the value of assets available for distribution is equal to the excess of those assets over the balance sheet liabilities shown at the end of the accounting period.If there is no excess, a notional value of 100 is used.
This is part one for Groups companies operate in UK.
