One of the surprise inclusions in last week’s suite of Finance Bill 2019-20 announcements was a proposal to allow corporation tax deferral in certain situations where a UK tax resident company transfers an asset to a fellow European Economic Area (EEA) group member. While the measure could well be a begrudging acknowledgment by government that current UK law risks breaching EU and EEA fundamental freedoms, the development is likely to provide a degree of (perhaps temporary) relief for corporate groups considering Brexit-related reorganisations in light of regulatory considerations or to mitigate potential supply chain disruption.
As context to this announcement, various corporation tax rules currently allow assets (and certain liabilities) to be transferred on a tax-neutral basis within a corporate group, provided that the asset will remain with the scope of UK tax following the transfer. However, separate tax rules allow tax to be deferred when a UK company migrates its tax residence to another EEA jurisdiction. A migration triggers a deemed market value disposal of the company's assets that is treated in a similar way to an actual asset transfer, but these deferral rules allow any tax to be paid in instalments, generally over a six year period. The deferred tax does bear interest during this period, meaning that the measure is really just a cash flow saving rather than true deferral. However, the migration rules still sit rather oddly with the lack of similar rules for actual asset disposals.
There have been lingering questions over whether the UK rules comply with the EU freedom of establishment and free movement of capital, as CJEU case law suggest that member states need to provide some form of deferral on intra-EU transfers to avoid placing an undue restriction on those freedoms. The point was finally addressed by the First Tier Tribunal earlier this year in Gallaher Ltd v HMRC (2019) UKFTT 207, where the tribunal held that the absence of any deferral mechanism on an intra-EYU transfer breached the EU freedoms.
The Finance Bill measure has apparently been proposed in light of the tribunal’s decision, and essentially treats a transfer to an EEA group company in the same way as a deemed asset disposal on a corporate migration. The measure applies from 11 July 2019, however HMT appears to be hedging its bets as the draft legislation allows for repeal of the measure by statutory instrument. It is slightly unclear whether this is intended to provide flexibility for the outcome of the Gallaher Ltd litigation or for Brexit-related reasons.
In any event, the proposal may provide some relief for corporate taxpayers as they deal with the disruptive effects of Brexit. However, the measure also leaves many questions unanswered, including the EU/EEA law consequences for transactions that occurred before the effective date of the measure, and the longer term position on whether the existing UK rules comply with EU and EEA law.
From 11 July 2019, companies may apply with immediate to effect, to defer payment of up to the amount of CT on profits or gains attributable to affected group asset transfers, for which the due and payable date given by TMA 1970, s. 59D has not yet passed.