OT62030 - Transferable tax history - Effect of a TTH election on the seller - Reduced profits

If it transpires that a seller company has overstated its profits in respect of an AP from which profits were transferred as a result of a TTH election, no changes should be made to the TTH election.

If not all of the profits of the AP in question were transferred, reduce any remaining profits by the amount of the reduction, down to zero if required. The tax paid on those profits can be repaid to the seller, but no tax can be repaid to the seller in respect of profits that have been transferred.

If the reduction in profits is greater than the remaining profits of the AP following the transfer, or all the profits of the AP were transferred, then the excess of the reduction over the remaining profits, or the full amount of the reduction as the case may be, is to be treated as a trade loss of the company, and can be relieved under the trade loss rules.

Example

Seller Company (S) made ring fence profits of £10m in AP 1. S made a TTH election and transferred £6 million profit to Purchaser Company (P), leaving £4m in charge. For the purposes of loss relief, S is treated as not having made the £6m profit or paid the £1.8m tax due.

An HMRC enquiry into AP 1 subsequently concludes that S’s ring fence profits should have been £3m, rather than £10m, a reduction of £7m. Because not all the profits of the AP were transferred, the remaining profits of £4m are reduced to zero. The £1.2m tax paid on that £4m can be refunded to S.

The balance of £3m (the £7m reduction, less the £4m that originally remained after the TTH election) is treated as a trade loss and can be carried forward to reduce subsequent profits.