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.