Finance Act 2002

General provisions about deductions U.K.

1 (1) For sections 337 and 337A of the Taxes Act 1988 (corporation tax: general provisions about taxation of income) substitute—

“337 Company beginning or ceasing to carry on trade

(1) Where a company begins or ceases—

(a) to carry on a trade, or

(b) to be within the charge to corporation tax in respect of a trade,

the company’s income shall be computed as if that were the commencement or, as the case may be, the discontinuance of the trade, whether or not the trade is in fact commenced or discontinued.

(2) Subsection (1) applies to a Schedule A business or overseas property business as it applies to a trade.

337A Computation of company’s profits or income: exclusion of general deductions

(1) For the purposes of corporation tax, subject to any provision of the Corporation Tax Acts expressly authorising a deduction—

(a) a company’s profits shall be computed without any deduction in respect of dividends or other distributions, and

(b) a company’s income from any source shall be computed without any deduction in respect of charges on income.

(2) In computing a company’s income from any source for the purposes of corporation tax—

(a) no deduction shall be made in respect of interest except in accordance with Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships); and

(b) no deduction shall be made in respect of losses from intangible fixed assets within Schedule 29 to the Finance Act 2002 except in accordance with that Schedule.”.

(2) For section 338 of the Taxes Act 1988 (corporation tax: charges on income) substitute—

“338 Charges on income deducted from total profits

(1) Charges on income are allowed as deductions from a company’s total profits in computing the corporation tax chargeable for an accounting period.

(2) They are deducted from the company’s total profits for the period as reduced by any other relief from tax other than group relief.

(3) The amount of the deduction is limited to the amount that reduces the company’s total profits for the period to nil.

(4) Except as otherwise provided, a deduction is allowed only in respect of payments made by the company in the accounting period concerned.

(5) The above provisions are subject to any express exceptions in the Corporation Tax Acts.

338A Meaning of “charges on income"

(1) This section defines what payments or other amounts are “charges on income” for the purposes of corporation tax.

This section has effect subject to any express exceptions in the Corporation Tax Acts.

(2) Subject to the following provisions of this section, the following (and only the following) are charges on income—

(a) annuities or other annual payments that meet the conditions specified in section 338B;

(b) qualifying donations within the meaning of section 339 (qualifying donations to charity);

(c) amounts allowed as charges on income under section 587B(2)(a)(ii) (gifts of shares etc to charity).

(3) No payment that is deductible in computing profits or any description of profits for the purposes of corporation tax shall be treated as a charge on income.

(4) No payment shall be treated as a charge on income if (without being so deductible) it is—

(a) an annuity payable by an insurance company, or

(b) an annuity or other annual payment payable by a company wholly or partly in satisfaction of any claim under an insurance policy in relation to which the company is the insurer.

In paragraph (a) “insurance company” has the same meaning as in Chapter 1 of Part 12.

338B Charges on income: annuities or other annual payments

(1) An annuity or other annual payment is a charge on income if—

(a) the requirements specified in subsection (2) are met, and

(b) it is not excluded from being a charge on income for the purposes of corporation tax—

(i) by any of the following provisions of this section, or

(ii) by any other provision of the Corporation Tax Acts.

(2) The requirements are that the payment—

(a) is made under a liability incurred for a valuable and sufficient consideration,

(b) is not charged to capital,

(c) is ultimately borne by the company, and

(d) in the case of a company not resident in the United Kingdom, is incurred wholly and exclusively for the purposes of a trade which is or is to be carried on by it in the United Kingdom through a branch or agency.

(3) An annuity or other annual payment made to a person not resident in the United Kingdom shall be treated as a charge on income only if the following conditions are met.

(4) The conditions are that the company making the payment is resident in the United Kingdom and that either—

(a) the company deducts tax from the payment in accordance with section 349, and accounts under Schedule 16 for the tax so deducted, or

(b) the person beneficially entitled to the income in respect of which the payment is made is a company that is not resident in the United Kingdom but which carries on a trade in the United Kingdom through a branch or agency and the payment falls to be brought into account in computing the chargeable profits (within the meaning given by section 11(2) of that company, or

(c) the payment is one payable out of income brought into charge to tax under Case V of Schedule D.

(5) An annuity or other annual payment is not a charge on income if—

(a) it is payable in respect of the company’s loan relationships, or

(b) it is a royalty to which Schedule 29 to the Finance Act 2002 applies (intangible fixed assets).

(6) Nothing in this section prevents an annuity or other annual payment from being a charge on income if it is a qualifying donation (within the meaning of section 339).”.

(3) In section 214(1) of the Taxes Act 1988 (chargeable payments connected with exempt distributions), in paragraph (c) (payments not to be treated as distributions for purposes of certain provisions) for “sections 337(2) and 338(2)(a)" substitute “ section 337A(1) ”.

(4) In section 834(1) of the Taxes Act 1988 (interpretation of the Corporation Tax Acts), in the definition of “charges on income" for “338" substitute “ 338A ”.

(5) In Schedule 23A to the Taxes Act 1988 (manufactured dividends), in paragraph 4(2)(b) for “338(4)(a)" substitute “ 338B(4)(a) ”.