A Unitary Business is the basic taxable unit. It consists of all legal entities under common control which operate in the same or related business. Note that I am using “business” to mean economic activity in general, and “Business” as a technical term for this basic taxable unit.
“Control” is defined using a 50% test, but this is to be extended to catch avoidance situations.
There is a presumption (rebuttable?) that businesses are related if there are a significant number of transfers between them, or share common resources/services.
Number of Businesses
Starting with a business that buys and sells widgets, where all entities are 100% subsidiaries, this is clearly a Business.
If we also buy and sell grommets, with broadly similar suppliers, customers, assets and staff, this would appear to be the same Business.
If we have a retail operation in the UK, and another in France (with a separate brand name, staff, assets and customer base), are these separate Businesses? If we set up an EU procurement company to supply both of them, do we now have 1, 2, or 3 Businesses? I assume that we consolidate into as few Businesses as we reasonably can, and so would just have the one.
Similarly: if we have a widget-selling business, and then acquire a separate grommet-selling business with its own staff, premises, suppliers and customers, is this immediately subsumed into the same Business (as the businesses are related), or do we need to wait until there is some economic integration? For example, Alliance Boots – there is a retail business which is primarily in the UK and a wholesale business which is primarily not, from which one can fairly safely conclude that there will be a lot of labour and assets which are not at all shared; but would the shared elements be enough to bring them into a single Business?
If we make & sell widgets, and buy & sell grommets, do we have a single Business or two Businesses? Or three, indeed – one of manufacturing and one/two of selling? Again, I assume we would combine these into one Business if we can: there is a single Business of selling, and the manufacturing is just another way of sourcing the product of one of the businesses within it.
Similarly, if we buy and sell both widgets and grommets, and have a 40% stake in the factory we buy the widgets from but get grommets from a third party, how many Businesses do we have? I assume that we have one, and we exclude the factory as not being controlled. Would this change if all or nearly all the factory’s sales are to us – would that be enough de facto control and integration to bring it into the Business? Can the factory dip into and out of the Business depending on how many thrird-party sales it makes?
Shareholdings: do we look through guarantee companies and partnerships? I assume so – the test would not simply be a shareholding test like the normal UK CT grouping test, but would look at actual control.
On that note: who exercises control, if we are ignoring companies? We need to find some way to identify management bodies which control each Business. This needs to be below the board of the parent company – clearly this will control all the Businesses, but if we only look at that level we could only ever have one Business.
Accounting: assume a 100% group with 3 Businesses. How do we establish the profit of each Business if they have a shared service centre? Or does the existence of the shared service centre itself make them into a single Business? It would seem odd if any inter-company transaction at all made businesses into a single Business, but if there is a threshold then we need to be able to deal with transactions beneath it. The obvious route would be to treat the actual amount received as a Sale, and the amount paid as a nothing (unless it can be brought into the Asset or Labour pools) – but how do we ensure that the Sale value is correct if we are trying to eliminate the arm’s-length principle in favour of a purely mechanical approach? What if the transaction is intra-company: the salary of the MD of a company involved in two Business, for example?
We have a widget seller based in the UK. It opens a branch in France – part of the same Business. It opens a subsidiary in Germany – same Business. When it starts a 50% JV with a local entrepreneur in Spain – is this the same Business, if something (operational factors?) gives us control? What if we have 40% but operational control (so it’s in our Business), and the Spanish partner has 60% (so it’s also in their Business)? Do we need a tie breaker for dual control situations? The simple answer must be that when in looking at the extension of “Control” to shareholdings below 50%, you can only do so if no-one else has control, but this may take some careful wording.
Where do we start with determining whether businesses are related? We can’t start with a company, as it could be involved in several Businesses, and to start with a business seems a bit chicken-and-egg. Do we just start by breaking down the group’s activities into some rough splits and then see how the detail fits together? Looking at the group that manufactures widgets, buys in grommets, and sells them both, should we start small and build up if they seem linked, or should we start assuming one Business and only split them if we can’t justify keeping them together? The latter seems simpler, but might lead to a presumption of unity which could distort things. Starting with the former might mean we end up too fragmentary.
I shall assume that all businesses in a group are a single Business to start with, but then actively examine the activities to see if one can justify splitting anything off.
Control will be defined as the power to have the business act in accordance with the wishes of a certain agency. I need to define the agency which can exercise this control.
I also need to define the form of control. Shareholding is a useful initial test, but obviously doesn’t work in all cases (such as a JV controlled by a 40% shareholder). I want something more rigorous than an elephant test; it needs to be capable of breaking ties.
I need to establish a threshold below which intra-group transactions are insufficient to form a Business.
I am trying to abandon the arm’s length principle, so inter-business transactions below the threshold will (for the moment) be left at the amount in the books and not adjusted.
I have assumed for the moment that there will be a single UT formula to apply to all Businesses. Should there be different formulas then Iwill need to make sure that each Business only contains businesses to which a single formula shuold apply. This may then require that the interaction threshold be disregarded, and two Businesses kept separate no matter how great their interactions. This seems like a complication to be layered on after a single-formula system has been established.