MTT21290 | Calculating the effective tax rate: Adjusted profits: Election where assets and liabilities adjusted to fair value for tax purposes

When an event has occurred (a ‘triggering event’), a member may be legally required or permitted to adjust, for domestic tax purposes, the value of its assets or liabilities to fair value (make a ‘relevant tax adjustment’). An example of a triggering event is a member leaving or joining a tax consolidation group.

The group can then elect for an adjustment to be made to the adjusted profits for MTT purposes, in accordance with section 216 of Finance (No.2) Act 2023. This allows the group to align MTT outcomes with local tax law.

This is an annual election that is made in respect of the relevant tax adjustment itself. See MTT52200 for guidance on making elections.

Relevant tax adjustment - exceptions

An adjustment cannot be a relevant tax adjustment if:

• it is made in connection with transfer pricing, or

• it is made in connection with the sale of assets in the course of carrying on a trade.

Effect of an election under section 216

Where an election is made:

• the member has an ‘adjustment amount’ in respect of each asset or liability that is subject to the relevant tax adjustment (the ‘relevant asset’), and

• for the purposes of determining the adjusted profits, the value of the relevant asset is to be treated as its fair value immediately after the triggering event.

This treatment is to apply for the adjustment period and all subsequent accounting periods.

In accordance with the election, the adjustment amounts are to be either:

• included in the adjusted profits of the member for the adjustment period, or

• split into five equal amounts to be included in the adjusted profits of the member in that period and the subsequent four accounting periods.

Adjustment period

The ‘adjustment period’ is the accounting period in which the relevant tax adjustment was made.

To determine the adjustment amount, subtract:

• the carrying value of the relevant asset immediately before the triggering event

from

• the fair value of the relevant asset immediately after the triggering event.

If the triggering event resulted in a non-qualifying gain, reduce the adjustment amount by the amount of that gain. In the case of a non-qualifying loss, increase the adjustment amount by the amount of that loss.

Member leaves the group before the end of the fourth accounting period subsequent to the adjustment period

Where:

• an adjustment amount has been split over five periods, and

• the member leaves the group before the end of the fifth period,

any part of the adjustment amount that has not been included in the adjusted profits of the member in a previous accounting period is to be included in the adjusted profits of the member for the final accounting period in which it was a member of the group.