Forming a tax consolidated group (Group) brings many benefits, but it also means that each entity in the Group is jointly and severally liable for the Group’s tax liability if the head company defaults. This means that even where an entity has made a payment to the head company, its liability for the entire Group liability is not reduced.
To overcome this issue, the Group members can execute a tax sharing agreement (TSA). Broadly, a TSA limits the liability of each group member to their proportionate share of the Group liability (its ‘contribution amount’) if the head company defaults. A TSA can also include a clear exit clause to facilitate a member leaving the Group with a limited liability for future tax debts, which is attractive to purchasers.
As well as having a TSA, Group members can implement a tax funding agreement (TFA), which ensures that intercompany payables and receivables arise between each member for their contributions towards the Group’s tax attributes (e.g. tax losses). This restores each entity to the same financial position it would be in if it were not part of the Group, and importantly, it manages the accounting risk of an unwanted equity distribution or contribution arising between the entities.
If you have been thinking about whether a TSA or a TFA is appropriate for your Group, get in touch with one of our team to make sure it applies for as many group liabilities as possible (including before 1 June for taxpayers with a 31 December year-end).