Pillar Two deemed consolidation applies even without an accounts duty

An entity cannot avoid the Pillar Two deemed-consolidation exercise simply because its accounting standard does not require it to prepare consolidated financial statementsGOV, HMRC’s multinational top-up tax guidance now explains. The exercise determines whether the entity has controlling interests and is consequently an ultimate parentGOV; it does not require the hypothetical accounts actually to be produced.

Where no statements within the other statutory definitions have been prepared, section 249(1)(d) requires the statements that would have been prepared, whether or not the entity was required to prepare themLegislation. The selected standard must be an authorised accounting standard that is either acceptable or applied with adjustments to prevent material competitive distortionsGOV. For MTT compliance, the group uses the figures that would have appeared in those statementsGOV.

There is a separate exception for the consolidation of particular entities. Section 249(2) does not require consolidation where the selected authorised standard does not require, or does not permit, itLegislation. HMRC gives the example of a non-material entity whose consolidation is elective: deemed consolidation does not force that entity to be consolidatedGOV. If no entities remain to be consolidated after permitted and required exclusions, the exercise can result in no consolidated financial statements and no ultimate-parent statusGOV. An investment entity required to account for investments at fair value may fall into this category.

HMRC also clarifies how this distinction affects investment funds, UK REITs and overseas REIT equivalents. Its excluded-entity guidance covers entities that would be ultimate parents but are not solely because they do not have consolidated financial statementsGOV. The revised example concerns an investment fund, X Ltd, whose chosen authorised standard does not permit its type of entity to consolidate other entitiesGOV. The deemed-consolidation exercise therefore leaves X Ltd outside a groupGOV, while X Ltd remains an excluded entityGOV.

In that example, X Ltd owns 10% of A2 Ltd and another excluded entity owns 90%. A2 Ltd belongs to a consolidated group and undertakes only activities ancillary to its ownersGOV. X Ltd’s minority interest counts towards the 95% qualifying-service-entity ownership threshold despite X Ltd being outside any group. The statutory service-entity exclusion also requires that no election to disapply exclusion is in forceLegislation.

The statute continues to require adjustments for material competitive distortions where accounts were prepared under a non-acceptable standardLegislation. Competitive distortions compare the treatment of items in those accounts with their treatment under the corresponding principles or procedures of international financial reporting standards. They are material if the sum of those differences exceeds €75 millionLegislation. Excluded entities’ revenue also remains relevant to determining whether the group meets the revenue threshold, even though excluded entities are not chargeable members for MTT calculationsGOV.

The legal basis is Finance (No. 2) Act 2023, sections 127 and 249GOV, explained in HMRC guidance MTT09520 and MTT10210.