The ICAEW / ICAS have released some proposed amendments to "TECH 02/10 Guidance on realised and distributable profits under the Companies Act 2016".  

The majority of these are updates following the move to new UK GAAP.  However, the opportunity has also been taken to address certain new issues and clarify treatment in some areas.

Definition of a distribution and intragroup loans

Additional guidance is proposed regarding the definition of a distribution.  This makes it clear that:

  • The label put on a transaction is not important, it is purpose and substance that matter.
  • In particular, undervalue transactions with shareholders or sister companies are capable of being a distribution.
  • The intention of those carrying out such transactions is key.
  • This is not just a matter of establishing whether they explicitly intended to make a distribution, but whether the intended substance of the transaction was something that, regardless of label, is a distribution (e.g. knowingly transferring an asset at undervalue).
  • A distribution can also arise from the assumption of a liability if the company does not receive consideration of the same amount.

The additional guidance expands on this in the context of intragroup "off market" loans. 

Where intragroup loans are interest free or at below market rates then amounts recognised will not necessarily constitute realised profits and losses.  The proposed additional guidance considers the situation where a loan is from a parent to a subsidiary and vice versa, as well as loans between sister companies.

Other proposed amendments

  • Simplification of the guidance on pensions.
  • Addition of new guidance to address the impact of Solvency II on insurance businesses.
  • Reorganisation of the guidance on deferred tax together with clarification that (unless a reversal of a realised loss) the recognition of a deferred tax asset will generally be an unrealised profit.
  • Clarification as to how to calculate the realised profit under the ‘top slicing’ rule when consideration comprises assets and liabilities.

Where these amendments relate to interpretation of the law they are to be regarded as having immediate effect.  In particular, this applies to the definition of a distribution and its application to intra-group loans.

Comments are invited by 9 June 2016.


Consultation draft TECH 05/16 with proposed amendments tracked

Our practical tax guides to:

Dividends: formalities for companies

Legal or unlawful dividends: Companies Act 2006

UK GAAP & FRS: changes from 2015