Taking flight: taxation on receivership
The recent case of Farnborough Airport Properties Company and another v HMRC is noteworthy for the light it shines on the dimly lit and often difficult interaction between tax law and insolvency.
The two companies operating Farnborough Airport (the host of ‘the largest industry event on the aerospace calendar’) were members of the same ‘group’ of companies as a third company, Piccadilly Hotels 2 Limited (“Piccadilly”). For tax purposes, all members of a “group” are essentially treated as a single economic unit. Group membership can be useful when, for example, assets need to be moved around the group: company A can transfer an asset to company B on a ‘no gain no loss’ basis – no tax is triggered at the time of the disposal. Similar tax grouping rules exist for stamp duty/stamp duty land and the specialist tax regimes for intangible assets, loan relationships and derivative contracts
In addition, being in the same tax group allows (subject to certain conditions) loss-making company A (let’s call it Piccadilly) to ‘surrender’ its losses to profit-making ‘claimant’ company B (let’s call it Farnborough Airport). This is called ‘group relief’. In this way, the tax liability of the group (treated as an economic whole) broadly reflects its overall profitability (when treated as an economic whole). The losses of Piccadilly become valuable to the wider group. Clearly, when a group is broken so that it ought not to be treated as the same economic unit, group relief should cease to be available.
The problem with loss-making companies is that they may become insolvent. In the case of Piccadilly, a receiver was appointed and the question arose as to how the appointment of a receiver affected the tax grouping? Did it break the economic unit and therefore, the tax group? Conventional wisdom has been that, unlike the appointment of a liquidator, entering receivership does not break the group.
Farnborough Airport claimed group relief (to the value of approximately £10.5m) surrendered to it by Piccadilly for the accounting period in which the receiver was appointed. HMRC, arguing the appointment of the receiver meant Piccadilly ceased to be a member of the same group as Farnborough Airport, denied the claim. Farnborough Airport appealed. That appeal was dismissed by the First-tier Tribunal (Tax Chamber) so Farnborough Airport appealed again to the Upper Tribunal (Tax and Chancery Chamber) (“the UTT”). In its decision, released on 4 October, the UTT also dismissed the appeal and confirmed that the receiver’s appointment had broken the group relationship and that HMRC had correctly denied the group relief.
The case is instructive because it encourages careful reconsideration of:
the possible tax implications of a company entering receivership (or any formal insolvency procedure); and
the close, but relatively complex, interaction of tax and insolvency regimes more generally.
The tax grouping of companies essentially depends on control. Control can normally be established by shareholding. In this case, however, it was common ground that Farnborough Airport and Piccadilly were both owned/controlled by the same parent company before and after the appointment of the receiver.
The critical point, therefore, was whether the appointment of a receiver represented an ‘arrangement’ the effect of which meant that the ultimate parent company lostcontrol of Piccadilly; that is, in the words of the UTT, whether “the powers which the receiver acquired over [Piccadilly] and its business and assets were so extensive that … the [ultimate parent company] was deprived of [the ability to secure that Piccadilly’s affairs were conducted in accordance with its wishes]”. It did not matter that no other person obtained control of Piccadilly; it was enough that the effect of the appointment was that control of the companies was no longer in the same hands. The economic unit ceased to exist.
The case, therefore, disturbs the up-to-now generally held view that the appointment of a receiver should not break the group relationship between a company in receivership and its shareholders. It is possible that the case is limited to its facts, with the crucial component being the sheer extent of the powers available to the receiver appointed, but, even if that so, the case flags (again) the risk that very real tax consequences can arise as a result of insolvency. In considering an insolvency process, an assessment of tax risk, especially in situations involving groups, should be made.