IFM40330 - Becoming a QAHC: entering with assets

FA22/SCH2/PARA17(1) to (3)

New accounting period

For corporation tax purposes, when a company becomes a QAHC, a new accounting period begins at the beginning of the day in which it becomes a QAHC. The previous accounting period will end at the end of the day before the company becomes a QAHC.

All residency requirements must be met on the same day that all required QAHC entry requirements have been met. A company which is currently tax resident in an overseas jurisdiction but plans to become UK tax resident may make an entry notification to the QAHC regime (see IFM41260). It is required that the company must be UK resident when it joins the regime (IFM40205). If the company becomes UK resident on the date that it has specified on its entry notification then this will mean that the company has met the UK residency requirement and, its first corporation tax accounting period will begin at the beginning of the day in which it becomes a QAHC. For these purposes, the company will be considered to have become UK resident at the start of that day, so UK residence and QAHC status begin simultaneously and there is no accounting period when the company is UK resident but not a QAHC.

A company may become UK resident prior to joining the QAHC regime, if this occurs then it is likely that there will be a new accounting period when the company becomes UK resident, and a further new accounting period will begin when the company joins the QAHC regime.

Deemed disposals on entry

The following assets held by a company that becomes a QAHC will be treated as disposed of immediately before becoming a QAHC and reacquired immediately after becoming a QAHC:

any overseas land (IFM40920);

any loan relationship or derivative contract the company is party to for the purposes of an overseas property business of the company (IFM40820); and

any qualifying shares (IFM40930).

The deemed consideration for both the sale and reacquisition of the assets is market value.

Any chargeable gains accruing from the deemed disposals of assets immediately before the point of entry will be chargeable to corporation tax, under general principles, in the accounting period that ended the day before entry into the QAHC regime.

Any losses accruing from the deemed disposal of assets immediately before the point of entry will crystallise in the AP that ended the day before the entry into the QAHC regime.

Rules regarding the use of losses arising prior to and after joining the QAHC regime can be found at IFM40350.

Companies joining the regime from jurisdictions outside the UK

FA2022/SCH2/PARA18

If a company, which was previously tax resident outside the UK, joins the QAHC regime within 30 days of becoming UK tax resident then PARA 18 removes the requirement for the deemed disposal of assets on entry to the regime if those assets were held immediately before the company became UK resident.

Where PARA 18 applies there is also no step up in base costs of assets held by the company. This is because there is no deemed disposal and reacquisition of assets by the company becoming a QAHC. This is unlikely to be relevant in practice as any disposal of those assets by the company within the regime will be exempt from tax on gains. If the company leaves the regime still owning the assets, or if the assets cease to be exempt in the hands of the QAHC, they will benefit from a tax-free step up in base cost at that time due to the deemed disposal and reacquisition on leaving the regime.

Where a stack of companies wishes to join the regime

FA2022/SCH2/PARA19

It is possible for a stack of QAHCs (a QAHC owned by a QAHC) to join the regime, possibly on the same day (see IFM41260 for clarification on the entry notification procedure). Each of the QAHCs will be required to treat the assets listed under PARA 17(2) as disposed at market value. This could therefore cause tax to be charged on deemed chargeable gains relating to the same asset more than once as the value of an asset held by a subsidiary QAHC will be reflected in the qualifying shares held by its parent. PARA 19 seeks to address this issue by allowing the gain on the deemed disposal of qualifying shares (as required by PARA 17(2)) to be reduced on a just and reasonable basis by an amount that reflects the gain accruing from the underlying asset. The just and reasonable reduction cannot reduce the gain to below nil.

Example

Company A holds 100 percent qualifying shares in company B which holds 100 percent qualifying shares in company C. All three companies join the QAHC regime on 1 July.

Company C’s assets include overseas land valued at £1m, company B’s assets include the qualifying shares in company C valued at £1.5m and overseas land valued at £500,000, company A’s assets include the qualifying shares in company B, valued at £2.5m.

On joining the QAHC regime, company C will be required to treat the overseas land as disposed of at market value on 30 June, this results in a gain of £750,000.

Company B will be required to treat the overseas land it holds as disposed of at market value on 30 June, this results in a gain of £300,000. Company B will also be required to treat the qualifying shares it holds in company C as disposed at market value on 30 June, which would have resulted in a gain of £1.5m, but as the value of company C’s overseas land is reflected in company B’s shares, company B will be able to reduce the gain arising from the deemed disposal of its shares in company C by a just and reasonable amount that reflects the underlying gain realised by company C on the deemed disposal of its overseas land. As company C has realised a gain of £750,000, this will constitute a just and reasonable amount, this will reduce company B’s gain on its shares to £750,000 (£1.5m - £750,000).

Company A must treat its shares in company B as disposed of on 30 June, this would have resulted in a gain of £2.5m. Company A however will also be able to reduce this gain by a just and reasonable amount that reflects the gain realised by company B on the deemed disposal of its shares in company C and the gain realised on the deemed disposal of its overseas land. The total gain realised by company B was £1.05m (£300,000 + £750,000), this therefore constitutes a just and reasonable amount, and after reduction, this will leave company A with a gain of £1.45m (£2.5m - £1.05m).