Common Control transactions are becoming increasingly common as companies adapt to global economic shifts and changing regulations.
What is Common Control?
Common Control occurs when one person, or a group acting together, controls two or more businesses. This control can stem from direct ownership, voting rights or legally binding agreements. Even when these businesses operate independently, HMRC consider them associated in certain contexts, depending on the degree and type of control involved.
When businesses under Common Control engage in transactions, different rules apply depending on the area of law, particularly VAT and transfer pricing. For VAT, unless a VAT group is in place, they must act as if the transaction occurred between unrelated parties. This approach ensures transparency and prevents manipulation of pricing or tax obligations.
Importance of Common Control
Although the ownership at the top remains unchanged, asset or equity transfers within the group can affect financial outcomes and legal responsibilities.
If two subsidiaries under the same parent transfer assets or merge, it is not a typical acquisition. Instead, it follows specific rules that reflect the unchanged ownership structure. This distinction influences asset valuations and tax calculations.
It is also a focus area for auditors and regulators, who scrutinise the consistency and fairness of these transactions.
Common Control Transactions
You may encounter Common Control transactions in various business scenarios, such as:
- A UK parent company transfers intellectual property to a newly established offshore subsidiary
- Two sister companies merge to form a new limited liability company during a group reorganisation
- Ahead of an IPO, a parent company transfers assets to a different subsidiary
- A parent entity merges into its subsidiary as part of a corporate restructure
While ownership remains constant, these legal and financial changes can influence operations and compliance requirements.
Accounting for these Transactions
Unlike typical business combinations, Common Control transactions often do not require you to record assets and liabilities at fair value. Instead, entities typically record them at historical cost or book value. This avoids artificial gains or losses that might arise from internal transfers.
However, there is no mandatory accounting standard under IFRS or UK GAAP for these transactions. Entities must select and apply a consistent accounting policy. Choosing retrospective presentation can enhance comparability but it can be complex, especially if historical data is incomplete or inconsistent.
Judgement is often required, particularly where the nature of the transaction is unclear or the accounting policy needs to be disclosed transparently.
Tax for these Transactions
Tax outcomes can vary depending on whether the transaction is taxable. Businesses need to consider:
- Temporary differences between the tax and accounting bases
- Whether deferred tax assets should be recognised and if valuation allowances apply
- Whether any tax losses or other attributes can be used across entities
These assessments often depend on HMRC interpretations and require detailed documentation, particularly in transfer pricing and IP-related transactions.
VAT Treatment Under Common Control
Common Control does not remove VAT responsibilities. Unless a VAT group registration is in place, each entity must act as if the transaction involved an unrelated party.
To comply with VAT rules, each business must:
- Charge VAT where applicable
- Issue compliant VAT invoices
- Accurately report the transaction in VAT returns
Proper VAT treatment prevents underpayment and penalties from HMRC, and ensures fair application of the tax across the group.
Valuation and Deal Planning
While accounting uses book value, tax rules often require fair market value. This difference means one transaction may have dual valuations: one for tax and another for accounting. Businesses must address this early to avoid inconsistencies.
Independent valuations can support tax positions, especially for intellectual property or asset transfers. Impairment testing may also be necessary, particularly for the receiving entity. These steps promote fairness and support compliance with regulatory expectations.
When planning an IPO, spin-off or group reorganisation, consider:
- Aligning economic goals with legal, tax and accounting requirements
- Maintaining consistency in accounting policies across the group
- Managing stakeholder expectations and ensuring transparency in reporting
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