Corporation Tax Act 2010
2010 CHAPTER 4
Annex 1: Minor changes in the law
Change 1: Small profits rate and marginal relief: drop the need for a claim:sections 18, 19, 20 and 21
This change removes the requirement that a company should make a claim for small profits rate or marginal relief.
Section 13(1) of ICTA provides that a company “may claim” that its basic profits are charged at the small companies’ rate. And section 13(2) makes the same provision for marginal small companies’ relief. The general approach of this Act is not to require a claim if the relief can be shown in a return.
In practice a claim for small companies’ relief is usually made in a return, by putting an “X” in a box. In accordance with SP1/91, HMRC accept that such an entry is a valid claim.
The provisions that govern claims are not the same as the provisions that govern returns. But in practice dropping the need for a claim has only the following two consequences, both of which relate to the time available for “claiming” the relief.
First, the absolute time limit for making a claim is replaced by a time limit that may vary according to the particular circumstances. That may be because the return is issued late or because the taxpayer makes a late return. Accordingly, HMRC are no longer able to refuse a claim because it is late by reference to an absolute time limit: returns time limits and sanctions apply and they depend on the date the return is issued and made.
Second, mistake relief claims under paragraph 51 of Schedule 18 to FA 1998 are possible if too much tax is paid as a result of omitting to include the relief in the tax return. Claims under paragraph 51 of Schedule 18 to FA 1998 must be made within six years of the end of the accounting period to which the return relates.
This change is in taxpayers’ favour in principle and may benefit some taxpayers in practice. But the numbers affected and the practical effects are likely to be small.
Change 2: Small profits rate and marginal relief: ignore “passive companies”: sections 25 and 26
This change enacts SP5/94 which excludes some non-holding companies from those treated as “associated companies”.
Although the HMRC practice in this area is presented formally as a statement of practice it contains an element of concession. So its enactment is a change in the law.
The statement of practice applies only if the company does not carry on a trade (see section 26(1)(a)). And it applies only to a “holding company”. So it must have at least one 51% subsidiary (see section 26(1)(b)). Those conditions are straightforward.
The statement of practice includes three detailed conditions (and a definition of 51% subsidiary). Section 26 sets out six conditions for a company to be a “passive company” in an accounting period.
The first condition (corresponding to the first detailed condition in SP5/94) is that the company has no assets in addition to shares in its subsidiaries. Subsection (5) of the section relaxes this condition for assets representing a dividend received.
The second condition (corresponding to part of the third detailed condition in SP5/94) is that the company has no income other than dividends from its subsidiaries.
The third condition (corresponding to part of the third detailed condition in SP5/94) is that any dividends received by the company are distributed in full. The section expresses this condition in more detail than the statement of practice because a company cannot distribute a dividend that it receives: the dividend received is part of its profits, out of which it may pay a dividend of its own. So subsection (4) of the section sets out a “redistribution condition” which compares the dividends received with dividends paid.
The fourth condition (corresponding to part of the third detailed condition in SP5/94) is that the company has no chargeable gains.
The fifth condition (corresponding to part of the second detailed condition in SP5/94) is that the company is not entitled to a deduction for management expenses. A company may incur minor administrative expenses. But the benefit of the treatment in the section is incompatible with a deduction for management expenses.
The sixth condition (corresponding to part of the second detailed condition in SP5/94) is that the company is not entitled to a deduction for qualifying charitable donations.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 3: Small profits rate and marginal relief: relaxations in the test for being an associated company: sections 25 and 28 to 30 and Schedule 1(section 99 of CAA)
This change enacts parts of ESC C9.
Under section 13(4) of ICTA two companies are associated, for the purpose of small companies’ relief, if one has control of the other, or if both are under the control of the same person. “Control” is construed in accordance with section 416 of ICTA (see now section 450 of this Act).
ESC C9 has four main parts, set out in paragraphs 2, 3, 4 and 5 of the concession.
Paragraph 2: Fixed-rate preference shares
Under section 416(2) of ICTA a company controls another if it possesses the greater part of its share capital. Share capital includes preference shares.
So a lending company providing finance to a borrowing company by way of preference shares may technically control the borrowing company with the result that the two companies are associated. Furthermore, all borrowing companies controlled in this way by the lender are associated with each other.
By concession, some holdings of fixed-rate preference shares are ignored for the purpose of determining control for the purposes of small companies’ relief. The concession applies if the holding of fixed-rate preference shares is the only reason for two companies to be treated as associated.
Section 28 enacts this part of the concession.
Paragraph 3: Loan creditors
Under section 416(2) of ICTA a company controls another if it possesses such rights as would entitle it to the greater part of the assets of the other company. A loan creditor may have such rights.
So a loan creditormay technically control the borrowing company with the result that the two companies are associated. Furthermore, all borrowing companies controlled in this way by the lender are associated with each other.
By concession loans made between companies that are otherwise completely unconnected are ignored if the loan creditor is not a close company or is a “bona fide commercial loan creditor”. And there is a similar concession if unconnected companies are controlled by a common loan creditor.
Section 29 enacts this part of the concession.
Paragraph 4: Trustees
Under section 416(1) of ICTA a company is associated with another if one controls the other or both are under common control. ICTA does not specifically exclude control which is established by rights and powers held on trust. By concession, such rights and powers are ignored.
Section 474(1) of ITA (which applies also for corporation tax purposes – see section 1169 of this Act) substitutes a notional person for the trustees. That notional person is not a company and so cannot be an associated company. It follows that ESC C9 is not needed to prevent a trustee company and a company which it controls from being treated as associated. Similarly, if section 474(1) of ITA treats the trustees of two settlements as separate notional persons, the concession is not needed to prevent two companies controlled by different settlementsfrom being treated as associated.
The concession applies only if the rights and powers in two companies are held by the trustees of a single settlement. Section 30 enacts this part of the concession.
Paragraph 5: Relatives
Section 417(3) and (4) of ICTA (see now section 448 of this Act) defines “associate” to include a relative. By concession, in some circumstances, HMRC restrict the definition of “relative” to a husband, wife or minor child. This part of the concession depends on there being “no substantial interdependence” between the companies concerned. This test forms part of the review of the associated companies rules, announced by the Chancellor in his Autumn 2007 Statement on Tax Simplification Reviews. For the moment this Change does not legislate paragraph 5 of the concession.
Capital allowances
It is not clear from the words of the concession whether or not it applies also for the purpose of section 99 of CAA (monetary limit for long-life assets). In practice the concession is applied for the purpose of section 99 of CAA. Schedule 1 to the Act amends the capital allowances rule so that the treatment in sections 28 to 30 applies also to the monetary limit for long-life assets.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 4: Trading income: omission of references to a company carrying on a profession or a vocation: sections 36, 188, 452, 456, 673, 837, 851, 860, 864, 880, 883, 886, 939, 957, 1071 and 1119
This change omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation.
The change is reflected in numerous sections in Part 3 of CTA2009 (trading income). It is included in the origins of the main provisions affected in CTA 2009, where it is acknowledged as Change 2. It is carried through into sections 36, 188, 452, 456, 673, 837, 851, 860, 864, 880, 883, 886, 939957 and 1071 of this Act. It is also carried through into paragraph (b) of the definition of “period of account” in section 1119 of this Act.
There are strong grounds for believing that for the purposes of the charge to corporation tax there are no activities that should be taken to constitute the carrying on of a profession or vocation by a corporate body or unincorporated association. There was a full discussion of the issues involved in Change 2 in Annex 1 to the commentary on CTA 2009.
It is theoretically possible that the application of trading income rules to activities that a company could argue is a profession or a vocation could lead to a change in the measure of taxable profits.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 5: References to “officer of Revenue and Customs” and “Her Majesty’s Revenue and Customs”: sections 37, 199, 472 to 478, 480, 481, 484 to 488, 495, 504, 507, 510, 511, 514, 525, 527, 533, 540, 545, 546, 561, 565, 571 to 578, 582, 586, 587, 592, 658, 670, 671, 710, 713, 740, 743 to 746 and 977
This change replaces references to the “Board of Inland Revenue” in the source legislation with references to “an officer of Revenue and Customs” or “Her Majesty’s Revenue and Customs”.
It brings the income and corporation tax codes back into line.
References in the source legislation to the “Commissioners of Inland Revenue (however expressed)” are treated by section 50(1) of CRCA as references to “the Commissioners for Her Majesty’s Revenue and Customs”. The rest of this note accordingly refers to the Commissioners for HMRC (“the Commissioners”) rather than to the Board of Inland Revenue.
The provisions affected by this change authorise or require things to be done by or in relation to an officer of Revenue and Customs rather than by or in relation to the Commissioners. This reflects the way in which Her Majesty’s Revenue and Customs is organised and operates in practice. Section 13 of CRCA allows nearly all functions conferred on the Commissioners to be exercised by any officer. All of the functions affected by this change, which are in the main concerned with administrative processes, are in fact exercised by officers of the Commissioners, and the Commissioners themselves are not personally involved in their exercise.
Where the source legislation provides for a claim or election to be made to the Commissioners, this Act does not expressly state to whom such a claim or election is to be made. Where a notice to deliver a corporation tax return has been issued, paragraphs 57 and 58 of Schedule 18 to FA 1998 require the claim to be made in the return or by amendment of the return if possible. A return must be made to the officer who issued it. A notice amending a return must be made to an officer. Similarly, where the claim is made outside a return or amendment, paragraph 2(1) of Schedule 1A to TMA requires the claim to be made to an officer.
This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.
Change 6: Interpretation: references to Scottish and Northern Ireland legislation: sections 44, 64, 67, 486, 488, 511 and 1119
This change is about the extent to which references to “Act” are to be interpreted as including references to Scottish and Northern Irish primary legislation.
“Northern Ireland legislation” is defined in section 24(5) of the Interpretation Act 1978 (the 1978 Act) and the definition applies generally by virtue of section 5 and Schedule 1 to the 1978 Act. It is the term commonly used in legislation when referring to Northern Irish primary legislation. The definition of “Northern Ireland legislation” has seven limbs, (a) to (g).
Section 832(1) of ICTA defines “Act” to include Acts of the Parliament of Northern Ireland and a Measure of the Northern Ireland Assembly. So it expressly covers limbs (b) and (d) of the definition of “Northern Ireland legislation” in the 1978 Act. As a consequence of various deeming provisions contained in Schedule 12 to the Northern Ireland Act 1998, it also covers limbs (c), (e) and (f) of the definition of “Northern Ireland legislation”. Only limbs (a) and (g) of the definition of “Northern Ireland legislation” are not covered.
To simplify the definition of “Act” the current wording in section 832(1) of ICTA is replaced in section 1119 with an unqualified reference to “Northern Ireland legislation”. The change in the law is that limbs (a) and (g) of the definition of “Northern Ireland legislation” are now covered, although the change is formal rather than substantial as the provisions mentioned in those limbs are not relevant to the Corporation tax Acts.
“Act” on its own does not include Acts of the Scottish Parliament (see the definition of “Act” in Schedule 1 to the 1978 Act). But it is appropriate that references to “Act” in sections 44, 64, 67, 486, 488 and 511 should include references to Acts of the Scottish Parliament. In each of these cases the extension of the meaning of “Act” can only be advantageous to taxpayers.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 7: Industrial and provident societies: enactment of ESC C5: section 47
This change gives statutory effect to ESC C5.
ESC C5 stated that:
“TA 1988 s 393(8) enables a company with a trading loss brought forward under TA 1988 s 393(1) to set off the loss not only against the trading income of the accounting period but also against any interest or dividends on investments which would have been taken into account as trading income but for the fact that they are charged to tax under other provisions.
In the case of a registered industrial and provident society carrying on a trade, the following items of income may be regarded as trading income for the purposes of s 393(8)--
(a)interest brought into the computation of corporation tax profits as income underSchedule D Case III;
(b)annual interest received under deduction of tax;
(c)amounts assessable under Schedule D Case V.”
Section 47 gives effect to this concession with a number of necessary modifications.
The reference to interest in (a) has been replaced with a reference to amounts that are chargeable under section 299 of CTA 2009 (charge to tax on non-trading profits from loan relationships) and the reference to amounts assessable under Case V in (c) has been replaced with a reference to amounts arising from possessions out of the United Kingdom. The reference to annual interest received under deduction of tax has not been rewritten as any such income would now be caught within the reference to amounts chargeable under section 299 of CTA 2009.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 8: Trading losses: restrictions: contribution to the firm in place of contribution to the trade: sections 56, 57, 58, 59, and 60
This change provides for certain restrictions on the use of trade losses, incurred by companies acting as limited partners or as members of limited liability partnerships (LLPs), to operate by reference to the company’s contribution to the firm (rather than contribution to the trade, as in the source legislation). It also deals with a number of consequential matters and clarifies a number of points about what is included in a company’s contribution.
Contribution to the firm
For companies that are members of LLPs, the source legislation restricted loss relief against total profits by reference to the company’s contribution to the limited liability partnership (see section 118ZC(2) and (3) of ICTA).
By contrast, for companies that are limited partners (that are not also members of LLPs), the source legislation restricted loss relief against total profits by reference to the company’s contribution to the trade (see section 118(3) of ICTA).
But partnership law is more likely to look at capital contributed to the partnership (referred to in the relevant sections of the Act as the firm), rather than to capital contributed to a trade that the partnership carries on. For instance, a company might become a limited partner in a partnership formed under the Limited Partnership Act 1907 (LPA). Under section 4(2) of the LPA the company, at the time of entering into the partnership, contributes a sum or sums as capital (or property valued at a stated amount). The LPA does not prevent further amounts being contributed at a later date. But the intention of the LPA is that the contribution is to the firm, not the trade. The firm uses the capital contributed to fund its various activities – be that one trade or more than one trade and any investments etc that the firm might hold. And the company has limited liability for the debts and obligations of the firm, rather than just for the debts and obligations of any trade that the firm happens to carry on.
The Act reflects this by providing that total profit or group relief restrictions on trade losses operate in relation to a company’s “contribution to the firm” rather than “contribution to the trade”. This is, in principle, taxpayer-favourable as it may allow total profit relief or group relief to be obtained by reference to a larger amount than would otherwise be the case.
Firm carries on more than one trade
Some consequential changes have been made to cater for the possibility that a firm might carry on more than one trade.
If a firm carries on only one trade, the restriction of trade loss relief against total profit or group relief by reference to the contribution to the firm means that the company can get such relief for losses up to the amount at risk, and no more. But if the firm carries on more than one trade, restricting total profit or group relief for trade losses in each trade by reference to the contribution to the firm might result in the company getting such relief for more than the amount at risk. Clearly the source legislation does not allow this in the case of limited partners (who are not also members of LLPs) as it restricts relief for trade losses against total profits by reference to the amount of capital contributed to each trade.
So in the case of limited partners (who are not also members of LLPs) the Act restricts the total profit relief available in respect of losses from all trades carried on by the firm to the amount that the company has at risk.
As noted earlier, for LLPs a member’s contribution is already in terms of the contribution to the LLP. But the source legislation does not explicitly deal with the possibility that an LLP might carry on more than one trade. Accordingly, to ensure that a consistent policy is applied throughout the sections (that is, the relief available is restricted to the amount at risk), the restriction mentioned in the preceding paragraph has been explicitly applied in relation to members of LLPs as well. This is in principle taxpayer-adverse in the case of members of LLPs.
Contribution to an LLP
The source legislation provides that the contribution to an LLP is the greater of the amount which the company has contributed to it as capital (so far as it is not recoverable) and the amount of the company’s liability on a winding up (see section 118ZC(2) of ICTA).
But the total amount the company has at risk in an LLP is, in principle, the sum of what has been contributed as capital to the LLP and the additional amount that the company could be called on to meet in a winding up of the LLP.
The Act provides that a company’s contribution to an LLP takes account of the total amount at risk, namely any amounts contributed as capital to the LLP (see section 60(2)) and any further amounts for which the company is liable on a winding up (see section 60(7)).
Profits or losses in accordance with generally accepted accounting practice
The Act provides explicitly, where the source legislation did not, instances where a reference to profits or losses means amounts calculated in accordance with generally accepted accounting practice. See sections 57(9) and 60(4).
Capitalised profits
The Act also explicitly provides that capitalised undrawn profits are included in an individual’s contribution. See sections 57(3) and 60(3).
Contributions to a firm — trading profits not drawn
The Act also provides that a company’s share of trading profits, taken into account in determining the company’s contribution to the firm, is calculated by looking at periods where such profits were made, and ignoring trading losses in other periods. The source legislation did not contain an equivalent provision. The effect is broadly to determine a company’s share of undrawn trading profits as the amount that the company would have received if such profits had been distributed fully on a period by period basis. See section 57(8).
This change is adverse in principle and in practice to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.
Change 9: Trading losses: restrictions: withdrawal of capital ignored where amounts charged to tax as profits of a trade: sections 57 and 60
This change amends the way in which the trading losses of limited partners or members of limited liability partnerships are restricted.
One of the elements in the restriction of such a trading loss is the net amount contributed to the firm (the full amount contributed less any capital withdrawn) by the limited partner or the member of the limited liability partnership. It is,however, possible that amounts of capital withdrawn may be regarded for tax purposes as profits. In these circumstances it is inequitable to restrict loss relief by reference to those amounts. This change corrects this potential inequity.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 10: Trading losses: restrictions: restrictions not to apply where an overseas property business carried on in the exercise of functions conferred by or under the law of a territory outside the United Kingdom: section 67
This change brings the position of an overseas property business that is carried on in the exercise of functions conferred by or under the law of a territory outside the United Kingdom in line with the treatment of an overseas property business that is carried on in the exercise of functions conferred by or under an Act of the United Kingdom government or the Scottish Parliament.
If an overseas property business is not carried on on a commercial basis then relief for losses can only be obtained if the business is carried on in the exercise of functions conferred by or under specific legislation. In these limited circumstances it is considered inequitable that relief may only be obtained if the legislation in question is United Kingdom legislation. The change extends the scope of the relief to functions conferred by or under the law of a territory outside the United Kingdom.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 11: Share loss relief, community investment tax relief and the corporate venturing scheme: omit the words “for full consideration”: sections 68 and 244 and Schedule 1(paragraph 46(2)(a) of Schedule 15 to FA 2000)
This change deletes the words “for full consideration” which qualify “by way of a bargain made at arm’s length”. It removes words which are not in practice applied to impose any additional requirement.
There are three places in the Tax Acts where the words “by way of a bargain made at arm’s length” are qualified by the words “for full consideration”. These are:
section 575(1)(a) of ICTA (relief for losses on unquoted shares in trading companies);
paragraph 29(4)(a) of Schedule 16 to FA 2002 (community investment tax relief); and
paragraph 46(2)(a) of Schedule 15 to FA 2000 (the corporate venturing scheme).
Paragraph 46(2)(a) of Schedule 15 to FA 2000 is also applied for the purposes of paragraph 67 of that Schedule by paragraph 67(3).
All these provisions apply for corporation tax purposes only. Prior to ITA, section 575(1)(a) and paragraph 29(4)(a) of Schedule 16 to FA 2002 also applied for income tax purposes.
Section 575(1)(a) of ICTA and paragraph 67 of Schedule 15 to FA 2000 are concerned with the circumstances in which an allowable loss incurred on a disposal of shares may be claimed as a relief in calculating taxable income. The phrase “for full consideration” has not caused practical difficulty in relation to the application of either of those provisions.
Case law (Berry v Warnett (1982), 55 TC 92 HL(9) and Bullivant Holdings Limited v CIR (1998), 71 TC 22 ChD10) confirms that a bargain may be made at arm’s length if a full and fair price is paid. Whether the price is full and fair is to be determined by reference to the circumstances of the disposal and it is clear that the price paid may be full and fair notwithstanding that it is substantially below open market value.
If the words “for full consideration” mean no more than that a full and fair price is paid in the circumstances of the disposal, the words are otiose. If they have independent meaning, this may require that the price paid is not less than market value, if market value is greater than the amount which is a full and fair price in the circumstances of the disposal. But in practice no such requirement is imposed.
Accordingly the words “for full consideration” have been omitted from section 131(3)(a) of ITA rewriting section 575(1)(a) of ICTA for income tax purposes. See Change 20 in Annex 1 to the explanatory notesonITA.
This Act similarly omits those words from section 68(2)(a) of this Act rewriting section 575(1)(a) of ICTA for corporation tax purposes and amends Schedule 15 to FA 2000 so that the words do not apply for the purposes of paragraph 67 of that Schedule (see below).
Paragraph 29 of Schedule 16 to FA 2002 and paragraph 46 of Schedule 15 to FA 2000 are concerned with the withdrawal or reduction of tax relief previously obtained.
These paragraphs contrast with the only other provisions in the Tax Acts dealing with the withdrawal or reduction of investment reliefs, namely:
section 299(1)(a) and (b) of ICTA and section 209(2) and (3) of ITA (withdrawal or reduction of EIS relief); and
section 266(2)and (3) of ITA (withdrawal or reduction of VCT relief).
In those provisions, the words “by way of a bargain made at arm’s length” appear without any qualification.
In practice, the provisions for the withdrawal or reduction of CITR are operated on the same basis as the similar provisions relating to EIS relief and VCT relief - see paragraph 7020 of HMRC’s Community Investment Tax Relief Manual (CITM7020).
The words “for full consideration” have accordingly been omitted from section 361(4)(a) in Part 7 of ITA rewriting Schedule 16 to FA 2002 for income tax purposes. See Change 20 in Annex 1 to the explanatory notesonITA.
This Act similarly omits those words from:
section 244 rewriting paragraph 29(4)(a) of Schedule 16 to FA 2002 for corporation tax purposes and
paragraph 46(2)(a) of Schedule 15 to FA 2000 (see Schedule 1).
The effect of this change is to conform provisions in each of the venture capital schemes dealing with the same issues, by removing from some of them words which are either otiose or apply a test which in practice is not required to be met.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 12: Share loss relief: corresponding bonus shares: sections 73 and 90
This change legislates the practice that corresponding bonus shares are qualifying shares for share loss relief.
The change in section 73(3) is equivalent to that made in section 135(4) of ITA and brings the provisions for share loss relief for investment companies back into line with the provisions for share loss relief for individuals. See Change 23 in Annex 1 to the explanatory notes on ITA.
When shares are issued by way of bonus they are not issued for consideration. Bonus shares do not, therefore, meet the requirements of section 573(6) of ICTA (rewritten as section 73(2)) that the company has subscribed for the shares in consideration of money or money’s worth.
In practice, where ordinary shares in the same company, of the same class and carrying the same rights as shares for which the company has subscribed are issued by way of bonus, claims for relief on the disposal of the shares issued by way of bonus are accepted.
Accordingly, section 73(3) has been included to provide that, where a company which has subscribed in consideration of money or money’s worth for shares in a qualifying trading company is issued with bonus shares in that company which are of the same class and carry the same rights (corresponding bonus shares), the company is treated as having also subscribed for the corresponding bonus shares in consideration of money or money’s worth.
This means that the corresponding bonus shares are shares which have been subscribed for by the company for the purposes of section 68(1).
Section 73(4) has been added to make clear that the corresponding bonus shares are treated as subscribed for at the time the original shares were subscribed forin actual consideration of money or money’s worth. This is principally for the purposes of section 69(4)(a), which has no equivalent in Chapter 6 of Part 4 of ITA.
The definitions of bonus shares and corresponding bonus shares are in section 90(1) and (2).
The effect of this change is to put on a statutory basis an existing practice which is favourable to taxpayers.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 13: Share loss relief: restrictions on the amount of share loss relief: section 75
This change refines and extends the provision in section 576(1) of ICTA which restricts the amount of share loss relief available in a case where qualifying shares forming part of a holding are disposed of.
This change is the same as that made in section 147 of ITA for the purposes of relief against income tax. See Change 26 in Annex 1 to the explanatory notes on ITA.
Section 576(1) of ICTA provides that, if a company disposes of qualifying shares forming part of a holding, the amount of relief must not exceed the sums which would be allowed as deductions in computing the allowable loss if the shares had not been part of the holding.
For the purposes of corporation tax on chargeable gains, where shares are pooled in a section 104 holding (see section 104 of TCGA) or a 1982 holding (see section 109 of TCGA), the total consideration given for all the shares in the pool is averaged across the shares. This means that, when there is a part disposal of shares out of the holding, a proportion of this consideration is deducted in computing the chargeable gain pro-rata to the number of shares disposed of over the total number of shares in the pool. This may result in an allowable loss on the disposal of such shares being greater than it would have been if the shares had not been pooled.
This provision is designed to limit the share loss relief available in such cases to no more than what would have been the amount allowable as a deduction in calculating the loss if the shares had not been pooled. Ignoring incidental costs of acquisition and disposal, this equates in most cases to the amount subscribed for the shares. It is a general rule, but is of special relevance to the case where some of the shares in the pool are not qualifying shares.
In connection with the changes in section 76 described in Change 16 in Annex 1, section 75 refines the circumstances in which the provision applies as follows:
where the qualifying shares disposed of form part of a section 104 holding or a 1982 holding at the time of the disposal or formed part of such a holding at any earlier time (subsections (1) and (2));
where both qualifying shares and shares that are not capable of being qualifying shares are acquired or disposed of on the same day and are treated by virtue of section 105(1)(a) of TCGA for the purposes of corporation tax on chargeable gains as acquired or disposed of by a single transaction (subsections (3) and (4)); and
where the qualifying shares in a company are treated for the purposes of corporation tax on chargeable gains by virtue of section 127 of TCGA as the same asset as other shares in the same company that are not capable of being qualifying shares or as debentures of the same company (subsections (5) and (6)).
The section has the following effects:
Subsections (1) and (2) rewrite the provision in section 576(1) with two changes.
The first change is that subsection (2) only applies to shares which are pooled in a section 104 holding or a 1982 holding. It requires the allowable deductions for the qualifying shares to be re-calculated as if the qualifying shares did not form part of the section 104 holding or the 1982 holding. But it does not affect the calculation of the allowable deductions in any other way. For example, if there has been an issue of corresponding bonus shares in respect of original qualifying shares, the re-calculated allowable deductions are apportioned in the usual way across the original shares and the corresponding bonus shares.
The second change is that subsection (2) expressly applies if the company disposes of all the shares in the section 104 holding or the 1982 holding and at some time those shares and other shares which have been disposed of earlier formed part of the same holding (see subsection (1)(b)(ii)). This deals with the effect on the allowable cost of the shares in the pool where the other shares were acquired at a different price from that of the shares now being disposed of. It is a clarification of the scope of the provision in section 576(1) of ICTA.
Subsections (3) to (6) are new. They are limited to mixed holdings (see the commentary on section 76 and Change 14) and deal with the residual situations where the cost of shares which are not within a section 104 holding or a 1982 holding is also subject to averaging.
Subsections (3) and (4) deal with the circumstances where the cost of qualifying shares and shares which are not capable of being qualifying shares acquired on the same day are subject to averaging.
Subsections (5) and (6) ensure that the limit is calculated separately in relation to the qualifying shares in the case of a reorganisation, such as a rights issue, involving qualifying shares and shares which are not capable of being qualifying shares or debentures. In those circumstances, the allowable deductions by reference to which the limit is to be calculated in accordance with this subsection are likely to differ from the cost of acquisition of the qualifying shares calculated in accordance with section 129 of TCGA.
Subsection (8) explains what is meant by “shares that are not capable of being qualifying shares” for the purposes not only of this section but also section 76. See Change 14 for a detailed explanation of why a mixed holding has been defined in terms of a holding which includes such shares. Subsection (9) extends this meaning for the purposes only of subsection (5) to cover re-organisations involving the issue of shares of a different class.
The effect of this change is mainly clarificatory. In particular the reference in section 75(1)(b)(ii) to the shares having formed part of such a holding that is a section 104 holding or a 1982 holding at an earlier time prevents the taxpayer claiming an amount of relief greater than the actual cost of the qualifying shares disposed of by advancing an argument that the restriction on the amount of share loss relief does not apply on the disposal of the whole of a holding.
This change is adverse to some taxpayers in principle and in practice. But the numbers affected and the amounts involved are likely to be small.
Change 14: Share loss relief: meaning of a mixed holding: section 76
This change substitutes for the meaning of a mixed holding in section 576(1) of ICTA a new definition of a mixed holding.
This change is the same as that made in section 148(1) of ITA for the purposes of relief against income tax. See Change 27 in Annex 1 to the explanatory notes on ITA.
Section 576(1) of ICTA contains a rule for identifying shares disposed of by a person out of a holding which comprises:
“(a)shares for which he has subscribed (“qualifying shares”); and
(b)shares which he has acquired otherwise than by subscription.”
This distinction has remained unchanged since the introduction of this provision by section 37 of FA 1980. At that time and at the time of its consolidation in 1988 as section 576(1) of ICTA, the wording was adequate to distinguish between shares which would qualify for share loss relief and those which would not.
Following the changes to the definition of qualifying trading company made by FA 1998 and FA 2001, the fact that this is the distinction made by section 576(1) of ICTA has become less evident.
At the time of a disposal of shares from a holding, those or other shares in the holding may be known to be incapable of ever being qualifying shares, even though they were subscribed for. This can be because:
the company failed to meet either the gross assets requirement or the unquoted status requirement at the time of issue of the shares; or
the company has failed to meet the condition that it has carried on its business wholly or mainly in the United Kingdom in relation to the shares. If the failure in relation to those shares was only during a period that ended more than 12 months before other shares in the holding were issued, it does not cause the other shares to be incapable of being qualifying shares.
Section 76(1), accordingly, provides that a mixed holding is one which, at the time of the disposal in question, includes shares that are not capable of being qualifying shares and “other shares”, that is shares which at that time may or may not qualify for relief on their disposal.
Shares that are not capable of being qualifying shares are defined in section 75(8) as not only shares acquired otherwise than by subscription, but also shares in relation to which the gross assets requirement or the unquoted status requirement or the requirement as to the carrying on of business wholly or mainly in the United Kingdom has not been met.
The effect in principle of this change depends on whether the rule as amended results in different shares being identified as disposed of by the taxpayer from those identified under the rule in the source legislation. Identification of different shares may in principle result in the amount of share loss relief available on the disposal in question being less, more or the same and may also affect the relief available on a subsequent disposal. But in practice mixed holdings are treated as including all holdings of shares in a company some of which qualify for share loss relief and some of which do not qualify (see paragraph 47010 of HMRC’s Venture Capital Schemes Manual).
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 15: Share loss relief: identification of which shares are disposed of: section 76
This change legislates the practice that, if the identification rule in section 576(1) of ICTA identifies that some but not all of the qualifying shares in the mixed holding are disposed of, the rule is also applied to determine which of those shares are disposed of.
This change is the same as that made in section 148(2) of ITA for the purposes of relief against income tax. See Change 28 in Annex 1 to the explanatory notes on ITA.
It is stated explicitly in section 76(2)(b) that the rule as amended by Change 14so applies.
The effect in principle of this change depends on whether the rule as amended results in different shares being identified as disposed of by the taxpayer from those identified under the rule in the source legislation. Identification of different shares may in principle result in the amount of share loss relief available on the disposal in question being less, more or the same and may also affect the relief available on a subsequent disposal. But in practice the qualifying shares disposed of and the proportion of the loss attributable to those shares is determined on a just and reasonable basis. This normally gives the same result as the rewritten legislation (see paragraph 47150 of HMRC’s Venture Capital Schemes Manual).
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 16: Share loss relief: identification of shares disposed of out of a mixed holding: section 76
This change expands and clarifies the rules for identifying the shares disposed of, in cases where the company disposes of some only of the shares in a mixed holding. As to what constitutes a mixed holding, see Change 14.
Section 576(1) of ICTA sets out a general rule that, where shares are disposed of out of a mixed holding, the shares disposed of are to be identified on a last in first out (LIFO) basis.
This rule is modified by section 576(1C) of ICTA in the case of a mixed holding which includes shares to which investment relief within the meaning given by Schedule 15 to FA 2000 (corporate venturing scheme) is attributable.
Shares forming a section 104 holding or a 1982 holding are regarded for the purposes of corporation tax on chargeable gains as indistinguishable parts of a single asset. Thus, the consideration given for the shares in the holding is spread evenly across the shares and there is no need for the purposes of corporation tax on chargeable gains to identify the specific shares disposed of.
The LIFO identification rule is, however, necessary for the purposes of section 573 of ICTA to identify whether, on the disposal of some only of the shares out of such a holding consisting partly of shares that are not capable of being qualifying shares, the shares disposed of are qualifying shares.
Shares of the same class held by the company in the same capacity normally constitute a section 104 holding or a 1982 holding (see sections 104 and 109 of TCGA). Section 107 of TCGA, however, provides special rules for identifying shares where there are acquisitions and disposals within a ten day period. Where some but not all of the shares acquired within a ten day period are disposed of within that period, section 107 of TCGA identifies the shares disposed of on a first in first out (FIFO) basis.
Section 105 of TCGA contains rules in relation to shares acquired on the same day. In practice, if some but not all of the shares of the same class acquired on the same day are shares that are not capable of being qualifying shares and if some only of the shares acquired on that day are disposed of, the question whether and to what extent the shares disposed of are qualifying shares is determined for the purposes of section 573 of ICTA on a just and reasonable basis; normally pro rata to the number of shares acquired on that day.
In rewriting the rule in section 576(1) of ICTA, the approach taken in section 76 is to ensure that the identification rules for share loss relief are wholly consistent with the identification rules for corporation tax on chargeable gains, so that:
so far as the rules in sections 105 and 107 of TCGA serve conclusively to identify whether and to what extent the shares disposed of out of a mixed holding are qualifying shares, those rules are explicitly applied (see subsections (3)(a)(i) and (4));
so far as shares acquired on different days are included in a section 104 holding, the LIFO rule in section 576(1) of ICTA is applied separately to the shares in the section 104 holding (see subsections (3)(a)(ii) and (5)); and
so far as shares acquired on different days are included in a 1982 holding, the LIFO rule in section 576(1) of ICTA is applied separately to the shares in the 1982 holding (see subsections (3)(a)(ii) and (5)).
In a case where the mixed holding includes shares to which investment relief is attributable, subsections (3)(a), (4) and (5) are displaced by subsections (3)(b) and (6).
In some cases those rules do not conclusively determine whether and to what extent the shares disposed of are qualifying shares. They may, for example, identify that some only of shares of the same class acquired on the same day are disposed of. In that case it is necessary to determine whether any of the shares disposed of are shares that are not capable of being qualifying shares. Subsection (7) legislates existing practice by providing an explicit rule that the determination is to be made on a just and reasonable basis.
This change only has any effect on taxpayers in the rare circumstances of the disposal at a loss of qualifying shares being some only of a number of shares acquired at separate times not earlier than nine days before the date of the disposal. The change applies a FIFO rule rather than a LIFO rule. The effect may be adverse or favourable depending on whether the shares identified as disposed of are or are not qualifying shares and, if qualifying shares were subscribed for at different times, the respective amounts subscribed for the qualifying shares. In all other circumstances, it has no effect for taxpayers.
This change is in principle and in practiceadverse to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.
Change 17: Share loss relief: shares to which section 127 of TCGA applies: section 77
This change makes explicit the time at which, among others, corresponding bonus shares are treated as issued for the purposes of section 76. It is, in part, consequential on the inclusion of section 73(3) (see Change 12) which treats corresponding bonus shares as subscribed for by the company.
This change is the same as that made in section 149(2) of ITA for the purposes of relief against income tax. See Change 31 in Annex 1 to the explanatory notes on ITA.
The time at which such shares are treated as issued to or acquired by the company claiming relief needs to be ascertained for a number of purposes. See section 89 and Change 20.
The time at which corresponding bonus shares are treated as issued to or acquired by the company claiming relief also needs to be ascertained for the purpose of determining which shares are disposed of in accordance with the identification rules in section 576(1) and (1C) of ICTA, rewritten in section 76.
Section 77(1) has been included for this purpose. A different approach from that in section 89(2) has been adopted. Section 76 applies where the holding includes shares to which investment relief within the meaning given by Schedule 15 to FA 2000 (corporate venturing scheme)is attributable. In cases where it so applies, section 76 applies the rules in paragraph 93 of Schedule 15 to FA 2000. For consistency, section 77(1) follows the wording in paragraph 93(7) of that Schedule.
Section 77(1) and paragraph 93(7) of Schedule 15 to FA 2000 do not apply only to issues of corresponding bonus shares. They also apply to allotments of shares for payment, for example by way of rights, which meet the requirements of section 126(2)(a) of TCGA and to which section 127 of that Act applies.
This ensures that, if investment relief is not attributable to the shares in the existing holding or the new shares, new shares issued by way of rights within section 126(2)(a) of TCGA are treated for the purposes of section 76 as acquired at the same time as the shares in the existing holding.
But if investment relief is attributable to the shares in the existing holding or to new shares allotted for payment, section 77(1) does not apply to the allotment. This is because paragraph 81 of Schedule 15 to FA 2000 provides that, if there is such an allotment for payment and investment relief is attributable either to the shares in the existing holding or to the allotted shares, section 127 of that Act does not apply.
In addition to making the necessary provision consequent on the explicit treatment of corresponding bonus shares as being subscribed for, this change has the effect, for the purposes of section 76, of treating rights issue shares as issued earlier than the date on which they are actually issued, except as described in the preceding paragraph.
If the rights issue shares form part of a mixed holding and some only of the shares in the mixed holding are disposed of, the effect of this change is to prevent the taxpayer from claiming a greater amount of relief or from obtaining relief earlier than would be the case under generally accepted practice (see paragraphs 47400 and 48350 of HMRC’s Venture Capital Schemes Manual), by advancing an argument that the rights issue shares are to be identified as being among the shares disposed of by reference to the actual date of their issue.
This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 18: Share loss relief: nominees and bare trustees: section 77
This change makes clear that, if shares of the same class are held as to some directly by the company and as to the others by a nominee or bare trustee for it, all the shares are included in a single holding of the company for the purposes of section 76.
This change is the same as that made in section 149(3) of ITA for the purposes of relief against income tax. See Change 32 in Annex 1 to the explanatory notes on ITA.
A company which has subscribed for shares may subsequently wish to transfer the shares into the name of a nominee or bare trustee. On a disposal of the shares on behalf of the company by the nominee or bare trustee, the allowable loss for the purposes of corporation tax on chargeable gains and the entitlement to relief under section 573 of ICTA is that of the company not that of the nominee or bare trustee.
The effect of this change is to prevent the taxpayer from claiming a greater amount of relief or obtaining relief earlier than has hitherto been the case in practice, by advancing an argument that, where a company has beneficial holdings of shares one of which is held directly and the other of which is held through a nominee or bare trustee, the provisions of section 76 should be applied separately.
This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 19: Share loss relief: resolution of conflicting provisions: sections 74 and 87 and Schedule 2 (disposals of new shares, and relief after an exchange of shares for shares in another company)
This change makes clear that the provisions of section 74 do not apply to an exchange of shares to which section 87 applies. It resolves an apparent conflict between section 304A of ICTA, rewritten by ITA as sections 576J and 576K of ICTA, and section 575(2) of ICTA, rewritten in section 74, which arises from the way in which section 575(2) of that Act achieves its purpose.
This change is the same as that made in sections 136(2) and 145(3) of ITA for the purposes of relief against income tax. See Change 24 in Annex 1 to the explanatory notes on ITA.
Section 575(2) of ICTA is an anti-avoidance provision. Its purpose is to prevent a person from obtaining share loss relief in respect of shares that are not capable of being qualifying shares in a company (“Oldco”) by swapping them for shares in another company (“Newco”) that are capable of being qualifying shares, except to the extent that the person gives additional consideration for the shares in Newco. For example, the shares in Oldco may not be capable of being qualifying shares because they were purchased from another shareholder. This provision has existed since the introduction of share loss relief in 1980.
Section 304A of ICTA was first applied for the purposes of share loss relief as part of the changes to the meaning of “qualifying trading company” made by FA 1998. It deals with the continuity of the requirements to be met by Newco following an exchange of qualifying shares in Oldco for qualifying shares in Newco without change of ownership.
Section 575(2) of ICTA applies to the issue of ordinary shares (“new shares”) by Newco in an exchange or scheme of reconstruction within section 135 or 136 of TCGA relating to shares (“old shares”) in Oldco. The new shares are in these circumstances “issued in consideration of … money’s worth”, that is the transfer or cancellation of the old shares. Accordingly, if Newco is a qualifying trading company in relation to the disposal of the new shares, the new shares disposed of are qualifying shares (see section 573(6) of ICTA rewritten in section 73(2)). This is the case whether or not the old shares are capable of being qualifying shares.
Section 575(2)(a) of ICTA operates to prevent share loss relief being obtained on the disposal of the new shares where the old shares were not themselves capable of being qualifying shares by requiring the following assumptions to be made:
first, that section 127 of TCGA does not apply to the exchange or scheme of reconstruction, so that there is a disposal of the old shares for the purposes of corporation tax on chargeable gains; and
second, that on that assumed disposal an allowable loss would have been incurred for those purposes.
Section 575(2)(a) of ICTA then requires that share loss relief would have been obtainable on the assumed disposal on the basis that it was a disposal by way of a bargain made at arm’s length. This is a consequence of the express reference in section 575(2)(a) of ICTA to the allowable loss being incurred “in disposing of [the old shares] as mentioned in subsection (1)(a) above”. Section 575(1) of ICTA sets out the categories of disposal in respect of which a claim for share loss relief may be made, including in paragraph (a) a disposal “by way of a bargain made at arm’s length for full consideration”. This requirement is rewritten in section 68(2)(a). See the commentary on section 68 and Change 11 in Annex 1.
Unless, on the assumptions described, share loss relief would have been obtained on the assumed disposal of the old shares, share loss relief may not be obtained on the disposal of the new shares, except to that extent that any “new consideration” has been given for the new shares (see section 575(2)(b) of ICTA rewritten in section 74(4) and (5)).
Section 304A of ICTA is one of the provisions applied by section 576(4A) of that Act with modifications for the purposes of defining a qualifying trading company by reference to the requirements of section 293 of ICTA. Section 304A of ICTA has been rewritten by ITA with the required modifications, in sections 145 and 146 of ITA for the purposes of relief against income tax and in sections 576J and 576K of ICTA for the purposes of relief against income subject to corporation tax. See the commentary on sections 145 and 146 of, and Schedule 1 to, ITA in the explanatory notes on that Act.
Section 304A of ICTA relates to an exchange of securities within section 135 of TCGA affecting old shares which are qualifying shares. The type of exchange to which section 304A of ICTA applies is one which involves no change of ultimate ownership. It typically occurs when a new holding company is placed above a previously loss making company as one of the steps in obviating difficulties arising under company law in relation to distributable profits.
The effect of section 304A of ICTA as modified and applied by section 576(4A) of that Act is that, if the exchange meets the requirements of section 304A(1) of ICTA, the new shares are capable of being qualifying shares and the requirements for Newco to be a qualifying trading company are to be applied as if Oldco and Newco were one and the same company. In particular, the unquoted status requirement in section 293(1A) of ICTA (rewritten in section 143 of ITA and section 576H of ICTA) and the gross assets requirement in section 293(6A) of ICTA (rewritten in section 142 of ITA and section 576G of ICTA) are to be met only at the time of issue of the old shares by Oldco.
But if the assumptions required by section 575(2)(a) of ICTA are to be applied to an exchange falling within section 304A(1) of that Act, the requirement that the assumed disposal arises by way of a bargain made at arm’s length is unlikely to be capable of being met. This would prevent a claim for share loss relief on the disposal of the shares in Newco and render nugatory the application of section 304A of ICTA for the purposes of share loss relief.
Change 24 in Annex 1 to the explanatory notes on ITA resolves that apparent conflict, for the purposes of relief against income tax, by providing in section 145(3)(a) of ITA that nothing in section 136(2) of that Act applies to an exchange falling within section 145(1) and cross–referring to that provision in section 136(2) of that Act.
But it was not within the scope of ITA, an income tax rewrite Act, to make the equivalent changes in sections 575(2) and 576J of ICTA for the purposes of relief under section 573 of that Act against income subject to corporation tax. It is within the scope of a corporation tax rewrite Act to make them and this change accordingly does so.
The effect of this change is to ensure that, in relation to shares in Newco issued on or after 1 April 2010, the legislation no longer contains an apparent conflict between provisions. The conflict is apparent in the sense that it arises in principle but has no effect in practice.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 20: Share loss relief: time of issue of corresponding bonus shares: section 89, Schedule 1 (paragraph 57A of Schedule 2 to ITA) and Schedule 2 (application of Part 5 of Schedule 2 in relation to corresponding bonus shares)
This change inserts an explicit provision in section 89 determining the time at which corresponding bonus shares are treated as issued to a company. It is consequential on the inclusion of section 73(3) which treats corresponding bonus shares as subscribed for by the company (see Change 12).
This change is the same as that made in section 150(3) of ITA for the purposes of relief against income tax. See Change 34 in Annex 1 to the explanatory notes on ITA.
The time at which such shares are treated as issued to the company claiming relief needs to be ascertained for the purposes of determining:
the beginning of the period during which the qualifying trading company must carry on its business wholly or mainly in the United Kingdom (section 78(5)(a));
the times at which the gross assets requirement is to be met (section 84(1)(a) and (2)(a));
the time at which the unquoted status requirement is to be met (section 85(1)); and
if section 87 applies, the time at which the new shares are to be treated as having been issued for the purposes of section 88(2)(b).
A provision corresponding to section 89(2) has been included in Part 5 of Schedule 2 with appropriate adaptation where the matter in question is whether, in relation to the application of transitional provisions,corresponding bonus shares are treated as having been issued before, rather than on, a particular date. A consequential amendment has been made by Schedule 1 adding in Part 6 of Schedule 2 to ITA a provision mirroring that in Part 5 of Schedule 2 to this Act.
This change is a necessary direct consequence of the inclusion, to the advantage of taxpayers, of the explicit treatment of corresponding bonus shares as being subscribed for.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 21: Share loss relief: investment company: omission of reference to savings bank and bank for savings: section 90, Schedule 1 (section 151 of ITA) and Part 5 of Schedule 2 (interpretation of Chapter 5 of Part 4)
This change results in certain savings banks and banks for savings no longer falling within the definition of “investment company” for the purposes of share loss relief in Chapter 5 of Part 4 of this Act and Chapter 6 of Part 4 of ITA.
Section 576L(1) of ICTA and section 151(1) of ITA apply the definition of investment company in section 130 of ICTA, with modification, for the purposes of share loss relief under section 573 of ICTA and Chapter 6 of Part 4 of ITA.
The definition of “investment company” in section 130 of ICTA, which applies for the purposes of Part 4 of ICTA, is as follows:
““investment company”, means any company whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom, but includes any savings bank or other bank for savings except any which, for the purposes of the Trustee Savings Bank Act1985 is a successor or a further successor to a trustee savings bank”
The principal use of the term in Part 4 of ICTA was for the purposes of section 75 of ICTA (expenses of management: investment companies). FA 2004 repealed that section in relation to accounting periods beginning on or after 1 April 2004 and replaced it with the current provisions in sections 75 to 75B of ICTA (rewritten in Part 16 of CTA 2009). The current provisions apply to “companies with investment business” as defined in section 130 of ICTA (rewritten in section 1218(1) of CTA 2009) That definition was inserted in section 130 of ICTA by FA 2004 and is as follows:
““company with investment business” means any company whose business consists wholly or partly in the making of investments.”
The notes on clauses to the Finance Bill 2004 state in relation to that definition that:
“the reference to savings banks has now been removed on the grounds that it is obsolete.”
The definition of “investment company” was retained in section 130 of ICTA for the reasons given in the notes on clauses to Finance Bill 2004:
“26The current definition of an “investment company” has not been repealed. The definition of an “investment company” will remain relevant for the purposes of:
section 573 ICTA (where it helps identify the companies entitled to relief against income in respect of losses on unquoted shares in trading companies); and
the transitional rules in Clause 43.”
This change replaces the cross-reference to and modification of the definition of “investment company” in section 576L(1) of ICTA and section 151(1) of ITA by a stand alone definition in section 90(1) of this Act and section 151(1) of ITA in the following terms:
““investment company” means a company—
(a)whose business consists wholly or mainly in the making of investments, and
(b)which derives the principal part of its income from the making of investments,
but does not include the holding company of a trading group.”
This wording omits reference to “any savings bank or other bank for savings except any which, for the purposes of the Trustee Savings Bank Act 1985 is a successor or a further successor to a trustee savings bank”. The omission applies, for corporation tax purposes, only in relation to the disposal on or after 1 April 2010 of shares issued on or after that date and, for income tax purposes, only in relation to the disposal on or after 6 April 2010 of shares issued on or after that date. See Part 5 of Schedule 2 (interpretation of Chapter) which preserves the effect of the source legislation in relation to shares issued before the relevant date. The omission has two effects.
First, no such savings bank or bank for savings is eligible for share loss relief under section 68 of this Act on such a disposal as it no longer meets the requirement that the investor is an investment company.
This is potentially adverse to taxpayers in principle and in practice, but no such bank is known to carry on business in the United Kingdom which includes the making of investments in shares in companies capable of being qualifying trading companies.
Second, the requirements in section 78(2)(b) and (3)(b) of this Act and section 134(2)(b) and (3)(b) of ITA, that to be a qualifying trading company the company must not be an investment company at the times mentioned, can be met by a company that is such a savings bank or bank for savings in relation to a disposal to which the new definition applies.
This is potentially favourable to taxpayers in principle but has no effect in practice, as it is also a requirement of section 78(2)(b) and (3)(b) of this Act and section 134(2)(b) and (3)(b) of ITA that the company is not at those times a trading company (as defined in section 90(1) of this Act and section 151(1) of ITA). Such a bank is a trading company within that definition, notwithstanding that it may be a mutual trader and the profits of its trade are not within the charge to tax on trade profits.
This change has an effect which is adverse to some taxpayers in principle and in practice. But the numbers affected and the amounts involved are likely to be small. It also has an effect which is in taxpayers’ favour in principle but whichis not expected in practice to alter the position for taxpayers.
Change 22: Share loss relief: time of disposal: section 90
This change makes explicit the accounting period in which the disposal is to be treated as occurring for the purpose of share loss relief.
The availability of share loss relief is dependent upon an allowable loss being incurred for the purposes of corporation tax on chargeable gains and this can only be incurred on a disposal within the meaning given in TCGA.
The provisions of TCGA which determine when a disposal occurs, including in particular section 28 of that Act, do not apply to Chapter 5A of Part 13 of ICTA. But in practice “the accounting period in which the loss was incurred” referred to in section 573(2) of ICTA is taken to be the accounting period in which the disposal is made or treated as made for the purposes of corporation tax on chargeable gains in accordance with TCGA.
Section 90(7) contains explicit provision to this effect.This change is similar to that made in section 151(8) of ITA for the purposes of relief against income tax. SeeChange 35 in Annex 1 to the explanatory notes on ITA.
Although this change in principle affects the timing of relief and could be favourable to some taxpayers and adverse to others, it is entirely in line with generally accepted practice and so has no practical effect.
Change 23: Recalculation of EEA amount: section 113
This change clarifies how the EEA amount is recalculated in a case where the EEA amount arises in a period that is longer than a year.
In accordance with paragraph 11 of Schedule 18A to ICTA the EEA amount must be recalculated in accordance with the “applicable UK tax rules”. Those rules include (paragraph 14 of the Schedule) any necessary splitting of the loss period in which the EEA amount arises to produce assumed accounting periods.
The amount that is available for surrender is limited to the amount given by the recalculation.
The recalculation necessarily involves apportionment of the EEA amount to the assumed accounting periods. But there is no rule to say how the comparison of the original and recalculated amount should be done: the original amount is for the whole loss period; the recalculated amount is for the assumed accounting periods.
Example
An EEA company has a loss of £12,000 for the period 1 January 2010 to 30 June 2011. None of the loss qualifies otherwise for relief from corporation tax (section 402(1)(b) of ICTA). All of the loss meets the conditions in section 403F(2) of ICTA.
| Assumed accounting period | EEA amount | Capital allowances(+)/balancing charges(-) | Recalculated amount |
|---|---|---|---|
| 1.1.10 to 31.12.10 | 8000 | -2000 | 6000 |
| 1.1.11 to 30.6.11 | 4000 | +3000 | 7000 |
In this (unlikely) case, neither recalculated amount exceeds the EEA amount of £12,000. So it is apparently possible to argue that the amount available for surrender is £13,000. This result is illogical given that the EEA amount is only £12,000, but it is not explicitly excluded by Schedule 18A to ICTA. Section 113(3) removes the possibility of this illogical result by making it clear that the maximum amount available for surrender in relation to all the assumed accounting periods comprised in the EEA period cannot be more than the qualifying part of the EEA amount.
This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 24: Multiple claims for group relief: section 141
This change clarifies the position if more than one claim is made for a company’s loss etc.
Section 403A of ICTA limits a group relief claim to the smaller of:
the “unused part of the surrenderable amount”; and
the “unrelieved part of the claimant company’s total profits”.
Any claim for group relief reduces the surrendering company’s unused part of the surrenderable amount and the unrelieved part of the claimant company’s total profits. In general, earlier claims limit the amounts of later claims. So, in dealing with multiple claims, it is necessary to know in what order to deal with the claims.
Before Self Assessment for companies it was possible to say when a claim became final. Usually, that would be because the inspector had made an assessment giving effect to the relief and the appeal period had expired. So section 403A(6) of ICTA identifies the previously claimed group relief as that which has been the subject of claims that have become final.
Under Self Assessment it is not generally possible to know whether an enquiry will be made (paragraph 24 of Schedule 18 to FA 1998), so extending the time limit for withdrawing claims (paragraph 74(1)(b) of the Schedule). To overcome this practical difficulty there is a practice, set out in paragraph 80220 of the HMRC Company Taxation Manual, of simply dealing with claims in the order in which they are made (whether or not they are final).
This Act enacts the practice.
In most cases the total amount of relief is not affected by this change. But, in principle, the relief may be given to one company instead of another.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 25: Group relief: restriction of surrender by company owned by consortium: section 148
This change relaxes the restriction that is made when group relief is surrendered by a company that is owned by a consortium and is also a member of a group.
The policy is that the total relief surrendered outside the group should not exceed the net loss (if any) of the group as a whole. So the losses etc of the surrendering company are treated for this purpose as reduced by any group relief claims that could be made by other companies in the group.
Example 1
| A company (C) owned by a consortium has a trading loss of £10,000 for its accounting period of 12 months ended 31 December 2009 available for surrender to the members (M1, M2 etc) of the consortium. C’s subsidiary (S) has profits of £2000 for its accounting period of 12 months ended 31 December 2009. |
Under section 405(2) of ICTA, S is assumed to make a group relief claim to cover its profits. S’s corresponding accounting period (see section 413(2A) of ICTA) is the 12 months ended 31 December 2009. So the assumed claim is for £2000 and (because no other companies are involved) that is the amount of the “potential group relief”. So C’s “loss or other amount” available for surrender to M1, M2 etc is reduced under section 405(1) of ICTA to £8000, the net loss of the group as a whole.
Example 2
The facts are the same as in Example 1 except that S’s accounting date is 30 September. The effect of section 413(2A) of ICTA is that, in relation to C’s accounting period ended 31 December 2009, S’s corresponding accounting period is the whole of the 12 months ended 30 September 2009.
The effect of section 405(2) of ICTA is that S is assumed to make a claim for group relief equal to the total of its profits of its entire accounting period ended 30 September 2009 (that is, its corresponding accounting period). Section 405 of ICTA does not provide for an apportionment of S’s profits, even though S could actually claim relief against no more than £1500, its profits attributable to the “overlapping period” (see section 403A of ICTA). So the £2000 restriction stands.
In section 148(5) the “maximum amount of group relief that could be given” on a claim by S may require an apportionment of S’s total profits. This makes no difference in Example 1. But in Example 2 C’s loss available for surrender is treated as reduced to £8500, instead of £8000.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 26: Group relief: equity holder’s share of profits or assets referable to UK trade: section 181
This change simplifies the calculation of the percentage of profits or assets to which an equity holder is entitled in cases involving non-UK resident companies.
The basic rule for all companies is that the percentage of profits to which an equity holder is entitled is calculated by reference to a company’s total profits (paragraph 2 of Schedule 18 to ICTA, rewritten in section 165). If the company has no profits it would be impossible to say what the percentage is. So, in cases where the company has no profits, the calculation is made by reference to £100 total profits.
There is a similar basic rule in paragraph 3 of Schedule 18 to ICTA, rewritten in section 166, for assets to which an equity holder is entitled in a winding up.
Paragraph 5F of Schedule 18 to ICTA deals with non-UK resident companies in which an equity holder’s entitlements may be related to a company’s “UK trade”. Sub-paragraph (7) caters for the possibility that the profits or assets referable to the UK trade are less than £100. The calculation is done on the assumption that the profits or assets referable to the UK trade are £100.
In accordance with the assumption in paragraph 5F(7)(c) of Schedule 18 to ICTA, the total profits or assets (adjusted if necessary in accordance with paragraph 2 or 3 of the Schedule) cannot be less than £100. Section 181 rewrites paragraph 5F(7) of Schedule 18 so that, if the profits or assets referable to the UK trade are between nil and £100, the actual amount is used in the calculation.
The change affects only Assumptions 2 and 3. Assumption 4 (rewriting paragraph 5F(7)(c) of Schedule 18 to ICTA) retains the reference to £100.
In cases where the non-UK resident company’s profits or assets referable to its UK trade are more than zero but less than £100 this change may alter the percentage calculated (particularly if those profits or assets are small). But it is unlikely to result in a change to the conclusion about the extent of an equity holder’s stake in a company.
This change is in principle and in practice adverse to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.
Change 27: Charitable donations relief: gifts and benefits linked to periods of less than 12 months: priority between methods of calculating annualised amounts of gifts and benefits: section 198
This change clarifies the operation of the rules about annualising the amounts of gifts and benefits in the various different sets of circumstances which can arise, by providing a priority rule to cater for certain cases where more than one of the statutory rules could apply in relation to a given set of circumstances.
If a company makes a donation of money to a charity, and receives a benefit in consequence of doing so, that benefit may affect whether the donation is “qualifying” (section 191). And that in turn affects whether the company obtains tax relief for the donation under section 190 as a qualifying charitable donation.
The source legislation (section 339(3DB) to (3DD) of ICTA) contains rules to counter tax advantages from fragmentation of the time periods attaching to donations or to consequent benefits. In particular, section 339(3DD) of ICTA (rewritten in section 198) lays down the method of annualising either the gift, or both the gift and the benefit, in different circumstances. Those circumstances are set out in section 339(3DB) and (3DC) of ICTA, rewritten in section 198 of this Act as conditions A to D.
But the source legislation does not set out what is to happen if the circumstances fall within one of Conditions C and D and within one of Conditions A and B, which in theory can occur.
This change provides a priority rule to cater for such cases, which is located in Step 2 of section 198(8). It provides that, in such a case, the rule relating to Conditions C and D takes priority.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 28: Community investment tax relief: permit deduction of expenses incurred by director, employee or associate: section 250
This change permits consideration given by a director or employee of an investor or by an associate of such a director or employee for a benefit or facility provided by the CDFI to be deducted in calculating value received.
Paragraph 35 of Schedule 16 to FA 2002, rewritten in section 249, provides for the circumstances in which the investor receives value from the CDFI for the purposes of determining whether any CITR falls to be reduced or withdrawn.
One of those circumstances (paragraph 35(1)(d)) is the provision by the CDFI of a benefit or facility for:
“(i)the investor or any associates of the investor, or
(ii)directors or employees of the investor or any of their associates.”
Associate is defined in paragraph 50 of Schedule 16 to FA 2002, rewritten in section 268.
Paragraph 36(d) of Schedule 16 to FA 2002 determines the amount of the value received in a case falling within paragraph 35(1)(d) as:
“(i)the cost to the CDFI of providing the benefit or facility, less
(ii)any consideration given for it by the investor or any associate of the investor.”
But paragraph 36 does not permit the deduction of any consideration:
“in a case where the benefit or facility is provided to a director or employee, given by the director or employee or by any associate of the director or employee, or
in a case where the benefit or facility is provided to an associate of a director or employee, given by the associate or by the director or employee.”
As the consideration is most likely to be given by the recipient of the benefit or facility, this may put the investor in a worse position if the benefit or facility is provided to a director or employee or an associate of a director or employee than if the benefit or facility is provided to the investor itself or an associate of the investor.
In rewriting paragraph 36(d) of Schedule 16 to FA 2002 in section 250 this omission has been rectified.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 29: Oil taxation: deduction for excess of nominated proceeds: section 283
This change clarifies the meaning of section 493(1A)(b) of ICTA.
For income tax and corporation tax purposes a separate “ring fence trade” is deemed to exist by virtue of section 16 of ITTOIA (for income tax) or section 492(1) of ICTA (rewritten in section 279 for corporation tax). The activities making up the ring fence trade are set out in section 16(2) of ITTOIA and section 492(1)(a) to (c) of ICTA (rewritten in section 274 for corporation tax).
Section 493 of ICTA contains rules which ensure that the correct value of oil or gas is brought into account in computing the profits of the ring fence trade. Section 493(1A) of ICTA deals with what is termed “an excess of nominated proceeds”. This is a concept that is part of the Petroleum Revenue Tax (PRT) regime. It allows a company to “nominate” a crude oil sales contract (within the crude oil forward market) as being a contract through which crude oil will actually be delivered, rather than only being a financial (or “paper”) transaction. The “excess” may arise if crude oil is delivered through a contract that has not been so nominated, and HMRC’s value exceeds the actual contract price of the oil (the excess is calculated by multiplying the volume delivered by the price/value difference).
Where this is the case, the same “excess” is also treated as a deduction by virtue of section 493(1A)(b) of ICTA. But the wording of section 493(1A)(b) is unclear in referring to “any trade to which section 492(1) [of ICTA] does not apply”. It is not clear whether this refers to the activities listed in section 492(1)(a) to (c), or to the deemed “separate trade” referred to in the full-out words of section 492(1), or to both. The use of the word “any” in “any trade” suggests a wide application. The explanatory notes published with the legislation that introduced this provision (section 151 of FA 2006) state that the intention is to give a deduction in computing profits of the non-ring fence trade, whereas the wording of section 493(1A)(b) might suggest that it only applies in the case of a separate trade that is deemed to exist by section 492(1).
Section 283 therefore clarifies the legislation by expanding the reference to refer to both the concept of the deemed separate trade, and the activities listed in section 492(1) of ICTA, thereby making it clear that the deduction can be given against the profits of any non-ring fence trade, not solely a deemed trade created by section 279.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 30: Close companies: charge to tax on loans and advances to participators: exception for small amounts: section 456 and Schedule 2
This change brings into line with practice the statutory exception, for small amounts, from the charge to tax on loans and advances made to participators in close companies. It does so by extending the exception to include not only loans but also advances.
Section 419 of ICTA imposes a charge to tax when a close company (otherwise than in the ordinary course of a business carried on by it which includes the lending of money) makes any loan or advances any money to an individual who is a participator in the company or to an associate of a participator in the company.
Section 420(2) of ICTA makes an exception to this charge when the amounts are small. So far as relevant, it provides:
“Section 419(1) shall not apply to a loan made to a director or employee of a close company, or of an associated company of the close company, if –
(a)neither the amount of the loan, nor that amount when taken together with any other outstanding loans which –
(i)were made by the close company or any of its associated companies to the borrower; and
(ii)if made before 31st March 1971, were made for the purpose of purchasing a dwelling which was or was to be the borrower’s only or main residence;
exceeds £15,000 and the outstanding loans falling within sub-paragraph (ii) above do not together exceed £10,000; … and
(c)the borrower does not have a material interest in the close company or in any associated company of the close company;
but if the borrower acquires such a material interest at a time when the whole or part of any such loan made after 30th March 1971 remains outstanding the close company shall be regarded as making to him at that time a loan of an amount equal to the sum outstanding.”
Section 420(2) of ICTA makes no reference to advances. But it would be anomalous to exclude advances from section 420(2) of ICTA, because an advance to a participator in a close company would then be subject to the charge under section 419 of ICTA in circumstances in which, if the participator had received the money by way of loan, section 420(2) of ICTA would have sheltered it from tax.
In practice, therefore, HMRC apply section 420(2) of ICTA to loans and advances alike.
Section 456 and the saving for close companies in Part 11 of Schedule 2, which are based on section 420(2) of ICTA, bring the law into line with practice.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 31: Charitable companies: gifts to eligible bodies under SA Donate: claims: section 475
Under this change an eligible body is not required to claim exemption from tax if it receives a qualifying gift as a result of a direction under section 429(2) of ITA (the “SA Donate” scheme).
Section 25(10) of FA 1990 treats a gift, which is both a qualifying donation for gift aid under Chapter 2 of Part 8 of ITA and paid to a charitable company, as the receipt, under deduction of income tax, of an annual payment of an amount equal to the grossed up amount of the gift. “Charitable company” is defined in section 25(12)(a) of FA 1990 to include not only companies established for charitable purposes but also bodies within section 507 of ICTA.
Section 505(1)(c)(iizb) of ICTA exempts annual payments and therefore qualifying donations received by a charitable company so far as they are applied for charitable purposes. Section 505 contains a general requirement for a claim for all the exemptions mentioned in the section. However section 83(4) of FA 2004 overrides this in one particular respect. It treats a charitable company as having made a claim to any exemption to which it is entitled under section 505(1)(c)(iizb) of ICTA in respect of qualifying donations which are received as a result of a direction under SA Donate by virtue of section 429(2) of ITA. (SA Donate allows an individual to give repayments of tax due under self-assessment to a charity of choice.)
Section 507 of ICTA gives eligible bodies, on receipt of a claim, the same exemption as charitable companies which apply the whole of their income to charitable purposes. But section 83(4) of FA 2004 does not include eligible bodies within its definition of charitable companies, leaving such bodies with the need to claim for relief on qualifying donations received as a result of a direction under section 429(2) ITA.
This change gives eligible bodies exemption if qualifying donations are received as a result of a direction under section 429(2) ITA without the need to make a claim, thus putting them on the same footing as charitable companies.
This change is reflected in the sections as follows.
Section 472 rewrites the exemptions for qualifying donations paid to charitable companies in section 505(1) of ICTA and section 25(10) and (12) of FA 1990. Subsection (5) rewrites section 83(4) of FA 2004 which exempts charities receiving qualifying donations under SA donate from the need to make a claim. Section 475 is the equivalent for eligible bodies of section 472, and subsection (7) exempts these bodies from making claims if qualifying donations are received under SA Donate, in the same way as section 472(5) does for charitable companies.
This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.
Change 32: Charitable companies: exemption for post-cessation receipts of certain trades: sections 478, 479, 485, 490, 491, 492 and Schedule 1
This change introduces an exemption from corporation tax, in the case of charitable companies, for the post-cessation receipts of trades whose profits would be exempt if the trade had not ceased.
In contrast with the equivalent income tax rules in ITA, adjustment income is subsumed within trading profits and, therefore, unlike the position for income tax, is already covered by the charitable exemptions.
Post-cessation receipts are taxed under Chapter 15 of Part 3 of CTA 2009. There is no exemption for post-cessation receipts in the source legislation for charitable companies, other than the exemption in section 46 of FA 2000 (rewritten in sections 480 to 482) which applies only if the receipts are below a certain level. But HMRC practice is to treat post-cessation receipts as exempt from corporation tax if they arise from a trade that benefited from the exemption in section 505(1)(e) of ICTA (rewritten as section 478).
If a trade is treated as two separate trades in accordance with section 479(2) and (3) any post-cessation receipts are apportioned to the two parts (and this could mean completely apportioned to just one part if relating only to that part) and an exemption is then available for the receipts apportioned to the charitable part.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 33: Requiring an apportionment to be just and reasonable: sections 479, 599, 875, 880, 952, 956 and 994
This change requires certain apportionments that are not required by the source legislation to bemade on a just and reasonable basis to be made on such a basis.
In some cases where there is an apportionment under legislation rewritten in this Act, theapportionment is required by the source legislation to be made on a just and reasonable basis.In other cases, it is required to be made only on a just basis or only on a reasonable basis, orthere are no requirements. In new tax legislation it is now the practice to require anapportionment to be just and reasonable. For example, before it was repealed by ITEPA,section 140B(4) of ICTA (inserted by FA 1998) required a just and reasonable apportionmentto be made of any consideration given partly in respect of one thing and partly in respect ofanother. There is no reason why an apportionment should not be on a just and reasonablebasis. And it is desirable that all apportionments should be made on the same basis.
On the other hand, section 784(4) of ICTA provides that “the amount to be deducted … shall be such proportion of the capital expenditure which is still unallowed as is reasonable” (rather than such proportion as is just and reasonable).
If an apportionment under legislation rewritten in this Act is not required tobe made on a just and reasonable basis, the rewritten provision requires the apportionment tobe made on a just and reasonable basis. The changes are as follows.
Sections 505(1B) and 784(4) of ICTA and section 120(6) of FA 2006 require apportionments (or a “proportion”) to be reasonable. Sections 479, 875(5)(a) and 599 respectively require those things to be just as well as reasonable.
Sections 343(9), 343ZA(7), 518(9) and 783(8) of ICTA require apportionments to be just. Sections 952, 956, 994 and 880 respectively require apportionments to be reasonable as well as just.
The same change has been made in previous rewrite Acts to provide a uniform expression of the basis on which apportionments are to be made.
This change makes minor amendments to a number of existing rules, but is expected tohave no practical effect as it is in line with generally accepted practice.
Change 34: Charitable companies: limit on exemption for profits etc of small-scale trades and certain miscellaneous income: sections 480, 481 and 482
This change rewrites the limit on the level of a charitable company’s income for the purposes of the exemption for profits etc of small-scale trades in section 480 and certain miscellaneous income in section 481 by reference to the charitable company’s incoming resources rather than in terms of its gross income. It also removes the requirement that the exemption for profits etc of a small-scale trade can apply only if the trade is carried on wholly or partly in the United Kingdom.
Section 46 of FA 2000 provides for an exemption from corporation tax for certain profits or other income or gains of a charitable company which are chargeable to corporation tax. The exemption applies in respect of a trade or to miscellaneous charges included in section 843A of ICTA.
ITA collects together a list of miscellaneous income charges in section 1016. This forms the list of those charges to which exemption under section 527 of ITA applies for income tax. The same approach is taken for corporation tax. Schedule 1 to CTA 2009 inserts a list as section 834A of ICTA, which is rewritten in this Act in section 1173.
Section 46(3) of FA 2000 provides that one of the requirements for the exemption to apply is that the charitable company’s “gross income” must not exceed the “requisite limit”. The “requisite limit” is defined in section 46(4) of that Act and depends on the charitable company’s incoming resources for the chargeable period.
Section 482 sets out the condition about the level of the trading and miscellaneous income that has to be met if the exemptions in sections 480 and 481 are to apply.
The condition operates by reference to the incoming resources associated with the trading activity and miscellaneous transactions whose profits are not exempt under other provisions. Tax law brings into account receipts that would not normally feature as incoming resources for accounting purposes – for example balancing charges under the capital allowances rules. The new definition ensures that all potentially taxable receipts are brought within its compass.
The source legislation aimed to bring in turnover for trading activity and gross receipts for miscellaneous transactions within section 843A of ICTA. But these terms are not used in charity accounting. “Incoming resources” is familiar to those involved in preparing or working with charity accounts. And since charity accounting does not allow offset between income and expenditure in determining disclosure (in contrast with the disclosure in the accounts of commercial organisations), it is relatively easy to check the limits.
It is not clear in section 46 of FA 2000 whether “gross income” includes incoming resources from an activity which gives rise to a loss, in cases where a profit would be taxable. But incoming resources from an activity are included irrespective of whether there is a profit or a loss.
This change aligns the rewritten legislation with the way it is considered section 46 of FA 2000 is operated in practice.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 35: Charitable companies: exemption for profits from fund-raising events: sections 483, 490, 491, 492 and Schedule 1
This change gives statutory effect to ESC C4 (trading activities for charitable purposes).
The concession provides an exemption for the profits of various fund-raising activities which amount to a trade, but which are only undertaken to raise money for charity. The concession does not apply in circumstances where an attempt is made to use it for tax avoidance. To reflect this, the new statutory exemption is subject to the restrictions in section 492.
The fund-raising event has to be of a kind that falls within the exemption from VAT under Group 12 of Schedule 9 to the Value Added Tax Act 1994. This Schedule provides an exemption from VAT for the supply by a charity of goods and services in connection with an event that is organised primarily to raise money for itself or other charities. The Schedule defines “event” and places certain limits on the number of events that a charity can hold in the same location in any given year.
Section 483, in line with the extra-statutory concession, is linked to the VAT legislation to provide consistency in tax treatment.
This exemption is also extended to the bodies listed in section 490 and to scientific research associations (see section 491).
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 36: Charitable companies: exemption for income from intellectual property etc: sections 488, 490, 491 and Schedule 1
This change provides an exemption from corporation tax for certain income from intangible assets, whether or not the income is annual in nature.
Schedule 29 to FA 2002 introduced a comprehensive regime for corporation tax for income and gains arising from intangible fixed assets, rewritten as Part 8 of CTA 2009. Those rules apply in general only to certain assets (principally, but not exclusively, those created or acquired on or after 1 April 2002). But all income from royalties and certain telecommunication rights falls within the regime – see sections 896 and 897 of CTA 2009. These are all covered by the existing exemption in section 505(1)(c)(iic) of ICTA, rewritten as section 488(3)(a).
Assets that do not fall within the rules of Part 8 of CTA 2009 are referred to in that Act as “pre FA 2002 assets”. Any chargeable gains arising from those assets is exempt in the hands of a charitable company under section 256 of TCGA, provided the necessary conditions are met. But any income from those assets that does not fall within Part 8 of CTA 2009 is only exempt if it falls to be treated as an annual payment and is thus exempt under section 505(1)(c)(iizb) of ICTA.
In practice HMRC allow an exemption for income from pre-FA 2002 intangible assets, whether or not it is annual in nature. This change is in line with that practice, and mirrors the change made for income tax in section 536 of ITA. The rewritten legislation adopts the concept of a non-trading gain on an intangible fixed asset, and is written in terms that assume that the income in question would be such a gain, even though the assets fall outside Part 8 of CTA 2009.
Note that this extension only applies in the case of what would be a non-trading gain if Part 8 of CTA 2009 were to apply. If a gain arises in respect of a pre-FA 2002 asset in the course of a non-charitable trade the exemption in this section does not apply.
This change also affects the exemptions available to the bodies listed in section 490 and to scientific research associations under section 491 and is relevant to a number of entries in Schedule 1.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 37: Charitable companies: exemption for income from estates in administration: sections 489, 490, 491, 492 and Schedule 1
This change provides an exemption to charitable companies which are liable to corporation tax on estate income charged under Chapter 3 of Part 10 of CTA 2009, to the extent that the income is applied to the purposes of the charitable company.
Estate income is income from property held by the personal representatives or administrators of the estate of a deceased person on behalf of the beneficiaries of the estate.
There is a long-standing HMRC practice of treating United Kingdom estate income received by charities as exempt, and of allowing repayment claims in such cases. This change puts this on an explicit statutory basis.
This exemption is also extended to the bodies listed in section 490 and to scientific research associations (see section 491) and is relevant to a number of entries in Schedule 1.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 38: Charitable companies: meaning of non-charitable expenditure: sections 496 to 498
This change clarifies the meaning of “non-charitable expenditure”.
Section 506(1) of ICTA defines “charitable expenditure” as:
“(subject to subsections (3) to (5) below) expenditure which is exclusively for charitable purposes.”
Section 506(3) to (5) of ICTA treats certain payments, investments or loans as amounts of non-charitable expenditure.
Section 505(4) of ICTA restricts a charitable company’s tax exemption by reference to non-charitable expenditure. “Non-charitable expenditure” is not defined but, by implication, it is expenditure which is not charitable expenditure.
Sections 496, 497 and 498 set out the definition of “non-charitable expenditure” in some detail, to reflect practice and HMRC guidance.
Section 496(1)(a) to (d), supported by section 497, provides in relation to trades, property businesses and miscellaneous transactions, that it is losses which may count as non-charitable expenditure, rather than those expenses which are required to be taken into account in calculating the profits or losses concerned.
Section 496(1)(a) to (d) also ensures that such losses do not count as non-charitable expenditure if corresponding profits would have been exempt under the provisions about small-scale trades, fund-raising events, lotteries or property income in sections 480, 483, 484 and 485. And section 496(1)(a)(i) makes it clear that losses made in a charitable trade do not count as non-charitable expenditure.
Section 498 supports section 496(1)(d), making it clear that expenditure (which is not itself defined in the source legislation) includes capital expenditure, but not the making of investments or loans or the repayment of loans made to the charitable company. Section 496(1)(g) and (h) then make specific provision about investments or loans that are not approved charitable investments or loans, reflecting section 506(4) of ICTA.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 39: Charitable companies: accounting period in which certain expenditure treated as incurred: section 499
This change makes it explicit that the time when expenditure is treated as incurred depends on UK GAAP.
Section 506(2) of ICTA provides that, for the purposes of section 505 of ICTA:
“where expenditure which is not actually incurred in a particular accounting period properly falls to be charged against the income of that accounting period as being referable to commitments (whether or not of a contractual nature) which the charitable company has entered into before or during that period, it shall be treated as incurred in that period.”
Section 506(2) of ICTA was first enacted in FA 1986 and advanced the time that certain expenditure is recognised, on the basis that charitable companies may have some flexibility in this regard. As a result of subsequent developments in accounting practice, the legislation now implicitly mirrors UK GAAP.
Section 499 is based on section 506(2) of ICTA, and makes the reference to UK GAAP explicit.
Section 499 is drafted in terms of the position if UK GAAP had applied, because there is no legal or other obligation requiring all charitable companies to prepare their accounts in accordance with UK GAAP. In particular “Accounting and Reporting for Charities: Statement of Recommended Practice (revised 2005)”, which imposes a requirement to account in accordance with UK GAAP on charitable companies (with certain exceptions), is not mandatory in Scotland and Northern Ireland. Neither does it apply to charitable companies which are able to prepare accounts on a “receipts and payments” basis rather than an “accruals” basis. This could, for example, apply to unincorporated associations whose turnover and assets do not exceed the statutory limits.
This approach ensures parity of treatment as between charitable companies operating in different parts of the United Kingdom or adopting different bases of accounting.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 40: Charitable companies: approved charitable investments: sections 511, 512, 513 and 1176
This change modernises the list of investments qualifying as approved charitable investments for the purposes of the rules restricting exemptions.
Although the list is based on Part 1 of Schedule 20 to ICTA (qualifying investments), it does not replicate the approach taken in that Part.
Part 1 of Schedule 20 to ICTA defines qualifying investments by specifying certain investments itself, and also by referring to investments falling within Part 1, Part 2 (apart from paragraph 13) or Part 3 of Schedule 1 to the Trustee Investment Act 1961 (TIA 1961).
For trust law purposes TIA 1961 has been largely superseded by the Trustee Act 2000 (TA 2000). TA 2000 increased significantly the range of investments trustees can invest in, and it would be a significant change in the law to allow any investment in accordance with TA 2000 to be treated as an approved charitable investment. But it would be unhelpful to continue to refer for tax purposes to a Schedule to an Act (TIA 1961) that trustees no longer need to refer to for investment purposes.
So the detail of investments covered by Schedule 1 to TIA 1961 is incorporated in sections 511 and 512 in an updated form.
This has been done by referring to the types of investment that a charitable company can hold on “an approved basis”. So investment in, for example, fixed or variable interest securities issued by any of Her Majesty’s Government, the government of any overseas territory within the Commonwealth and the government of any state within (broadly) the European Union (EU) is reduced to securities issued by the government of any state in the EU and of any other state. This is wider, and so (strictly) is a taxpayer-favourable change. And rather than list the large number of individual entities in whose securities a charitable company can hold an approved investment, reference is made to the international entities listed in the directive on the taxation of interest payments. Again, this is a taxpayer-favourable change.
This approach tends to broaden the scope of possible investments, but in a way that is in keeping with HMRC practice in relation to claims that an individual investment should be regarded as qualifying, as set out in paragraph 9(1) of Schedule 20 to ICTA.
When it comes to the ability to hold an approved investment in the securities of (broadly) a non-listed company, the anti-avoidance provisions in Part 4 of Schedule 1 to TIA 1961 have been largely repeated.
A more detailed analysis of where the approved investments in the source legislation appear in the rewritten sections 511 and 512 is as follows:
| Schedule 20 to ICTA | Section 511 | Section 512 |
|---|---|---|
| Paragraph 2 | See details below relating to investments listed in TIA 1961 | |
| Paragraph 3 | Types 2 and 4 | |
| Paragraph 3A | Types 3 and 4 | |
| Paragraph 4 | Type 5 | |
| Paragraph 5 (note: the Unlisted Securities Market no longer exists) | Type 1 | Subsection (1)(h) |
| Paragraph 6 | Type 8 | |
| Paragraph 6A | Type 1 | Subsection (1)(g) |
| Paragraph 7 | Type 9 | |
| Paragraph 7A | Type 11 | |
| Paragraph 8 | Type 11 | |
| Paragraph 9 | Type 12 | |
| Part 1 of Schedule 1 to TIA 1961: | Section 511 | Section 512 |
|---|---|---|
| Paragraph 1: Savings Certificates | Type 6 | |
| Paragraph 1: Other | Type 1 | Subsection (1)(a) |
| Paragraph 2 (note: only deposits in the National Savings Bank are still relevant) | Type 10(a) |
| Part 2 of Schedule 1 to TIA 1961 | Section 511 | Section 512 |
|---|---|---|
| Paragraph 1: Treasury Bills and Tax Reserve Certificates | Type 6 | |
| Paragraph 1: Northern Ireland Treasury Bills | Type 7 | |
| Paragraph 1: Other | Type 1 | Subsection (1)(a) |
| Paragraph 2 (but principal must be guaranteed as well as interest) | Type 1 | Subsection (1)(a) |
| Paragraph 3 (but assumes nationalised industries are not an issue in the United Kingdom and are not likely to be an issue elsewhere) | Type 1 | Subsection (1)(b) |
| Paragraph 4 (and extended to securities issued outside the United Kingdom) | Type 1 | Subsection (1)(b) |
| Paragraph 4A (and extended to securities issued outside the United Kingdom and drops requirement about parameters for setting the interest rate) | Type 1 | Subsection (1)(b) |
| Paragraph 5 (and extended to securities issued outside the United Kingdom) | Type 1 | Subsection (1)(c) and (d) |
| Paragraph 5A (and extended to securities issued outside the United Kingdom and drops requirement about parameters for setting the interest rate) | Type 1 | Subsection (1)(c) and (d) |
| Paragraph 5B | Type 1 | Subsection (1)(b) and (c) |
| Paragraph 6 | Type 1 | Subsection (1)(h) |
| Paragraph 7 | Type 1 | Subsection (1)(h) |
| Paragraph 9 (but some loans and deposits are not covered as this is considered unnecessary) | Type 1 | Subsection (1)(b) |
| Paragraph 9A (but drops requirement about parameters for setting the interest rate) | Type 1 | Subsection (1)(b) |
| Paragraph 10A | Type 8 | |
| Paragraph 12 | Type 10(b) | |
| Paragraph 13 | Formerly excluded by paragraph 2 of Schedule 20 to ICTA – now excluded by reference under Type 5 | |
| Paragraph 14 | Type 5 | |
| Paragraph 15 | Type 6 | |
| Paragraph 16 | Type 1 | Subsection (1)(b) |
| Paragraph 17 (but principal must be guaranteed as well as interest) | Type 1 | Subsection (1)(b) |
| Paragraph 18 (but assumes nationalised industries are not an issue in the United Kingdom and are not likely to be an issue elsewhere) | Type 1 | Subsection (1)(b) |
| Paragraph 19 | Type 1 | Subsection (1)(b) |
| Paragraph 20 | Type 1 | Subsection (1)(c) and (d) |
| Paragraph 21 | Type 1 | Subsection (1)(i) |
| Paragraph 22 (but some loans and deposits are not covered as this is considered unnecessary) | Type 1 | Subsection (1)(b) |
| Paragraph 23 (and extended to similar societies outside the EU) | Type 10(c) | |
| Paragraph 24 | Formerly excluded by paragraph 2 of Schedule 20 to ICTA – now excluded by reference under Type 5 |
| Part 3 of Schedule 1 to TIA 1961 | Section 511 | Section 512 |
|---|---|---|
| Paragraph 1 (and extended to securities issued outside the United Kingdom) | Type 1 | Subsection (1)(i) |
| Paragraph 2 | Type 1 | Subsection (1)(e) |
| Paragraph 2A | Type 1 | Subsection (1)(g) |
| Paragraph 3 | Type 8 | |
| Paragraph 4 (and extended to securities issued outside the EU and to securities of non-EU incorporated companies) | Type 1 | Subsection (1)(i) |
| Paragraph 5 (and extended to similar societies outside the EU) | Type 1 | Subsection (1)(f) |
| Paragraph 6 | Type 8 |
| Part 4 of Schedule 1 to TIA 1961 | Section 513 |
|---|---|
| Paragraph 1 | Not covered – this is taxpayer-favourable |
| Paragraph 2 | Covered by Conditions A and B |
| Paragraph 2A | Covered by Conditions A and B |
| Paragraph 3 | Covered by Condition C |
Paragraph 3(b) of Part 4 of Schedule 1 to TIA 1961 excludes from approved investments shares or debentures which have not paid dividends in each of the preceding five years but deems dividends to have been paid by a company where one of the reasons for its formation is to acquire the control of another company or companies. This exception to the dividend rule is rewritten in section 513(8). “Control” in these circumstances is not defined by TIA. In practice the definition in section 840 of ICTA (rewritten in section 1124) applies and this is now made statute. Section 1124 therefore applies for the purposes of section 513(8) as a result of section 1176(2).
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 41: Non-UK companies: sections 520, 535, 536, 541, 579 and 581
This change clarifies the basis on which non-UK companies which are members of a group UK REIT are charged to tax.
A non-UK resident company is chargeable to (corporation) tax on its chargeable gains only if they accrue on the disposal of assets in the United Kingdom that are used in a trade carried on through a permanent establishment in the United Kingdom (section 10B of TCGA). This is consistent with the limitation on the charge to corporation tax set by sections 5 and 19 of CTA 2009. Such assets cannot be “involved in property rental business”.
Section 124(3) of FA 2006 provides that:
“Corporation tax shall be charged in respect of gains accruing to C (residual) at a rate determined without reference to section 13 of ICTA (small companies rate).”
Paragraph 32(3) of Schedule 17 to FA 2006 provides that (in the case of a non-UK company):
“The property rental business of the company in the United Kingdom shall be treated as if it were (subject to the application of this Part) chargeable to corporation tax.”
It is implausible that these rules override section 10B of TCGA. So this Act makes clear that the rules about the taxation of chargeable gains do not apply to non-UK resident companies.
But there is an important distinction between companies not resident in the United Kingdom (to which section 10B of TCGA applies) and non-UK companies (to which some sections in Part 12 of this Act apply). The distinction concerns dual resident companies. These are companies resident in the United Kingdom and resident in another territory (see section 521(1)).
Dual resident companies are not affected by the rule in section 520(3) because their world-wide profits are within the charge to corporation tax. It follows that they do not meet the condition in section 520(2)(b). But they are within the rules about chargeable gains and assets of UK REITs (see sections 535 to 537 and 579 to 581).
The change removes any possibility that a charge to tax on the chargeable gains of a non-UK resident company is imposed by Part 4 of FA 2006.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 42: UK REITs: conditions as to property rental business: exclusion of non-member’s interest: section 529
This change excludes from a group’s property rental business the percentage of that business held by a non-member of the group.
For the purposes of the tests in section 529 the property rental businesses of members of a group are treated as a single business. The tests are:
whether the business involves at least three properties; and
whether a single property represents more than 40% of the value of all the properties in the business.
The number of properties involved (the first test) is not affected by this Change.
A company in the group may have a minority shareholder. In accordance with section 533(3) that shareholder’s interests in the company are excluded from the financial statements required by that section. The effect of this Change on the second test is illustrated by the following examples.
Example 1
Company A (the principal company of the group) has a property worth £40. Company B (wholly owned subsidiary of A) has a property worth £20. Company C (75% subsidiary of A) has a property worth £40. The remaining 25% interest in C is held by a non-member of the group.
If 100% of the value of C’s property is taken into account, the 40% test is passed (40 is not more than 40%x(40+20+40)). If only 75% of the value of C’s property is taken into account, the 40% test is failed (40 is more than40%x(40+20+30)).
Example 2
Company A (the principal company of the group) has a property worth £25. Company B (wholly owned subsidiary of A) has a property worth £30. Company C(75% subsidiary of A) has a property worth £45. The remaining 25% interest in C is held by a non-member of the group.
If 100% of the value of C’s property is taken into account, the 40% test is failed (45 is more than 40%x(25+30+45)). If only 75% of the value of C’s property is taken into account, the 40% test is passed (33.75 (75%x45) is not more than40%x(25+30+33.75)).
It is easier in general to pass the 40% test if the interest in the subsidiary’s property is restricted to the extent of the parent’s holding. And applying the test in that way follows the economic reality of the relationship.
This change is in principle and in practice adverse to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.
Change 43: Enactment of regulations: sections 551 to 554, 561 to 568, 573 to 577,and 584 to 598
This change relates to the enactment and revocation of:
SI 2006/2864: the Real Estate Investment Trusts (Breach of Conditions) Regulations 2006 (except regulation 11);
SI 2006/2866: the Real Estate Investment Trusts (Joint Ventures) Regulations 2006;
SI 2007/3425: the Real Estate Investment Trusts (Joint Venture Groups) Regulations 2007; and
SI 2007/3540: the Real Estate Investment Trusts (Breach of Conditions) (Amendment) Regulations 2007
These regulations were made by the Treasury under sections 114 to 116 and 138 of FA 2006 and sections 973 and 974 of ITA.
The regulation-making powers are not rewritten to the extent that regulations made under them are enacted in this Act. The omission or restriction of the various regulation-making powers means that it is no longer possible to amend by secondary legislation the provisions enacted in this Act.
But some regulation-making powers are retained.
Section 543(8) (based on section 115(3B) of FA 2006) is a power to specify the criteria to be applied by HMRC in deciding whether a charge under section 543 should be waived.
Section 554 (based on section 114 of FA 2006) contains powers to provide that a charge does not arise or is reduced if the company takes certain action and for the collection of information.
Section 600 (based on section 136A of FA 2006) is a power to treat persons as members of a group UK REIT.
This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.
Change 44: UK REITs: notional amount charged following breach of condition: exclusion of non-member’s interest: section 567
This change excludes from the total market value of a group’s assets the value of the percentage of those assets held by a non-member of the group.
If there is a breach of Condition 2 in section 108(3) of FA 2006 (balance of business: assets involved in tax-exempt business) a charge to tax is imposed by regulation 7A of SI 2006/2864 (inserted by regulation 5 of SI 2007/3540). The amount of the charge is based on the market value of the assets involved in the UK property rental business of G (property rental business).
Some of those assets may be held by a company in which a non-member of the group has an interest. In that case, the non-member’s percentage of the assets may be excluded from the financial statements prepared under paragraph 31 of Schedule 17 to FA 2006 (see, in particular, sub-paragraph (5)).
Section 567 of this Act rewrites the rule in regulation 7A of SI 2206/2864. It includes, in subsection (4)(c) of the section, a rule excluding a non-member’s share in the assets of the group. The exclusion is on the same basis as that for the purposes of financial statements (see section 533(3)).
This change reduces the amount that may be charged to tax on the occasion of a breach of the balance of business (assets) condition.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 45: Corporate beneficiaries under trusts: treatment of trustees’ expenses: section 611
This change makes explicit some of the rules about the way expenses, incurred by trustees in connection with income to which a corporate beneficiary is entitled, reduce the amount of the beneficiary’s income for tax purposes.
Section 611 applies sections 500 and 503 ITA to a corporate beneficiary. These sections are concerned with the treatment of trustees’ expenses in a case where a beneficiary, liable to income tax, is entitled to trust income as it arises. This is where the beneficiary has an interest in possession (IIP).
Section 689A(2) ICTA, which was repealed by ITA, made reference to the effect on a beneficiary with an IIP where the trustees have incurred expenses. But section 689B was the only provision in ICTA that provided details of the tax treatment of trustees’ expenses in relation to IIP income (as well as other income from trusts, for example discretionary payments).
This part of section 689B is rewritten in section 503(2) and (3) of ITA. Other rules introduced by sections 500 and 503 of ITA are based on established practice and case law – see Change 91 in Annex 1 to the explanatory notes accompanying ITA.
There are few, if any, examples of a trust in which there are corporate beneficiaries with an IIP and so this change is very unlikely to have any effect for corporation tax purposes.
This change is in principle adverse to some taxpayers and favourable to others. But it is likely to have no practical effect as it is in line with generally accepted practice.
Change 46: Co-operative housing associations and self-build societies: change from tax year to accounting period: sections 642, 647, 648, 651, 655 and 656.
This change amends the references to year of assessment in relation to co-operative housing associations (section 488 of ICTA) and self-build societies (section 489 of ICTA).
These bodies are all within the charge to corporation tax. However, in the source legislation, their claims to exemption in respect of rents receivable from tenants are in terms of tax years. This is because there is also a potential impact on the tenant’s income tax liability - for example, the tenant might have been entitled to deduct the rent payable as an expense for tax purposes.
In addition, earlier versions of the legislation transferred entitlement to relief for interest payable from the association/society to the tenant under the relief for mortgage interest provisions until that relief was abolished. It therefore made sense to operate by reference to tax years.
In contrast, the exemption from corporation tax on chargeable gains in respect of disposals of property by these bodies to their members has always been by reference to an accounting period.
As the link to mortgage interest relief has now gone the rationale for retaining the tax year as the basis of the claim and relief is significantly reduced and this change therefore standardises the claim and relief on the basis of an accounting period.
There is no need for a transitional provision as these bodies can claim for part of a tax year or accounting period so no there be no gaps in eligibility for exemption.
This change is in principle and in practice adverse to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.
Change 47: Co-operative housing associations and self-build societies: Department for Social Development for Northern Ireland: sections 644, 645, 649, 653 and 657.
This change replaces references to “the Head of the Department of the Environment for Northern Ireland”, “the Head of the Department for Social Development for Northern Ireland” and “the Department of the Environment for Northern Ireland” with “the Department for Social Development”.
Article 6(e) and Part 5 of Schedule 4 of the Departments (Transfer and Assignment of Functions) Order (Northern Ireland) 1999 (SI 1999/481) transferred housing functions under the Housing (Northern Ireland) Orders 1981 to 1992 from the Department of the Environment to the Department for Social Development (DSD). In view of the transfers of functions and the responsibility of the DSD for other matters relating to housing, it is appropriate for the functions under sections 488 and 489 of ICTA relating to Northern Ireland to be exercisable by the DSD. This change therefore replaces the references in sections 488(6)(b) and (8) and 489(12) of ICTA to “the Department of the Environment for Northern Ireland” with the “Department for Social Development”.
Article 5 of the Scotland Act 1988 (Transfer of Functions to the Scottish Ministers etc) Order 2004 substituted the reference to “the Head of the Department for Social Development for Northern Ireland” in section 488(6)(iii) of ICTA. It is unclear whether there was sufficient power under this Order to make that substitution. Subsections (5) and (6) of section 645 make it clear that the functions concerned are exercisable by the DSD as regards Northern Ireland.
By virtue of paragraph 11(2) of Schedule 12 to the Northern Ireland Act 1998, references in section 488 of ICTA to the Head of a Department are to a Minister. In sections 644, 645 and 649 functions are expressed to be conferred on the Northern Ireland department concerned, rather than on the Minister in charge of the department, in line with modern practice.
This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.
Change 48: Receipt of club benefits by members: arm’s length agreements for employment or for goods or services: section 660
This change removes certain formalities which apply where a club member supplies goods or services to the club or is employed by the club and the club wishes to satisfy the requirements for tax exemptions.
In order to qualify as an amateur sports club paragraph 3(1) of Schedule 18 to FA 2002 requires that only the ordinary benefits of a community amateur sports club can be provided to members and guests. Those benefits are set out in paragraph 3(3) of Schedule 18. A club’s powers are thus restricted to the actions which allow them to provide those benefits to their members. Paragraph 3(4) of Schedule 18 however makes provision for clubs to enter into agreements to pay for goods or services or to pay remuneration to a member and to continue to satisfy the requirements for exemption. The main rule is that where there are such agreements with members then they must be at arm’s length.
Paragraph 3(4) also imposes the condition that the terms of such agreements with the member should be approved by the club’s governing body without the member concerned being present. In practice HMRC do not enforce this rule, being only concerned that the agreement is at arm’s length. This change omits these formalities in the rewritten section. This means that the only requirement is that the agreement should be at arm’s length. This does not, of course, exclude the necessity for evidence demonstrating that the agreement is at arm’s length.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 49: Changes in company ownership: company with investment business: restriction on relief for non-trading loss on intangible fixed assets: sections 681 and 698
This change clarifies the restriction imposed by section 768E of ICTA, when there is a change in the ownership of a company with investment business, on relief for a non-trading loss on intangible fixed assets.
If there is a change in the ownership of a company with investment business, and the relevant conditions are met, section 768E of ICTA has effect to prevent relief being given for a non-trading loss on intangible fixed assets incurred before the change of ownership against profits arising after that change.
In particular, section 768E(5) of ICTA provides that a loss made in any accounting period beginning before the change of ownership may not be set off against profits under section 753(3) of CTA 2009.
But an unrelieved non-trading loss on intangible fixed assets is not, as such, set against profits. Section 753(3) of CTA 2009, so far as relevant, says:
“To the extent that the loss is not set off … it is carried forward to the next accounting period of the company and treated as if it were a non-trading debit of that period”
Section 768E(5) of ICTA blurs the distinction between:
calculating the company’s non-trading gain or loss under section 751 of CTA 2009; and
setting a non-trading loss against profits under section 753(1) of that Act.
Section 768E(5) uses wording derived from paragraph 35(1) of Schedule 29 to FA2002, which has been rewritten as section 753(1) of CTA 2009; it does not reflect section 753(3) of that Act.
The purpose of section 768E of ICTA is set out in section 768E(1) of that Act. It is therefore considered that the courts would adopt a rectifying construction of section 768E(5) of that Act in order to restrict relief which would otherwise be given under section 753(3) of CTA 2009.
Accordingly, sections 681(3) and 698(4) (which are based on section 768E(5)(a) and (b) respectively of ICTA) reflect the wording of section 753(3) of CTA 2009. This has different effects in the context of sections 681(3) and 698(4). In a case within section 681(3), profits arising after the change in ownership cannot be sheltered at all. In a case within section 698(4), the extent to which profits arising after the change in ownership can be sheltered is restricted. This reflects the differing wording of section 768E(5)(a) and (b) of ICTA: “profits” and “so much of those profits”.
This is a change in the law, in that it prevents taxpayers arguing for an alternative interpretation.
This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 50: Changes in company ownership: company with investment business: asset transferred within group: restriction on reliefs for non-trading loss on intangible fixed assets and property losses: sections 698, 700 and 701
This change clarifies the restrictions imposed by sections 768D and 768E of ICTA on relief for, respectively, property losses and non-trading losses on intangible fixed assets when there is a change in the ownership of a company with investment business and an asset is transferred within the corporate group of which that company is a member.
If there is a change in the ownership of a company with investment business, and section 768C of ICTA (deductions: asset transferred within group) applies, sections 768D and 768E of ICTA have effect to prevent relief being given for, respectively, property losses and non-trading losses on intangible fixed assets incurred before the change of ownership against profits arising after that change.
Sections 768D(6)(b) and 768E(5)(b) of ICTA quantify this restriction by reference to the amount of profits which “represents the relevant gain within the meaning of [section 768C of that Act]”, but they do not expressly define this technical expression.
But sections 768D(6)(b) and 768E(5)(b) of ICTA only apply in cases in which section 768C of that Act applies, and it would be anomalous if the words under review had a different meaning in sections 768D(6)(b) and 768E(5)(b) of ICTA from the meaning which they have in section 768C(8) of that Act. Sections 768D(6)(b) and 768E(5)(b) of ICTA therefore refer to section 768C(8) of that Act by implication. Since section 768C(8) of ICTA only applies if section 768C(6) of that Act applies, sections 768D(6)(b) and 768E(5)(b) of that Act also refer to section 768C(6) of that Act by implication and so are similarly restricted by that provision.
Section 698 of this Act (restriction on relief for non-trading loss on intangible fixed assets) is based on section 768E of ICTA, and sections 700 and 701 of this Act (disallowance of UK property business losses and disallowance of overseas property business losses) are based on section 768D of ICTA. Sections 698(2), 700(2) and 701(2) of this Act mirror the restriction in section 768C(6) of that Act. They therefore expressly restrict the application of sections 698, 700 and 701 of the Act.
This limitation is a change in the law, since it prevents HMRC arguing that any of these restrictions has a wider scope.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 51: Manufactured payments and repos: definition of “manufactured interest”: section 801 and Schedule 1
This change:
adopts the definition of “manufactured interest” used in the loan relationships regime in rewriting the unallowable purpose test for manufactured payments; and
abolishes the power to apply, with modifications, prescribed provisions of TMA to manufactured interest.
Section 539 of CTA 2009 (relationships treated as loan relationships etc: manufactured interest etc) defines “manufactured interest” in relation to a manufactured interest relationship. A company has a manufactured interest relationship if (a) an amount is payable by or on behalf of a company or to a company under arrangements relating to the transfer of an asset representing a loan relationship and (b) this amount either (i) is representative of interest under the loan relationship or (ii) falls to be treated as representative of such interest when it is paid. Such an amount is “manufactured interest”.
“Loan relationship” is defined in section 302 of CTA 2009. Also, Part 6 of that Act treats certain other matters as loan relationships.
Paragraph 1(1) of Schedule 23A to ICTA defines “manufactured interest” as:
“an amount –
(a)which is representative of a periodical payment of interest on United Kingdom securities [as defined in paragraph 1(1) of that Schedule], and
(b)which, under a contract or other arrangements for the transfer of the securities, one of the parties is required to pay to the other”
These two definitions are similar but not the same.
“Manufactured interest” as defined in CTA 2009, unlike “manufactured interest” as defined in ICTA, does not necessarily relate to United Kingdom securities. Paragraph 4(1) of Schedule 23A to ICTA however, provides:
“This paragraph applies in any case where, under a contract or other arrangements for the transfer of overseas securities, one of the parties (the “overseas dividend manufacturer”) is required to pay to the other (“the recipient”) an amount representative of an overseas dividend on the overseas securities; and in this Schedule the “manufactured overseas dividend” means any payment which the overseas dividend manufacturer makes in discharge of that requirement”
Paragraph 1(1) of Schedule 23A to ICTA gives “overseas securities” a wide definition, and any manufactured interest as defined in CTA 2009 which does not relate to United Kingdom securities is a MOD. (The converse does not hold; a MOD relating to foreign shares is not manufactured interest within either definition.)
Broadly speaking, therefore, manufactured interest as defined in CTA 2009 is either manufactured interest as defined in ICTA or else a MOD.
There are two technical differences between the two definitions of “manufactured interest”.
First, “United Kingdom securities” is defined using the expression “securities”, which is non-exhaustively defined in paragraph 1(1) of Schedule 23A to ICTA as including any loan stock or similar security. It is logically possible for an instrument to rank as a “United Kingdom security” as defined in paragraph 1(1) without being a loan relationship as defined in CTA 2009. In this respect, the ICTA definition is wider than the CTA 2009 definition.
Second, “manufactured interest” as defined in CTA 2009, unlike “manufactured interest” as defined in ICTA, is not necessarily representative of a periodical payment. In this respect, the CTA 2009 definition is wider than the ICTA definition.
“Manufactured interest” is defined in these two different ways for historical reasons. Schedule 23A to ICTA (manufactured dividends and interest) was inserted by FA 1991; in that Schedule, “manufactured interest” was chiefly used in provisions relating to income tax which have since been rewritten in ITA. By contrast, CTA 2009 uses “manufactured interest” in the corporation tax provisions relating to loan relationships, which are based on FA 1996. The income tax provisions of Schedule 23A to ICTA were rewritten in Chapter 2 of Part 11 and Chapter 9 of Part 15 of ITA and repealed.
“Manufactured interest”, as defined in paragraph 1(1) of Schedule 23A to ICTA, is used in:
the definition of “manufactured payment” in paragraph 7A(10) of that Schedule (manufactured payments under arrangements having an unallowable purpose); and
the power given by paragraph 8(3)(a) of that Schedule to apply, with modifications, prescribed provisions of TMA to manufactured interest.
The opportunity has been taken to simplify and harmonise the corporation tax legislation by adopting the CTA 2009 definition of “manufactured interest” in rewriting paragraph 7A(10) of Schedule 23A in section 801 of this Act.
In principle, adopting the CTA 2009 definition of “manufactured interest” in section 801 of this Act changes the scope of the unallowable purpose test for manufactured payments, because it narrows the definition of “manufactured interest” in one respect and broadens the definition in another respect. In principle, the former change to the definition is favourable to some taxpayers and the latter change is adverse to some taxpayers.
But, in the context of this provision, the technical differences between the two definitions of “manufactured interest” do not amount to any difference in practice.
As paragraph 8(3)(a) of Schedule 23A to ICTA has been superseded by Corporation Tax Self Assessment, Schedule 1 repeals it as unnecessary. The Treasury has not exercised its power to make regulations for corporation tax purposes under paragraph 8(3)(a). Abolishing this power therefore has no practical effect.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 52: Transactions in land: company chargeable: provider of opportunity to realise a gain: section 821
This change omits words from section 776(8) of ICTA indicating that where a gain on a transaction of land that is charged under that section is derived from an opportunity of realising a gain provided by another person and as a result that person is liable for the tax, it does not matter whether or not the opportunity was put at the disposal of the person to whom the gain actually accrues.
Section 776 of ICTA charges gains of a capital nature relating to the land to corporation tax where the gains are made by persons connected with land or the development of land and the statutory conditions are met.
In certain circumstances, companies which are liable to pay corporation tax in the United Kingdom may enter into transactions in land as a result of which value, or an opportunity of realising a gain, is provided to another person (who may not be so liable). In such cases, section 776(8) of ICTA lays down that the provider of the value or, as the case may be, the opportunity is the company chargeable to corporation tax under section 776.
Section 776(8), so far as relevant, reads: “If all or any part of the gain accruing to any person is derived from value, or an opportunity of realising a gain, provided directly or indirectly by some other person..., whether or not put at the disposal of the first–mentioned person …”.
In Yuill v Wilson (1980), 52 TC 674(11) on page 706, Goff LJ criticised the drafting of what is now section 776(8):
“I find it very difficult to appreciate what [the words “whether or not put at the disposal of the first-mentioned person” in what is now section 776(8)] were intended to cover. In the case of value I can well see that a gain may be derived by one person from value provided by another, whether directly or indirectly, without that value being put at the disposal of the first-mentioned person; for example, if A pays money to B as consideration for the grant of an option to C. As at present advised, however, I find it very difficult to see how one can gain from an opportunity provided by another without that opportunity being put at the disposal of the first-mentioned person. (emphasis added)”
As it is considered that no sensible meaning can be given to the words “whether or not put at the disposal of the first-mentioned person” so far as they relate to the earlier words “an opportunity of realising a gain”, in rewriting the passage under review section 821 (transactions in land: company chargeable) refers only to the value provided by another person and not the opportunity of realising a gain.
If this view were incorrect, then the restriction of the scope of section 821 might in some circumstances exclude taxpayers from liability under the “transactions in land” Part.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 53: Transactions in land: clearance procedure: section 831
This change gives the Commissioners for HMRC responsibility for granting or denying clearance concerning transactions in land.
Section 776 of ICTA is a complex anti-avoidance provision concerning transactions in land. Section 776(11) lays down a statutory clearance procedure. It provides that the taxpayer company is to provide particulars of the transaction to “the inspector to whom it makes its return of income”.
This could cause theoretical difficulties if the taxpayer:
is not legally obliged to file a self-assessment return;
does not file a self-assessment return; and
wishes to obtain clearance under section 776(11) of ICTA.
In practice, if the taxpayer makes a clearance application to the HMRC office dealing with that taxpayer’s affairs, that HMRC office processes the application.
Section 831, which is based on section 776(11) of ICTA, gives the responsibility for clearances concerning transactions in land to the Commissioners for HMRC, rather than the officer to whom the taxpayer makes a return of income. This is consistent with section 707 of ICTA (transactions in securities: clearance procedure), which is rewritten in section 749 of this Act.
This change in the law, in practice, has no effect on the administration of the clearance procedure for transactions in land.
This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.
Change 54: Transactions in land: power to obtain information: “reasonably requires”: section 832
This change expressly restricts the particulars that an officer of Revenue and Customs may require to be provided, under section 778(1) of ICTA, to those particulars which the officer may reasonably require.
Section 778(1) of ICTA enables the Board or an inspector to require a person to give them such particulars “as the Board or the inspector think necessary” for the purposes of section 776 of that Act (transactions in land).
In section 832, the opportunity has been taken to modernise this language and expressly impose the criterion of reasonableness. This is consistent with the way in which HMRC exercise the power in practice.
This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.
Change 55: Sale and lease-back etc: restriction of excessive lease rentals: relationship with accounting practice: sections 838 and 865
This change puts on a statutory basis HMRC’s published practice on the interaction between section 779 of ICTA (sale and lease-back: limitation on tax reliefs) and the accounting treatment for finance lease rentals.
The Inland Revenue set out in Statement of Practice 3/91 (SP3/91) its view on the timing of deductions for rentals payable by lessees under finance leases. It also published an article supplementing SP3/91 in the Tax Bulletin,February 1995 (TB15). The material in SP3/91 and TB15 is substantially reproduced in paragraphs 61105 to 61185 of HMRC’s Business Income Manual (BIM61105 to 61185).
Generally speaking, the effect of SP3/91 is that tax relief is given for finance lease rentals in the period in which they are charged in calculating the lessee’s accounting profit or loss. If a lessee makes a payment under a lease, and the economic benefit of the payment extends over several periods of account, then (broadly speaking) the accounting treatment is to charge the payment as expenditure in the periods of account to which the payment in economic substance relates. Thus under SP3/91 tax relief is not necessarily given in the period in which the finance lease rental payment is made; tax relief may be deferred to later periods.
Section 779 of ICTA is an anti-avoidance provision restricting tax relief for excessive rentals paid under sales and lease-backs of land. If it applies to a payment, tax relief for that payment is deferred (and may in certain circumstances be denied altogether). Section 782 of ICTA (leased assets: special cases) is a similar provision applying to transactions involving assets other than land. Sections 779 and 782 of ICTA apply for the purposes of both income tax and corporation tax.
HMRC’s practice, as published in TB15 and BIM 61105, is to apply SP3/91 before making any adjustments under section 779 of ICTA (see BIM 61105). Depending on the facts, this may mean that there is no need for any adjustments to be made under section 779 of ICTA.
FA 1998 introduced specific legislation which (broadly speaking) is to the same effect as SP3/91, but goes further. Section 42 of FA 1998 has been rewritten for the purposes of income tax and corporation tax in, respectively, section 25 of ITTOIAand section 46 of CTA 2009 (use of generally accepted accounting practice in calculating trade profits). Section 272 of ITTOIA and section 210 of CTA 2009 apply, respectively, section 25 of ITTOIA and section 46 of CTA 2009 in calculating profits of a property business.
Under section 25 of ITTOIA and section 46 of CTA 2009, trade profits are calculated in accordance with GAAP, subject to adjustments required or authorised by law. These provisions operate by reference to receipts and expenses to be brought into account, not by reference to payments made. But sections 779 and 782 of ICTA do not acknowledge GAAP. And they assume that tax relief is given for payments made rather than expenses brought into account. So there is a conflict. The Act resolves this in this way.
First, it acknowledges that a calculation for tax purposes is made in accordance with GAAP.
Second, it provides that, if deductions for tax purposes are allowed for (eg) the rental payments under a lease, the first step is to calculate:
the total expenses to date brought into account, in accordance with GAAP, in respect of the payments; less
the total deductions allowed in previous periods for the payments.
Third, it then provides for the rules currently contained in section 779 or 782 of ICTA to be applied to the figure given by that calculation, so that the deduction allowed for the period is that figure as reduced by those rules (but is the unreduced figure if those rules do not require a reduction to be made).
Resolving the conflict in this way – rather than making the adjustments required by sections 779 and 782 of ICTA first and then applying GAAP to give relief for lease rental expenditure – could, in principle, affect the periods in which relief is given. This could be favourable to the taxpayer, adverse to the taxpayer or favourable to the taxpayer in some respects and adverse to the taxpayer in other respects. The extent to which it would be favourable or adverse would depend on the facts and, in particular, on the rental profile of the lease under review.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 56: Sale and lease-back etc: exclusion of service charges etc to be on just and reasonable basis: section 843
This change requires that, in calculating the amount of a payment for which tax relief is restricted under section 779 of ICTA, a just and reasonable amount must be excluded from the rent or other payment in respect of services or the use of relevant assets or rates usually borne by the tenant.
Section 779 of ICTA is an anti-avoidance provision which restricts tax relief for excessive payments of rent (and similar charges) in respect of land. Section 779(6)(d) provides that:
in calculating the amount subject to restriction it is necessary to exclude so much of any payment as is in respect of services or the use of assets or rates usually borne by the tenant; and
in determining the amount to be so excluded provisions in any lease or agreement fixing the payments or parts of payments which are in respect of services or the use of services may be overridden.
But section 779 of ICTA does not indicate either what considerations would justify such an override or what criterion should be used instead. In 1964, when this anti-avoidance provision was first introduced, it was natural to envisage that the decision to override the lease or agreement would be taken by the Inland Revenue. But that does not sit easily with Self Assessment.
Section 843 therefore replaces the overriding provision of section 779(6)(d) of ICTA with a requirement to exclude so much of the payment as is just and reasonable.
This change has no implications for the amount of tax paid, who pays it, or when. It affects (in principle but not in practice) only administrative matters.
Change 57: Company distributions: premium paid on redemption of share capital: section 1024
This change narrows the scope of the stipulation in section 211(7) of ICTA that premiums paid on redemption of share capital are not treated as repayments of share capital.
Section 211(7) of ICTA is not limited in its application and therefore potentially applies across the entirety of ICTA. It appears however to have no practical application beyond Chapter 2 of Part 6 of ICTA, which sets out what is to be treated as a distribution.
This change therefore makes it explicit that this particular stipulation applies only to the question of what is to be treated as a distribution.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 58: Company distributions: duty to provide a tax certificate: interest that is not a qualifying distribution: sections 1104 and 1106 and Schedule 1
This change makes clear that section 234A of ICTA applies to a payment of interest only where interest is treated as a distribution, in whole or in part, and not to all payments of interest made by a company.
The origins of section 234A of ICTA lie in section 33 of FA 1924. The provision was introduced specifically to deal with what were known as “tax free dividends”, that is dividends paid by a company to its shareholders where the income tax had already been settled. It was felt that the shareholder should be given more detailed information about the amounts involved and the tax deducted. The provision was largely unchanged through the Income Tax Act 1952 (section 199) and the Income and Corporation Taxes Act 1970 (section 242).
It was amended by paragraph 19 of Schedule 24 to FA 1972 when the imputation system was introduced and the distinction between a qualifying and non-qualifying distribution was introduced. The amendment, which was described as consequential, made separate provision for the two different categories of distribution, and amended the requirements in relation to a qualifying distribution to refer to the tax credit attaching to such a distribution.
This became section 234 of ICTA, with the key provisions being in subsections (3) and (4). Section 32 of F(No 2)A 1992 introduced section 234A of ICTA to deal with payments made directly into a bank account. Section 234(3) and (4) of ICTA were repealed and restated in section 234A of ICTA, along with further provisions to cover direct payment into an account held by the recipient or a nominee.
Section 234A of ICTA applies where “dividend or interest is distributed” by a company – subsection (1) – and this wording has been unchanged from the introduction of the provision in 1924. It may be inferred from this that the section only applies to distributions and not to ordinary payments of interest made by a company. This is reinforced by the penalty provision in section 234A(9) of ICTA (which refers to “distribution”), and by the commencement provision for section 32 of F(No.2)A 1992, which introduced section 234A of ICTA (the new provision was applied to “distributions begun after the day on which this Act is passed”).
But section 234A(6) of ICTA refers to “interest which is not a qualifying distribution or part of a qualifying distribution”. The definition of a qualifying distribution is in section 14 of ICTA, and that definition covers the vast majority of distributions, with the exception of certain types of bonus issue of shares or securities. It is very difficult to see how a payment of interest could therefore fit within the scope of a distribution that is not a qualifying distribution. Section 234A(6) of ICTA could therefore be read as applying to all payments of interest made by a company, including banks, and not just those that are treated as distributions.
If that were true, however, it would overlap with section 975 of ITA, which is the provision under which banks, building societies and other payers of interest deliver tax deduction certificates, and would impose a penalty for failure to comply, whereas none is stipulated in the case of section 975 of ITA.
The origins of section 975 of ITA lie in section 50 of FA 1963. The Royal Commission on the Taxation of Profits and Income (the Radcliffe Committee)reported in 1955 in the following terms:
“though the law requires that a company’s dividend warrants shall be accompanied by statements giving particulars of the tax deductions made,...there is no statutory obligation on a person who deducts tax from any interest ... to furnish a similar certificate” (Cmd 9474).”
The Commission clearly reported on the basis that section 199 of the Income Tax Act 1952, the precursor of section 234A(6)of ICTA, did not apply to all payments of interest and that a new provision would therefore be desirable.
Published guidance and commentaries do not comment explicitly, but the prevailing practice is that certificates for the deduction of income tax from interest payments are delivered under section 975 of ITA.
This change treats section 234A(6) of ICTA as otiose; it appears to have no effect if confined to distributions, and there is evidence from the history of the provision that it was not intended to apply to all payments of interest made by companies.
The change therefore removes any argument that section 234A of ICTA could apply to all payments of interest made by a company, including banks, and could therefore lead to a penalty for failure to comply, as opposed to section 975 of ITA which is enforceable by the recipient of the payment and where no penalty is set down in the tax legislation.
The change also affects the consequential amendment in Schedule 1 of paragraph 80 of Schedule 2 to ITEPA which replaces a reference to section 234A of ICTA with the appropriate rewritten provisions of this Act.
This change has no effect on any liability to tax. Itis in principle favourable to some taxpayers, by removing a requirement on them, and adverse to thosetaxpayers who might have received certificates but do not now do so. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 59: Interpretation: definition of “personal representatives” for the purposes of the Corporation Tax Acts: section 1119
This change applies the defined term “personal representatives” for the purposes of the Corporation Tax Acts.
It brings the income tax and corporation tax codes back into line.
The application of the defined term to the Income Tax Acts is described in Change 150 in Annex 1 to the explanatory notes on ITA. This note draws substantially on the contents of that note.
With the exception of sections 229 and 701 of ICTA, wherever the term “personal representatives” is used in the Corporation Tax Acts, other than in CTA 2009 and Part 4 of FA 2004, the term is undefined. Places where it is so used include the following provisions on which this Act is based:
Section 254(12) of ICTA (interpretation of Part 6 of ICTA) (see section 1117);
section 417(3) of ICTA (meaning of “associate” for the purposes of Part 11 of that Act (close companies)) (see section 448);
section 777(7) of ICTA (provisions supplementary to sections 775 and 776 of that Act (transactions in land)) (see section 825);
section 784(2) of ICTA (leased assets subject to hire-purchase agreements) (see section 875 but note the rewrite does not use the term “personal representatives”)
paragraph 50(1) of Schedule 16 to FA 2002 (meaning of “associate” for the purposes of that Schedule) (see section 268).
Section 229(1) of ICTA (interpretative provisions for sections 219 to 228 of ICTA) defines “personal representatives” as “persons responsible for administering the estate of a deceased person”. Section 701(4) of ICTA (rewritten in section 968 of CTA 2009) had a more detailed definition that had some similarities with the definition of “personal representatives” formerly in section 111(3) of FA 1989, which is the basis of the definition in section 989 of ITA (see Change 150 in Annex 1 to the explanatory notes on that Act). The definition in section 701(4) of ICTA provided that:
““Personal representatives” means, in relation to the estate of a deceased person, his personal representatives as defined in relation to England and Wales by section 55 of the Administration of Estates Act 1925 and persons having in relation to the deceased under the law of another country any functions corresponding to the functions for administration purposes under the law of England and Walesof personal representatives as so defined.”
Section 55(1)(xi) of the Administration of Estates Act 1925 provides that:
““personal representative” means the executor, original or by representation, or administrator for the time being of a deceased person, and as regards any liability for the payment of death duties includes any person who takes possession of or intermeddles with the property of a deceased person without the authority of the personal representatives or the court, and “executor” includes a person deemed to be appointed executor as respects settled land.”
The definition in section 55 of the Administration of Estates Act 1925 refers to executors as well as administrators. Under English law, executors are generally appointed by the will. Administrators are appointed by the court where no one is appointed as executor by the will or where the deceased dies without leaving a valid will.
English law recognises three other categories of executor. The first is executor according to the tenor, who on the terms of the will is appointed to perform the essential duties of an executor where the deceased person has failed to nominate a person to be his executor. The second is executor de son tort, who is a person who takes upon himself the position of executor or intermeddles with the goods of the deceased person without having been appointed executor or administrator. The third is special executor, the term given to a person who is a trustee of settled land at the time of the death.
The position is similar for Northern Ireland.
For the purposes of Scottish law, an executor is appointed either expressly or impliedly by the deceased, in which case he is known as an executor nominate, or by the court, in which case he is known as an executor dative. So the term “executor” under Scottish law is broadly equivalent to an “executor or administrator” under English law. Scottish law also recognises judicial factors and executor-creditors who may be appointed by the court to administer the deceased’s estate or part of it. Although a judicial factor could not be described as an executor, such a factor might be regarded as an “administrator”.
So, whether in relation to England and Wales or any other part of the United Kingdom, a deceased person’s personal representatives within the meaning of section 701(4) of ICTA are the persons responsible for administering the person’s estate.
Accordingly, the first limb of the definition in section 1119, that personal representatives are:
“in the United Kingdom, persons responsible for administering the estate of the deceased,”
catches the same persons in relation to each part of the United Kingdom as did section 701(4) of ICTA, but does so more directly and succinctly (and broadly matches the definition in section 229(1) of ICTA).
It follows from this that the application of the first limb of the definition in section 1119 in relation to the provisions in the Corporation Tax Acts which use the expression “personal representatives” without definition, including those rewritten in this Act, reflects the ordinary meaning of that term in each part of the United Kingdom.
The second limb of the definition in section 1119 is in similar terms to the equivalent part of section 701(4) of ICTA. It provides that personal representatives are:
“in a territory outside the United Kingdom, those persons having functions under its law equivalent to those of administering the estate of the deceased”
Section 701(4) of ICTA was rewritten in section 968 of CTA 2009, for the purposes of Chapter 3 of Part 10 of that Act (beneficiaries’ income from estates in administration) in terms matching those in section 989 of ITA. The definition in section 1119 matches section 968 of CTA 2009 but applies for the purposes of the Corporation Tax Acts (whether in CTA 2009, this Act or elsewhere). As a result, section 968 of CTA 2009 is repealed by this Act.
That leaves the question of whether there is any change involved in applying the second limb to provisions in the Corporation Tax Acts which use the expressions “personal representatives” without definition, as those provisions apply to countries and territories outside the United Kingdom.
The terms “executor” and “administrator” are not terms of art in relation to countries and territories outside the United Kingdom. But it seems likely that a court would hold that references to “personal representatives” in tax legislation would, in the absence of a definition, cover the people that most closely resemble executors or administrators in the United Kingdom. In view of what is said above, that means the people who have functions corresponding to those of personal representatives in the United Kingdom, that is, functions equivalent to those of administering the estate of the deceased.
References to “personal representatives” without definition in the Corporation Tax Acts, including in those provisions on which this Act is based, can be read as references to anyone with responsibility for administering a deceased person’s estate, including those with equivalent responsibilities in other jurisdictions. These provisions can be divided into two categories.
In the first category are provisions which confirm that, on an individual’s death, rights and liabilities which are or would otherwise have been conferred on the individual are conferred on the individual’s personal representatives.
In this context it is clear that the references to “personal representatives” are to whoever in fact has the role of administering the property of the deceased person. These provisions are intended to confirm that such persons have the same ability and responsibility to deal with the deceased individual’s tax affairs as the individual would have had if the individual were still alive, and are subject to the same tax liabilities.
Provisions in this category rewritten in this Act include section 777(7) of ICTA. Such provisions which are not being rewritten include paragraph 62 of Schedule 18 to FA 1998 which provides that personal representatives may vary or revoke a claim, election, application or notice to the extent the deceased could do so if alive.
The second category covers those provisions which apply only because a person has died, so that his or her property is being administered by his or her personal representatives.
In this category of cases, the fact that someone has died creates a gap in the law (or at least a doubt as to what the law is) or requires some special arrangement to be made. The provisions in question fill the gap or satisfy the requirement. So it is consistent with the aim of these provisions for them to be interpreted as applying in all cases in which a person has died and his or her property is being administered by others.
Provisions in this category rewritten in this Act include:
section 220(3) of ICTA which provides that the residence and ordinary domicile of personal representatives are the same as those of the deceased in relation to the conditions for disapplication of the company distribution rules to a purchase of the company’s own shares; and
the meaning of “associate” given by section 417(3) of ICTA and paragraph 50(1) of Schedule 16 to FA 2002, which provide that a person who has an interest in shares or obligations forming part of a deceased’s estate is an associate of the personal representatives of the deceased.
Provisions in this category which are not being rewritten include section 76(5)(d) of ICTA, which provides that a deceased person’s personal representatives count for the purposes of determining amounts relevant to the expenses of insurance companies as would have been the case had the deceased been alive.
As a consequence of the inclusion of this definition in section 1119, the definition to the same effect in section 968 of CTA 2009 is, as mentioned above, no longer necessary and is repealed by Schedule 3 to this Act. Section 229(1) of ICTA is also repealed.
This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.
Change 60: Corporation Tax Acts definitions: meaning of “local authority” in relation to Northern Ireland: claims: section 1130 and Schedule 1
This change defines “local authority”, in relation to Northern Ireland, explicitly in terms of relevant district councils rather than by reference to authorities with power to raise a rate.
Section 842A of ICTA defines “local authority” in the Corporation Tax Acts in relation to each of England and Wales, Scotland and Northern Ireland as “an authority of a description specified” in a list of institutions relevant to each of those parts of the United Kingdom.
In relation to Northern Ireland, section 842A(4) of ICTA specifies:
an authority having power to make or determine a rate;
an authority having power to issue a precept, requisition or other demand for the payment of money to be raised out of a rate.
Section 842A(5) of ICTA defines “rate” for the purposes of that section as “a rate the proceeds of which are applicable for public local purposes and which is leviable by reference to the value of land or other property”.
The Office of the Legislative Counsel in Northern Irelandhas advised that this definition of “local authority” in relation to Northern Ireland is now inappropriate. Section 842A of ICTA refers to an authority with power to make or determine “a rate”. But there are two different kinds of “rate” in Northern Ireland: adistrict rate which is set by district councils and a regional rate which is set by the Departmentof Finance and Personnel, which are levied as one rate by the Department of Financeand Personnel. Section 842A of ICTA could therefore be construed as defining as a “localauthority” an entity which is part of central government in Northern Ireland. This is not the intended effect of this provision and would produce a result out of step with the equivalent provisions for the meaning of “local authority” in England and Wales and Scotland.
In addition, the Office of the Legislative Counsel in Northern Ireland has advised that the wording ofsection 842A(4)(b) of ICTA is inapt for the local rating system in Northern Ireland as there is no analogue in that jurisdiction for the term “precept” and the term “requisition” is not used.
The definition in section 842A(4) of ICTA has therefore been rewritten so that it captures only district councils constituted under section 1 of the Local Government Act (Northern Ireland) 1972 and does not extend to theDepartment of Finance and Personnel.On this basis there is no need to replicate section 842A(4)(b) of ICTA as no other relevant authorities fall within that limb.
An amendment in Schedule 1 to the Act makes a corresponding change to section 999(3) of ITA.
This change affects the scope of provisions referring to local authorities in relation to Northern Ireland. It makes explicit the bodies to which the term refers but does not in practice change the scope of the definition. The change affects in principle the taxation of such bodies (for example, see section 984 (exemption for local authorities etc in the United Kingdom)) and of companies holding securities issued by such bodies (for example, see section 806 (meaning of “UK securities” in Part 17 (manufactured payments and repos))). While in principle it cuts down the potential scope of the definition, it has no such effect in practice.
This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 61: Non–UK resident companies: transactions through brokers: section 1145
This change removes a difference between:
the wording of one of the conditions which determines whether or not, in relation to transactions carried out by a non–UK resident company (otherwise than as a trustee) through a broker in the United Kingdom, the broker is the permanent establishment of the non–UK resident company and
the wording of the parallel condition which determines whether,in relation to transactions carried out by any other non–UK resident through such a broker, the broker is the UK representativeofthe non–UK resident.
Prior to the enactment of section 148 of, and Schedule 26 to, FA 2003, sections 126 and 127 of FA 1995 applied to determine who was the UK representative of a non–UK resident (including a non–UK resident company) in respect of income or chargeable gains arising through a branch or agency in the United Kingdom. Section 127 of FA 1995 provides that certain branches or agents are not UK representatives in relation to income or chargeable gains arising from a transaction carried out through them, including, in particular, brokers who meet certain conditions in relation to the transaction.
Following the enactment of section 148 of, and Schedule 26 to, FA 2003, the provisions of FA 1995 only apply in relation to non–UK residents who are not companies and to non–UK resident companies in the capacity of trustee. The FA 2003 provisions determine whether or not a person is the permanent establishment of a company in another territory and, in the case of a permanent establishment in the United Kingdom, provide for the permanent establishment to be the UK representative of the non–UK resident company in relation to income or chargeable gains arising through the permanent establishment.
Under Schedule 23 to FA 1995, a branch or agency which is a UK representative is responsible for assessment and payment of the income tax and capital gains tax chargeable on the income and chargeable gains of the non–UK resident arising through the branch or agency. Under section 150 of FA 2003, a permanent establishment in the United Kingdom is responsible for assessment and payment of corporation tax on income or chargeable gains attributable to the permanent establishment.
Section 148(3) of FA 2003 provides that a company is not regarded as having a permanent establishment in a territory by reason of its carrying on business there through an agent of independent status acting in the ordinary course of the agent’s business. Schedule 26 to FA 2003 supplements that provision by, among other things, setting out the conditions under which transactions carried out through a broker in the United Kingdom are treated as carried out through an agent of independent status.
Paragraph 2 of Schedule 26 to FA 2003 provides for conditions that apply in determining whether a broker is a permanent establishment in respect of transactions carried out by a non-UK resident company through the broker in the United Kingdom. Under the FA 2003 legislation it was intended that these conditions would be the same as those that apply when determining, under section 127(2) of FA 1995, whether a broker is the UK representative of any other non-UK resident in relation to transactions carried out by that non-UK resident through the broker.
Section 127(2)(d) of FA 1995 contains the words “(apart from this paragraph)”. But those words are not included in the parallel condition in paragraph 2(2)(d) of Schedule 26 to FA 2003. No change was intended and that provision is in practice operated in the same way as section 127(2)(d) of FA 1995.
The effect of the additional words in section 127(2)(d) of FA 1995 is that the question whether the broker is to be regarded as the UK representative of the non–UK resident in relation to the income (or other amounts) in question is to be determined without reference to the condition in that paragraph. They are considered necessary to avoid the impasse that would otherwise arise in operating the condition in accordance with the following analysis:
A transaction falls within section 127(2)(d) of FA 1995 only if there is no income or other amount chargeable to tax for the same tax year in relation to which the broker is the non–UK resident’s UK representative.
If there is any other income or amounts deriving from another transaction carried out by the broker for the non–UK resident, section 127(1)(b) and (2) apply to determine whether the broker is the non–UK resident’s UK representative in relation to it.
For the broker not to be the non–UK resident’s UK representative, the second transaction must fall within section 127(2).
But absent the words “(apart from this paragraph)”, in applying the condition in section 127(2)(d) to the second transaction, the question whether the condition is met depends on whether it is met in relation to the first transaction.
This change removes the potential for such an impasse in the provisions for determining whether a broker in the United Kingdom is the permanent establishment of a non–UK resident company in relation to transactions carried out by the non–UK resident company through the broker. It does so by adding words equivalent to “(apart from this paragraph)” in section 1145(6).
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 62: Meaning of permanent establishment: substitution of reference to income for reference to chargeable profits in paragraph 4(3) of Schedule 26 to FA 2003: section 1148
This change substitutes a reference to a non–UK resident company’s income in section 1148(3) for the reference to its chargeable profits in paragraph 4(3) of Schedule 26 to FA 2003.
This change is identical to the change made in rewriting paragraph 4(3) of Schedule 26 to FA 2003 in section 821(3) of ITA in relation to the limit on liability to income tax of non–UK resident companies under section 815 of that Act. See Change 121 in Annex 1 to the explanatory notes on ITA.
Paragraph 3 of Schedule 26 to FA 2003 sets out conditions relating to investment transactions carried out by a non–UK resident company (other than a company in the capacity of a trustee) through an investment manager in the United Kingdom.If the conditions in paragraph 3(2) are met, the investment manager is not a permanent establishment of the non–UK resident company in relation to the investment transactions. The non–UK resident company’s profit on those transactions are chargeable not to corporation tax but to income tax and then only to the extent provided by section 815 of ITA.
Paragraph 4 of Schedule 26 to FA 2003 sets out the requirements of “the 20% rule” referred to in paragraph 3(2)(d) of that Schedule. This rule relates to the percentage of “relevant excluded income” in which the investment manager and connected persons may have a beneficial interest. It is equivalent to section 127(5) of FA 1995 which prior to FA 2003 applied to all non–UK residents but which since the enactment of section 148 of, and Schedule 26 to, FA 2003 only applies where the non–UK resident is not a company (other than a company in the capacity of a trustee).
The basis on which the legislation in FA 2003 was prepared was that it was not to affect the law under FA 1995, except so far as required to adopt the concept of permanent establishment in place of branch or agency in relation to non–UK resident companies (other than companies in the capacity of trustees).
It is clear from the reference in the definition of “relevant excluded income” in section 127(5) of FA 1995 to “such of the profits and gains of the non–resident…as…for the purposes of Chapter 1 of Part 14 of the ITA(limits on liability to income tax of non–UK residents) would fall (apart from the requirements of section 819 of that Act) to be treated as disregarded income (see section 813 of that Act)” that the defined term in FA 1995 is limited to income and does not include gains. This is reflected in section 821(2) of ITA.
The reference to “the aggregate of such of the chargeable profits of the company” in paragraph 4(3) of Schedule 26 to FA 2003 is, therefore, in practice read as referring to income only.
Accordingly, section 1148(3) refers to “the total of the non–UK resident company’s income for the accounting periods” which derives from the relevant investment transactions.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 63: Investment trusts: disposal of shares or securities from a holding: section 1162
This change puts into legislation a well-known and established concession relating to the 15% holding limit condition.
Under section 842(1) of ICTA, the Commissioners of HMRC may approve a company as an investment trust only if it is shown to their satisfaction that the company meets certain conditions. One of these conditions is that no holding in a company (other than an investment trust or a company that would qualify as an investment trust if its shares were included in the official UK list) represents more than 15% of the investing company’s investments (“the 15% holding limit condition”).
Section 842(2), read with subsection (3)(b) of that section, provides for some exceptions. One of these is that if a holding in a company met the 15% holding limit condition when it was acquired or when it was last added to, it is treated as continuing to meet the condition until further shares or securities are acquired in that company.
In addition, where there is a disposal of shares or securities from a holding that exceeded the 15% holding limit and immediately after the disposal the holding represents 15% or less of the investing company’s investments, HMRC treats the holding as continuing to represent 15% or less by value of the investing company’s investments in later accounting periods until the holding is next enlarged.
This is set out in the HMRC Company Tax Manual as follows:
“If a company has a holding which, at 6 April 1965 or at the date of acquisition, exceeded the percentage limits, it may dispose of part of the holding to bring the reduced holding within the 15 per cent limit. So long as no addition is made to the holding, approval should not be withdrawn for any subsequent accounting period solely because the reduced holding has appreciated relative to the other investments so that it exceeds 15 per cent of the company’s investments.”
In section 1162(4) and (5) this concession is worded:
“(4)Subsection (5) applies if-
(a)a company disposes of shares or securities from a holding it has in a company,
(b)immediately before the disposal the holding represents more than 15% by value of the investing company’s investments, and
(c)immediately after the disposal the holding represents 15% or less by value of the investing company’s investments.
(5)For the purpose of determining whether the investing company meets condition E in accounting periods later than that in which the disposal was made, the holding is treated (if it does not already fall to be so treated under subsection (3)) as continuing to represent 15% or less by value of the investing company’s investments until the holding is next enlarged.”
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice.
Change 64: Procedure for making orders and regulations: section 1171
This change concerns the procedure for making regulations in connection with the construction industry scheme in Chapter 3 of Part 3 of FA 2004. In accordance with section 73A of FA 2004 the Treasury may by order designate an international organisation to be exempt from the obligation, as a contractor, to deduct tax from payments to sub-contractors.
There are three main parliamentary procedures for making orders, depending on the degree of scrutiny thought appropriate.
No scrutiny: Sometimes Parliament may decide that it does not need any control over the exercise of a power.
Negative resolution procedure: The order can become law without adebate or vote inParliament. It can beopposed and may be rejected but not amended.
Affirmative resolution procedure: The order is subject to affirmativeresolution. It cannotcome into effect until bothHouses have approved adraft statutory instrument in a vote.
Most tax regulations are made under the negative resolution procedure. That is the general rule in:
section 828 of ICTA;
section 570B of CAA;
section 717 of ITEPA;
section 873 of ITTOIA; and
section 1014 of ITA.
But there are exceptions in each Act for regulations that are routinely administrative, for which no Parliamentary scrutiny is considered necessary.
The power to designate an international organisation for the purpose of the construction industry scheme was in section 582A(1) of ICTA (applied by subsection (6) of that section). That power was excepted from the negative resolution procedure in section 828(3) of ICTA by subsection (4) of that section. So the power fell within the “no scrutiny” procedure.
ITA rewrote most of the rules about international organisations in section 979 of ITA. But that section does not apply to the construction industry scheme. Instead, ITA inserted section 73A of FA 2004. That section is an exception to the general rule in section 1014(4) of ITA that orders or regulations are to be made under the negative resolution procedure (see subsection (5)(a) of that section). So the power iswithin the “no scrutiny” procedure.
The difficulty is that the ITA rules apply only to powers “under the Income Tax Acts”. The deduction under section 61 of FA 2004 is “a sum equal to the relevant percentage of … the payment”. On the face of it, that sum is neither income tax nor corporation tax, although it may be treated as either by section 62(2) or (3)(c) of FA 2004.
It is possible that, to the extent that section 61 of FA 2004 is part of the Corporation Tax Acts, there is no exception to the general rule in section 828(3) of ICTA that a power such as that in section 73A of FA 2004 is to be exercised by an instrument subject to the negative resolution procedure.
This change excludes the order-making power under section 73A of FA 2004 from the negative resolution procedure required under subsection (4) of section 1171. The effect of the change is to restore the position to what it was before ITA and bring the income tax and corporation tax rules back into line.
This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.
Change 65: Corporation Tax Acts definitions: amendment of section 991 of ITA: Schedule 1
This change corrects an error in section 991 of ITA and brings the definition of “bank” in the Income Tax Acts and Corporation Tax Acts into line.
Section 840A of ICTA defines “bank” for the purposes of any provision of the Corporation Tax Acts that applies this definition. Prior to the amendment of this section by paragraph 226 of Schedule 1 to ITA, the section applied for both the Income Tax Acts and the Corporation Tax Acts.
Among the categories of body which make up the defined term in section 840A of ICTA is “a relevant international organisation which is designated as a bank for the purposes of that provision by an order made by the Treasury”. The “provision” referred to is the provision that applies the definition of “bank” in this section. An order made under this power may therefore affect some but not all of the provisions that apply the definition. While the only order made to date using this power (the European Investment Bank (Designated International Organisation) Order 1996 (SI 1996/1179), repealed by Schedule 3 to ITA) applied for the purposes of all such provisions, there may be circumstances in which it would be desirable to restrict the scope of the designation under such an order.
Section 991 of ITA expresses the power to designate an international organisation as a bank “for the purposes of this section”, that is, for the purposes of section 991 of ITA, rather than for the purposes of the provisions that apply the definition. It therefore omits the option to designate an international organisation as a bank for the purposes of some but not all provisions.
Section 1120 rewrites section 840A of ICTA but includes that option in its expression of the power as it applies to the Corporation Tax Acts (see subsection (5)). Schedule 1 to the Act therefore amends section 991 of ITA to restore the option in the income tax definition and to keep the income tax and corporation tax codes in line.
This change has the potential to limit when an international organisation is treated as a bank for the purposes of some provisions of the Income Tax Acts. Whether that leads to an increase or decrease of tax (or whether there is any effect) depends on the affected provision and the circumstances of the affected taxpayer.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 66: Company distributions: demergers: Schedule 2
This change disapplies paragraph 8(1) of Schedule 2 in respect of the repeal by this Act of regulations that amend the source legislation for section 1081(1). As a result, section 1081(1) applies to the whole of the first accounting period of a company to which this Act has effect.
Section 213 of ICTA provides that certain distributions made in the course of a demerger are excluded from references to “distribution” in the Corporation Tax Acts (see the definition of that term in section 832(1) of ICTA). The Corporation Tax (Implementation of the Mergers Directive) Regulations 2009 (SI 2009/2797) amended section 213(4) of ICTA, substituting the words “resident in a memberState” for the words “UK resident” in setting out a condition applying to companies relevant to the demerger. The regulations ensure that the United Kingdom is, in respect of distributions in a demerger, fully compliant with its obligations under Directive 90/434/EEC of the European Council on cross-border mergers etc of limited liability companies.The effect of the amendment is to increase the number of cases in which distributions in the course of a demerger are exempt distributions (and are therefore taken out of the charge to income tax or corporation tax on income). Section 1081(1) rewrites section 213(4) of ICTA as so amended, and accordingly provides that one condition for exemption under the provisions about exempt distributions is that “each relevant company must be resident in a member State at the time of the distribution”.
The regulations came into force on 11 November 2009 and have effect in relation to distributions falling within section 213(3) of ICTA made on or after that date. The Act repeals the regulations in full. Paragraph 8(1) of Schedule 2 preserves the remaining force of a transitional or saving provision associated with a provision rewritten by the Act notwithstanding the repeal by the Act of that transitional or saving provision. Without the change made by this paragraph, the application of the amendment made by the regulations for distributions made on or after 11 November 2009 would continue to have effect for some companies in respect of the first accounting period to which this Act applies.
The Act comes into force on 1 April 2010 and has effect for corporation tax purposes for accounting periods ending on or after that day. It therefore applies to accounting periods beginning as early as 2 April 2009. Because of the change made by this paragraph, the law as restated in section 1081(1) applies to any distribution made in that first accounting period. There is therefore no question of having to apply different rules (that is, those in this Act and those as they existed in ICTA before the regulations had effect) to the same accounting period. This change ensures, having regard to the need for a statement of compatibility under section 19 of the Human Rights Act 1998, that the law to be enacted in the Act is also compliant with the United Kingdom’s obligations under Directive 90/434/EEC of the European Council on cross-border mergers etc of limited liability companies.
The change may further increase the number of cases in which distributions in the course of a demerger are exempt distributions. That reduces the incidence of the charge to income tax or corporation tax on income for those who benefit from the change.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
[1982] STC 396
[1998] STC 905
[1980] STC 460.
