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Corporation Tax Act 2010

Introduction

1.These explanatory notes relate to the Corporation Tax Act 2010 which received Royal Assent on 3 March 2010. They have been prepared by the Tax Law Rewrite project at HMRC to assist readers in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament.

2.The notes need to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of its contents. So if a section or part of a section does not seem to require explanation or comment, none is given.

3.The commentary on each section indicates the main origin or origins of the section. A full statement of the origins of each section is contained in the Act’s Table of Origins.

4.At the end of the commentary, there is supporting material in two annexes:

  • Annex 1 contains details of the minor changes in the law made by the Act;

  • Annex 2 contains lists of:

    • the Extra-Statutory Concessions to which the Act gives effect,

    • the minor changes made by the Act which involve giving statutory effect to principles derived from case law, and

    • provisions not included in the Act on the grounds of redundancy.

Summary

5.The main purpose of the Corporation Tax Act is to rewrite primary corporation tax legislation so that it is clearer and easier to use but without changing its general effect.

6.This Act contains provisions which affect the calculation of liability such as losses and group relief. It also contains provisions dealing with distributions, avoidance and particular types of companies and activities.

7.The Act reproduces the law on which it is based. It does not generally change the meaning of the law. The minor changes which it does make are within the remit of the Tax Law Rewrite project and the Parliamentary process for the Act. In the main, such minor changes are intended to clarify existing provisions, make them consistent or bring the law into line with well established practice.

Background

The Tax Law Rewrite project

8.In December 1995 the Inland Revenue presented a report to Parliament on the scope for simplifying the UK tax system (The Path to Tax Simplification). The main recommendation was that UK direct tax legislation should be rewritten in clearer, simpler language.

9.This recommendation was warmly welcomed, both in Parliament and in the tax community. In his November 1996 Budget speech the then Chancellor of the Exchequer (the Rt Hon Kenneth Clarke QC MP) announced that the Inland Revenue would propose detailed arrangements for a major project to rewrite direct tax legislation in plainer language.

10.The project team has been carrying out this work. The aim is that the rewritten legislation should use simpler language and structure than previous tax legislation. The members of the project are drawn from different backgrounds. They include HMRC employees, private sector tax professionals and parliamentary counsel including (as head of the drafting team) a senior member of the Parliamentary Counsel Office.

Steering Committee

11.The work of the project is overseen by a Steering Committee, chaired by the Rt Hon the Lord Newton of Braintree OBE DL. The membership of the Steering Committee as at 31 October 2009 was:

  • The Rt Hon the Lord Newton of Braintree OBE DL (Chairman)

  • Dr John Avery Jones CBE

  • Adam Broke

  • Nicholas Dee

  • Dave Hartnett CB

  • The Rt Hon Michael Jack MP

  • Eric Joyce MP

  • District Judge Rachel Karp

  • Professor John Tiley CBE

  • John Whiting OBE

Consultative Committee

12.The work is also reviewed by a Consultative Committee, representing the accountancy and legal professions and the interests of taxpayers. The membership of the Consultative Committee as at 31 October 2009 was:

Robina DyallChairman
Adam BrokeSpecial Committee of Tax Law Consultative Bodies
Colin CampbellFormerly Confederation of British Industry
Russell ChaplinLondon Chamber of Commerce & Industry
Mary FraserAssociation of Chartered Certified Accountants
Malcolm Gammie CBE QCThe Law Society
Julian Ghosh QCRevenue Bar Association
Keith GordonChartered Institute of Taxation
Terry HopesInstitute of Chartered Accountants in England and Wales
Vic PeakeFederation of Small Businesses
Isobel d’InvernoLaw Society of Scotland
Simon McKieInstitute of Chartered Accountants in England and Wales
Lakshmi NarainChartered Institute of Taxation
Francis SandisonThe Law Society
Michael TemplemanInstitute of Directors
Professor David WilliamsOffice of the Social Security Commissioners
Mervyn WoodsConfederation of British Industry
Consultation

13.The work produced by the project has been subject to public consultation. This has allowed all interested parties an opportunity to comment on draft clauses.

14.Consultation took the form of a series of papers presenting clauses in draft and documents containing responses to comments received. These were published between September 2007 and October 2009. A draft Bill was published for consultation in March 2009. All these documents are available on the Tax Law Rewrite website.

15.In addition to this consultation the project also presented its papers to the Consultative and Steering Committees to inform them and to seek their views on particular issues. The project also consulted on an informal basis with specialists in particular subject areas. These included Russell Chaplin, Paul Bloom of Beechams LLP, Hugh Faulkner (Dairycrest), Krishna Sooben (Radio Taxis Group) and Tony Spillett of BDO LLP who advised the project as corporation tax practitioners.

16.Those who responded in writing to one or more of the papers or to the draft Bill include:

  • BDO LLP

  • Bircham Dyson Bell LLP

  • The British Property Federation

  • CASCS Development Forum

  • The Charity Law Association

  • Chartered Institute of Taxation

  • Colin Campbell

  • Confederation of British Industry

  • Ernst & Young LLP

  • Francis Sandison

  • Freshfields Bruckhaus Deringer LLP

  • Horwath Clark Whitehill

  • Institute of Chartered Accountants in England and Wales

  • KPMG LLP

  • Pinsent Masons LLP

  • PricewaterhouseCoopers LLP

  • Professor David Williams

  • Slaughter and May

  • The Law Society

  • The UK Oil Industry Taxation Committee

17.As there was some movement of material between this Act and the Taxation (International and Other Provisions) Act during the course of the work on the Bills, this list includes respondents to both Bills. The list excludes any individuals who requested that their responses be treated in confidence.

Corporation Tax Act

18.The Act contains provisions relating to:

  • losses, gifts to charities and various reliefs available to companies such as group relief;

  • distributions;

  • particular types of companies and activities;

  • avoidance; and

  • definitions;

and completes the rewrite of most of the corporation tax provisions. The Corporation Tax Act 2009 and this Act take the place of ICTA as the main corporation tax Acts.

19.The Act has 1185 sections and four Schedules. The sections are arranged as follows:

  • Part 1: Overview

  • Part 2: Calculation of liability in respect of profits

  • Part 3: Companies with small profits

  • Part 4: Loss relief

  • Part 5: Group relief

  • Part 6: Charitable donations relief

  • Part 7: Community investment tax relief

  • Part 8: Oil activities

  • Part 9: Leasing plant or machinery

  • Part 10: Close companies

  • Part 11: Charitable companies etc

  • Part 12: Real Estate Investment Trusts

  • Part 13: Other special types of company etc

  • Part 14: Change in company ownership

  • Part 15: Transactions in securities

  • Part 16: Factoring of income etc

  • Part 17: Manufactured payments and repos

  • Part 18: Transactions in land

  • Part 19: Sale and lease–back etc

  • Part 20: Tax avoidance involving leasing plant or machinery

  • Part 21: Leasing arrangements: finance leases and loans

  • Part 22: Miscellaneous provisions

  • Part 23: Company distributions

  • Part 24: Corporation Tax Acts definitions etc

  • Part 25: Definitions for purposes of Act and final provisions

20.The Schedules are:

  • Schedule 1: Minor and consequential amendments

  • Schedule 2: Transitionals and savings etc

  • Schedule 3: Repeals and revocations

  • Schedule 4: Index of defined expressions

21.The commentary uses a number of abbreviations. They are listed below.

AUTauthorised unit trust
CAAthe Capital Allowances Act 2001
CASCcommunity amateur sports club
CDFIcommunity development finance institution
CITRcommunity investment tax relief
CRCAthe Commissioners for Revenue and Customs Act 2005
CTA 2009the Corporation Tax Act 2009
CVScorporate venturing scheme
DTAdouble taxation arrangement
EEAEuropean Economic Area
ESCExtra-statutory concession
FA 1986Finance Act 1986 (and similarly for other Finance Acts)
F(No 2)AFinance (No 2) Act
FISMAthe Financial Services and Markets Act 2000
GAAPgenerally accepted accounting practice
HMRCHer Majesty’s Revenue and Customs
ICTAthe Income and Corporation Taxes Act 1988
IHTAthe Inheritance Tax Act 1984
ITAthe Income Tax Act 2007
ITEPAthe Income Tax (Earnings and Pensions) Act 2003
ITTOIAthe Income Tax (Trading and Other Income) Act 2005
LLPlimited liability partnership
MODmanufactured overseas dividend
OEICopen-ended investment company
OTA 1975the Oil Taxation Act 1975
PRTpetroleum revenue tax
SAYESave As You Earn
SPStatement of Practice
TCGAthe Taxation of Chargeable Gains Act 1992
TIOPAthe Taxation (International and Other Provisions) Act 2010
TMAthe Taxes Management Act 1970
UK GAAPUK generally accepted accounting practice
UK REITReal Estate Investment Trust
VATvalue added tax

Part 1: Introduction

Section 1: Overview of Act

22.This section describes the content of the Act. It is new.

Part 2: Calculation of liability in respect of profits

Overview

23.This Part is about the calculation of liability. Chapter 1 provides an introduction to the Part.

24.Chapter 2 is about the rates at which corporation tax is charged.

25.Chapter 3 is about the calculation of the amount of profits to which rates of corporation tax are applied.

26.Chapter 4 is about currency.

Chapter 1: Introduction
Section 2: Overview of Part

27.This section is new.

28.Subsection (5) explains that the final stages of the calculation of the corporation tax payable by a company are found in paragraph 8 of Schedule 18 to FA 1998.

Chapter 2: Rates at which corporation tax on profits charged
Section 3: Corporation tax rates

29.This section introduces the rates of corporation tax. It is based on section 2 of CTA 2009.

30.The main rate has to be set annually. But the small profits rate may, in principle, be set at any time. In practice the annual Finance Act sets the small profits rate (and the associated limits and fractions, if they change) for the financial year immediately preceding the year for which it sets the main rate. So, for instance, section 7 of FA 2009 set the main rate for financial year 2010; and section 8 of the Act set the small companies’ rate (renamed small profits rate in this Act) and fractions for the financial year 2009.

Chapter 3: Calculation of amount to which rates applied
Overview

31.This Chapter explains how to calculate the company’s profits on which corporation tax is chargeable for an accounting period. These are the profits referred to in the first step in paragraph 8(1) of Schedule 18 to FA 1998. The applicable rates of corporation tax set out in the preceding Chapter of this Act are applied to the amount of these profits.

32.In this Act these profits are known as “taxable total profits”.

33.The main corporation tax self-assessment provisions in Schedule 18 to FA 1998 have not been rewritten.

Section 4: Amount of profits to which corporation tax rates applied

34.This section sets out the stages by which the profits of a company on which corporation tax is chargeable are calculated. Subsections (1) and (2) are new and subsections (3) and (4) are based on section 834C of ICTA.

35.The starting point is to find a company’s total profits. Subsections (3) and (4) rewrite the definition of total profits in section 834C of ICTA. Section 834C was inserted by CTA 2009 into ICTA: it is based on section 9(3) of ICTA which was repealed by CTA 2009.

36.Step 1 in subsection (3) refers to the amount in respect of which the company is chargeable under the charge to corporation tax on income after any reduction required to give effect to relief from tax. This covers reliefs that reduce one or more of the components of income subject to the charge. Relief for trade losses brought forward against trade profits of the subsequent accounting period is an example of a relief that operates against a single component of income. Reliefs that potentially operate against more than one component of income include relief under section 68 of the Act for losses on disposals of certain shares (see section 71(1)) and relief under section 457 of CTA 2009 for non-trading deficits from loan relationships.

37.Similarly Step 2 refers to the amount to be included in respect of chargeable gains (under section 8 of TCGA) after any reduction required to give effect to relief from tax. This caters for reliefs that operate to reduce the amount of chargeable gains that feeds into the total profits calculation:again relief under section 457 of CTA 2009 for non-trading deficits from loan relationships is an example of a relief that potentially operates in this way.

38.Under subsection (4) the calculation of total profits is subject to the provisions of the Corporation Tax Acts. One example of the kind of qualification covered by this subsection is provision of the kind to be found in Chapter 3 of Part 11 of the Act, under which certain income of charitable companies is not taken into account in calculating total profits (see, for example, section 478(1)).

39.“Total profits” is defined for the purposes of the Corporation Tax Acts by reference to section 4(3) and (4): see sections 1118(5) and 1119.

40.Subsection (2) completes the calculation of the profits of a company on which corporation tax is chargeable for an accounting period, in this Act the company’s “taxable total profits”. Step 1 starts with the total profits of the period. Step 2 provides for the deduction of any amounts which can be relieved against the total profits of the period.

41.The reference to amounts which can be relieved allows for particular rules about deductions from total profits such as those that apply to the calculation of ring fence profits from oil activities.

42.The qualification in subsection (4) for subsection (2) takes into account non-standard provision for relief such as the relief under section 459(1)(b) of CTA 2009 for non-trading deficits from loan relationships. Under section 462, relief is given by way of set off against components of total profits, but only after certain reliefs listed in section 463(5) of CTA which operate against total profits.

43.In Schedule 1 there is an amendment to section 1219(1) of CTA 2009 which deals with relief for expenses of management. In section 1219(1), which is based on section 75(1) of ICTA, the reference is to the deduction being made in calculating total profits. The amended subsection refers to the deduction being made from total profits.

44.Under the new section 1219(1A), the deduction for management expenses is given priority over all other deductions made in the calculation of taxable total profits.The effect of the law is not changed by this amendment and the revised wording accords with both current interpretation and practice.

Chapter 4: Currency
Overview

45.This Chapter contains a basic rule about the currency in which companies calculate and express their income and chargeable gains (see section 5) followed by four special rules (sections 6 to 9) which apply in certain cases, and rules dealing with how to convert losses carried backwards or forwards. It is based on sections 92 to 92E of FA 1993.

46.References in this Chapter to a company’s “functional currency” are to the currency that is most commonly used in the general economic and business environment in which the company operates – so for a company operating primarily in the UK the “functional currency” is sterling.

47.Schedule 2 contains rules that cover circumstances where a company elects that changes made by FA 2009 should only apply to accounting periods beginning on or after the date on which FA 2009 received Royal Assent, instead of on or after 29 December 2007.

Section 5: Basic rule: sterling to be used

48.This section states the basic rule for the preparation of company tax returns. It also provides signposts to the four special rules, which detail how a company is to comply with the basic rule in certain cases. It is based on section 92 of FA 1993.

Section 6: UK resident company operating in sterling and preparing accounts in another currency

49.This section sets out the first special rule. It is based on section 92A of FA 1993.

50.This special rule applies to a UK resident company that prepares its accounts in a currency other than sterling and whose functional currency is sterling (see subsection (1)), and which has prepared its accounts in accordance with GAAP.

51.When this special rule applies, profits or losses (adjusted to comply with corporation tax rules) must be calculated in sterling.

Section 7: UK resident company operating in currency other than sterling and preparing accounts in another currency

52.This section sets out the second special rule. It is based on section 92B of FA 1993.

53.This special rule applies to a UK resident company whose functional currency is not sterling (see subsection (1)(b) and (c )), that prepares its accounts in a currency that is different from its functional currency and which has prepared its accounts in accordance with GAAP. It is immaterial whether the currency used to prepare the accounts is sterling or another currency.

54.When this special rule applies, the company’s profits or losses (adjusted to comply with corporation tax rules) must be calculated in the functional currency. The resulting amount of those profits or losses must then be translated from the functional currency into sterling (see subsection (2)).

Section 8: UK resident company preparing accounts in currency other than sterling

55.This section sets out the third special rule. It is based on section 92C of FA 1993.

56.This special rule applies to a UK resident company whose accounts currency is not sterling, but which is not subject to the special rule in either section 6 or section 7. This rule applies, for example, if the company’s functional currency is the same as the currency used to prepare the accounts.

57.When this special rule applies, profits or losses (adjusted to comply with corporation tax rules) must be translated from the accounts currency into sterling.

Section 9: Non-UK resident company preparing return of accounts in currency other than sterling

58.This section sets out the fourth special rule. It is based on sections 92C and 92E of FA 1993.

59.This special rule applies to a non-UK resident company which trades in the United Kingdom through a permanent establishment, and which in the preparation of its return of accounts for the permanent establishment has prepared its accounts in a currency which is not sterling.

60.When this special rule applies, profits or losses (adjusted to comply with corporation tax rules) must be translated from the accounts currency into sterling.

Section 10: The equivalent in another currency of a sterling amount

61.This section provides the method of determining the “appropriate exchange rate” to be used for conversion of sterling amounts into another currency where required by section 7, 8 or 9. It is based on sections 92B, 92C and 92E of FA 1993.

Section 11: Sterling equivalents: basic rule

62.This section sets out the method for translating an amount from a non-sterling currency into sterling where required by section 7, 8 or 9. It is based on sections 92D and 92E of FA 1993.

63.This section is subject to special rules dealing with losses carried forwards or backwards.

Section 12: Sterling equivalents: carried-back amounts

64.This section sets out how a loss is to be converted into sterling from another currency in order to establish the sterling amount of a carried-back loss. It is based on section 92DA of FA 1993.

Section 13: Sterling equivalents: carried-forward amounts

65.This section sets out how a loss is to be converted into sterling from another currency in order to establish the sterling value of a loss carried forward to a later period. It is based on section 92DB of FA 1993.

Section 14: Carried-back amounts

66.This section applies where a company accounts in sterling or identifies sterling as its functional currency, but carries back a loss to an accounting period where it computed its profits and losses for tax purposes in a currency other than sterling. It is based on section 92DC of FA 1993.

Section 15: Carried-forward amounts

67.This section applies where a company accounts in sterling or identifies sterling as its functional currency, but carries forward a loss to an accounting period where it computes its profits and losses for tax purposes in a currency other than sterling. It is based on section 92DD of FA 1993.

Section 16: Sections 13(2) and 15(5): profit against which carried-forward amount to be set

68.This section provides interpretation of what is meant by the profit in a later period against which a loss is to be set off. It is based on section 92DE(3) and (4) of FA 1993.

Section 17: Interpretation of Chapter

69.This section provides interpretation of a number of terms used in the Chapter. It is based on sections 92DE and 92E of FA 1993.

Part 3: Companies with small profits

Overview

70.The profits of a company are charged to tax at a lower rate than the main corporation tax rate if the profits of the company are within certain limits.

71.A lower rate is used if the company’s profits (for a full year) are no more than the “lower limit”. In making this comparison, there may be two adjustments.

72.First, some franked investment income is added to the profits of the company.

73.Second, the amount of the “lower limit” is split between companies that are under common control.

Section 18: Profits charged at the small profits rate

74.This section sets out the three conditions for the small profits rate to apply. It is based on section 13 of ICTA.

75.The first condition is that the company is resident in the United Kingdomin the accounting period. If a company becomes, or ceases to be, resident in the United Kingdom an accounting period ends (see the rules about accounting periods in section 10 of CTA 2009). So the effect of this condition is that the company must be resident in the United Kingdomthroughout the accounting period.

76.Some non-resident companies trading in the United Kingdom through a permanent establishment may be entitled to the small profits rate as a result of a provision of a DTA.

77.The second condition is that the company is not a “close investment-holding company”. That expression is defined in section 34.

78.The third condition is that the “augmented profits” (defined in section 32) of the company do not exceed the lower limit. If the profits fall between that limit and the upper limit, marginal relief may be due in accordance with section 19.

79.This section does not include a requirement that the company should make a claim for the relief. See Change 1 in Annex 1.

Section 19: Marginal relief

80.This section is the first of five that set out the rules for marginal relief. It is based on section 13 of ICTA.

81.Two conditions for the reliefare the same as the first two conditions for entitlement to the small profits rate (see the commentary on section 18). But for the purposes of this relief there are two further conditions. The “augmented profits” (defined in section 32) of the company need to fall between:

  • the “lower limit” (in ICTA, the “lower relevant maximum amount”); and

  • the “upper limit” (in ICTA, the “upper relevant maximum amount”).

82.The limits are set out in section 24.

83.Finally, if this section is to apply, the company must have no ring fence profits.

84.This section does not include a requirement that the company should make a claim for the relief. See Change 1 in Annex 1.

Section 20: Company with only ring fence profits

85.This section is the second of five that set out the rules for marginal relief. It is based on section 13 of ICTA, section 3 of FA 2007 and section 7 of FA 2008.

86.Three conditions for the reliefare the same as those for entitlement to marginal relief (see the commentary on section 19). But for the purposes of this section the augmented profits must include only ring fence profits.

87.Subsection (2) applies the “ring fence fraction” instead of the standard fraction (see section 19(2)).

Section 21: Company with ring fence profits and other profits

88.This section is the third of five that set out the rules for marginal relief. It is based on section 3 of FA 2007 and section 7 of FA 2008.

89.Three conditions for the reliefare the same as those for entitlement to marginal relief (see the commentary on section 19). But for the purposes of this section the augmented profits include both ring fence and other profits.

90.Subsection (2) gives a deduction in two parts: one relating to the ring fence amount (see section 22); the other relating to the remaining amount (see section 23).

Section 22: The ring fence amount

91.This section is the fourth of five that set out the rules for marginal relief. It is based on section 3 of FA 2007 and section 7 of FA 2008.

92.The section calculates the marginal relief available on the ring fence amount. It uses the appropriate part (“UR”) of the upper limit.

Section 23: The remaining amount

93.This section is the fifth of five that set out the rules for marginal relief. It is based on section 3 of FA 2007 and section 7 of FA 2008.

94.The section calculates the marginal relief available on the remaining (non-ring fence) amount. It uses the appropriate part (“UZ”) of the upper limit.

Section 24: The lower limit and the upper limit

95.This section sets the limits for small profits rate and marginal relief. It is based on section 13 of ICTA.

96.Subsection (2) deals with the straightforward case where there are no associated companies.

97.Subsection (3) deals with the case where there are associated companies. The limits are divided equally between the companies.

98.Subsection (4) reduces the limits if the company’s accounting period is less than 12 months long.

Section 25: Associated companies

99.This section defines “associated company” for the purpose of section 24. It is based on section 13 of ICTA.

100.Subsection (1) sets out the position if a company is an associated company for any part of an accounting period. It counts as an associated company for the whole of the accounting period.

101.Subsection (2) clarifies the position if more than one company is an associated company for different parts of an accounting period.

Example

  • Company A claims small profits rate for its accounting period from 1 January2009 to 31 December 2009.

  • A is associated with B in the period 1 January 2009 to 31 March 2009.

  • A is associated with C in the period 1 October 2009 to 31 December 2009.

A has two associated companies in its accounting period ending on 31 December2009, even though it never has more than one at any time.

102.Subsection (3) is the rule that associated companies that carry on no business are ignored. The rule is modified by subsection (6).

103.Subsection (4) is the main rule for determining whether or not companies are “associated”, based on “control”.The rule is modified by subsection (6).

104.Subsection (5) defines “control” for the purpose of subsection (4). The definition is based on section 450 but is modified by subsection (6).

105.Subsection (6) introduces the special rules for associated companies in the next five sections.

Section 26: Section 25(3): treatment of certain non-trading companies

106.This section is the rule that passive non-trading companies are ignored as associated companies. It is new. See Change 2 in Annex 1.

107.Subsection (1) sets out the three conditions for the treatment in the section. The first two conditions reproduce the main words of SP5/94. The third condition introduces the concept of a “passive company”, defined in subsection (3).

108.Subsection (2) is the result if the conditions are met: the company is treated as being within section 25(3) and is ignored for the purposes of claims for small profits rate by any company with which it is associated.

109.Subsection (3) reproduces the conditions in SP5/94 for a company to qualify as a passive company.See Change 2 in Annex 1 for a fuller discussion of the conditions.

110.Subsection (4) sets out the condition that any dividends received from subsidiaries are distributed in full by the holding company.

111.Subsection (5) makes clear that a company that receives, or is due to receive, a dividend is not treated on that ground alone as having assets.

Section 27: Attribution to persons of rights and powers of their partners

112.This section modifies the rule in section 25(4) and (5) about “control”. It is based on section 13(4), (4A), (4B) and (4C) of ICTA.

113.Section 451 attributes to a person rights that belong to any associate of that person. In accordance with section 448, “associate” includes a (business) partner.

114.This section relaxes the rule about attributing a partner’s rights unless tax planning arrangements are in place.

Section 28: Associated companies: fixed-rate preference shares

115.This section is the rule that some fixed-rate preference shares are ignored in determining whether one company controls another. It is new. See Change 3 in Annex1.

116.Subsection (1) sets out the three conditions for the special treatment. The second condition includes a reference to the company which holds the shares taking part in the management or conduct of the issuing company’s business. It is unlikely that a company (rather than an individual) would do this but the section retains this part of the condition for the relaxation to apply.

117.Subsection (2) sets out a definition of “fixed-rate preference shares”. ESC C9 refers to the definition in Schedule 28B to ICTA, which deals with venture capital trusts. The definition here reproduces the rewritten version in section 313(7) of ITA.

Section 29: Association through a loan creditor

118.This section is the rule that some loan creditors are ignored in determining whether one company controls another. It is new. See Change 3 in Annex 1.

119.Subsection (1) deals with the simple case of a loan creditor which would otherwise be associated with the company to which it has lent money. The subsection sets out the three conditions that have to be met if the loan creditor is to be ignored. The second condition (“no connection”) is amplified in subsection (5).

120.Subsections (2) and (3) deal with the more complex case of two companies which would otherwise be associated with each other because they are controlled by the same loan creditor. The condition in subsection (2)(b) is amplified in subsection(5).

121.Subsection (4) defines “control” for the purpose of subsection (2)(a). The definition is based on section 450 but is modified by subsection (1) of this section (to eliminate some loan creditors) and sections 27 (to prevent attribution of some partners’ rights), 28 (to eliminate some fixed-rate preference shares) and 30 (to eliminate some trustee companies).

122.Subsection (5) sets out the condition in ESC C9 that there is “no past or present connection” between the company and the loan creditor. It reflects the strict interpretation that is used in practice in applying the concession.

123.Subsection (6) imports the definition of “loan creditor” from section 453. Section 453(4) prevents a bank from being treated as a loan creditor just because of an ordinary bank loan.

Section 30: Association through a trustee

124.This section deals with some holdings by trustees. It is new. See Change 3 in Annex 1.

125.Subsections (1) and (2) deal with the case of two companies which would otherwise be associated with each other because they are controlled by the same trustees. If the trustees controlling each companyare treated as different “distinct” persons by section 474(1) of ITA the companies are not controlled by the same person and this section does not apply.

126.If this section applies,the rights or powers of the trustees are to be ignored in determining whether the companies are associated with each other. This treatment applies only if there is no other connection between the companies (see subsection (1)(b)).

127.Subsection (3)(b) means that subsection (1)(b) restatesthe condition in ESC C9 that there is “no past or present connection” between the companies. It reflects the strict interpretation that is used in practice in applying the concession.

Section 31: Power to obtain information

128.This section allows an officer of HMRC to require information for the purposes of this Part. It is based on Schedule 12 to FA 1989.

129.Subsection (1) is an information power about shareholders.

130.Subsections (3) and (4) are information powers about bearer securities.

Section 32: Meaning of “augmented profits”

131.This section defines the augmented profits which are compared with the limits in sections 19 and 24 to determine whether or not small profits rate is due. It is based on section 13 of ICTA.

132.In section 13 of ICTA the word “profits” is used in a special sense to mean the total of what are usually referred to as profits and some franked investment income. This may lead to confusion. So this section uses “taxable total profits” (see section 4(2)) to mean the amount on which corporation tax is charged and introduces a new term “augmented profits” which is used only in this Part.

133.Subsection (1) is the basic definition of “augmented profits”. In determining whether a company’s profits are “small” for the purposes of this Part, dividends receivedare taken into account, even though those dividends are not charged to corporation tax.

134.Subsection (2) excludes what is usually known as “group income”. This comprises:

  • distributions from companies in the same group as the receiving company; and

  • distributions from trading companies (“quasi-subsidiaries” – defined in subsection (3)) which are owned by a consortium of which the receiving company is a member.

135.The meanings of “trading company” and “relevant holding company” in subsection (2)(b) are set out in section 33(4).

Section 33: Interpretation of section 32(2) and (3)

136.This section expands the meaning of “51% subsidiary”. It is based on section 13ZA of ICTA.

137.Subsection (1) is similar to the group relief rule (see section 151). It ensures that the tax relationship between companies is not based simply on share-holding if the share-holding does not represent the true economic relationship. So the subsection looks also at the equity holders’ entitlement to profits and assets. “Equity holders” are defined in subsection(7) by reference to the group relief rules (see Chapter 6 of Part 5 of this Act).

138.Subsection (2) makes clear that the basic test for being a 51% subsidiary in section 1154(2) of this Act still applies.

139.Subsection (3) is similar to the group relief rule (see section 151). Shares held by a share dealer are ignored.

140.Subsection (4) provides the meaning of “trading company” for the quasi-subsidiaries in section 32(2)(b).

141.Subsections (5) and (6) are similar to the group relief rule (see section 153). But subsection (5)(b) and (c) includes an economic test for the 5% ownership requirement in a consortium.

Section 34: Close investment-holding companies

142.This section defines the close investment-holding companies which are excluded from small profits rate by sections 18(b) and 19(1)(b). It is based on sections 13A and 839(8) of ICTA.

143.The rule about close investment-holding companies is an anti-avoidance rule. Without it, a wealthy individual could transfer investments to a company where undistributed income would bear tax at a rate lower than the individual’s marginal rate.

144.The section uses the expression “candidate company” to describe the company which is being considered to determine whether or not it is a close investment-holding company.

145.Subsection (1) defines close investment-holding companies by exclusion. All close companies are close investment-holding companies unless they exist for “permitted purposes”.

146.Subsection (2) sets out the permitted purposes. The first two purposes (paragraphs (a) and (b)) are concerned with the activities (broadly, trades and property businesses) of the candidate company itself. The last four purposes (paragraphs (c) to (f)) allow a candidate company to qualify as having a permitted purpose by reference to “qualifying companies” (and some others) with which it is closely connected.

147.Subsection (3) excludes from the property businesses in subsection (2)(b) letting to individuals who have a close connection with the candidate company.

148.Subsection (4) extends the purpose in subsection (2)(c) so that it covers not only investment in a qualifying company but also investment in another company which itself invests in a qualifying company.

149.Subsection (5) ensures that a company which exists for a permitted purpose does not become a close investment-holding company simply because it is wound up. But this special treatment lasts for only one accounting period.

150.Subsection (6) defines “qualifying company” by reference to the same purposes of trades and property businesses as apply to the candidate company in subsection (2)(a) and (b).

151.Subsection (7) provides two definitions for the section. In this section some permitted purposes depend on control of the candidate company. ESC C9 would operate against taxpayer companies in this context and so does not apply. It follows that the relaxations in sections 28 to 30 do not apply here and the meaning of “control” is different from that in section 25(4).

Part 4: Loss relief

Overview

152.This Part contains rules relating to various reliefs available for losses.

153.The reliefs are set out in separate Chapters.

154.The source legislation dealt with the carry forward of trade losses (section 393 of ICTA) before set off against total profits of the same accounting period or carry back (section 393A of ICTA). In practice companies tend to prefer to set losses off against total profits or carry them back rather than carry them forward. The rewritten legislation reflects this practice by dealing first with the set-off against total profits and carry back, from section 37 onwards, and then turning to the carry forward of losses in section 45.

Chapter 1: Introduction
Section 35: Overview of Part

155.This section provides an overview of the Part. It is new.

156.Subsection (3) refers to section 47 of CTA 2009 which is reproduced here in order to avoid the need to cross-refer to that Act:

(1)

The same rules apply for corporation tax purposes in calculating losses of a trade as apply in calculating profits.

(2)

This is subject to any express provision to the contrary.

Chapter 2: Trade losses
Overview

157.This Chapter deals with relief for trading losses.

Section 36: Introduction to Chapter

158.This section provides an overview of the Chapter and also includes provision about the meaning of references to “trade” and “carrying on a trade” . In particular it carries forward the effect of sections 6(4)(b) and 834(2) of ICTA in providing that a “trade” includes an office. It is based on sections 6(4), 393(10), 393A(9) and 834(2) of ICTA.

Section 37: Relief for trade losses against total profits

159.This section explains how a loss in a trade may be relieved against total profits of the same or earlier periods. It is based on sections 6(4), 393A(1), (2), (3), (10) and 834(2) of ICTA.

160.Subsection (3)(b) establishes that a loss in trade may be carried back to the twelve month period prior to the accounting period in which the loss arose. The exceptions to this rule, where the carry–back period is extended, are set out in sections 39 to 42. These exceptions affect companies either rarely or not at all.

161.Subsection (4) deals with the order of set-off of losses claimed under subsection(3). Such losses must first be set against total profits of the loss making period before, if the claim so requires, being carried back to earlier periods. Where it is possible to carry a loss back for more than one period (see sections 39 to 42) then the loss must be set against total profits of the most recent period before the balance of the loss can be carried back to the period preceding that period and so on.

162.Subsections (5) and (6) prohibit the carry back of losses from what used to be Case V trades but what are now referred to as trades “carried on wholly outside the United Kingdom”. The courts established that a Case V trade was one that was carried on wholly outside the United Kingdom.

163.Ogilvie v Kitton (Surveyor of Taxes) (1908), 5 TC 338,Court of Exchequer (Scotland) determined that where a trade is “carried on” depends not only on the location of the day-to-day transactions of the trade but also on where the management and control of the company takes place. In the case of a company where the directors are responsible for management and control and that management and control function is exercised in the United Kingdom it is very unlikely that the company has a trade “carried on wholly outside the United Kingdom”.

164.There is, however, one situation where a company managed and controlled in the United Kingdom may have a trade carried on wholly outside the United Kingdom. That is where the company is a partner in a partnership and the business of the partnership is managed and controlled abroad. By using the words “carried on” in the section the link with existing case law has been maintained.

165.Subsection (7) sets out the time limits for making a claim. The time limit may be extended by an officer of Revenue and Customs. See Change 5 in Annex 1.

166.Subsection (9) provides that relief is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts. Examples of such restrictions or modifications are to be found in:

  • the rest of the Chapter;

  • Chapter 3 of this Part (relief for losses in cases involving limited partnerships and limited liability partnerships);

  • Section 304(relief for losses in relation to oil activities);

  • Section 944 (modified application of Chapter 2 of Part 4 in relation to transfers of trade without a change in ownership); and

  • Chapter 3 of Part 22 (relief for losses if company is a member of a partnership and certain arrangements for transferring relief are in place).

167.Subsection (2D) of section 393A has not been rewritten. The subsection was a signpost to section 393B where certain provisions relating to losses arising in a ring fence trade applied. The structure of the rewritten section makes such a signpost unnecessary.

168.Subsections (7), (7A) and (8) of section 393A have not been rewritten. These subsections dealt with excess trade charges. It is no longer possible for trade charges to arise and these subsections were therefore redundant.

169.The definition of charges in section 338A of ICTA was limited to qualifying donations to charity. To be added to trade losses (section 393(9) of ICTA) the charges must have beenpayments made wholly and exclusively for the purposes of the trade. Section 338A(3) stipulated that no payment that was deductible in computing profits should be treated as a charge. If a payment was made wholly and exclusively for the purposes of the trade it would be allowable as a deduction in computing profits. Hence, it could not be a charge.

Section 38: Limit on deduction if accounting period falls partly within 12 month period

170.Where a loss is being relieved against the profits of an earlier accounting period this section limits the relief available if that period falls partly within the twelve month period prior to the loss-making period. It is based on section 393A(2) of ICTA.

171.The effect of this section can be illustrated as follows:

Example

Accounting period 312m01/01/11 to 31/12/11Loss in trade£24,000
Accounting period 28m01/05/10 to 31/12/10Total profits£12,000
Accounting period 112m01/05/09 to 30/04/10Total profits£15,000

The twelve month period prior to the loss making period is 01/01/10 to 31/12/10. Accounting period 2 falls wholly within this period and the loss in trade is sufficient to cover all of the total profits of this period. £12,000 of the loss in trade remains to be relieved. The proportion of Accounting period 1 that falls within the relevant twelve month period is 4/12. 4/12 of the total profits of Accounting period 1 is £5,000. Accordingly the amount to be deducted under section 37(3) cannot exceed £5,000. This means that £7,000 of the loss in trade arising in Accounting period 3 cannot be relieved under section 37.

Section 39: Terminal losses: extension of periods for which relief may be given

172.This section extends the length of the period referred to in section 37(3)(b) when a company ceases to trade and makes a terminal loss. It is based on section 393A(2A) and (2B) of ICTA.

173.The entitlement to make a claim remains an entitlement under section 37. If a loss has already been fully utilised under that section there is no possibility of relieving that loss again by virtue of the fact that it is a terminal loss within section 39.

Section 40: Ring fence trades: extension of periods for which relief may be given

174.This section extends the length of the period referred to in section 37(3)(b) when a company makes a loss in a ring fence trade and certain conditions are met. It is based on section 393A(2A), (2C) and (12) of ICTA.

175.The definition of a “ring fence trade” is to be found in section 162 of CAA. Broadly, such a trade is one concerned with oil extraction activities.

176.Subsection (1)(b) provides that in the loss-making period the company must have received an allowance under section 164 of CAA. Such an allowance is given in relation to expenditure incurred on the decommissioning of plant or machinery used in a ring fence trade.

Section 41: Sections 39 and 40: transfers of trade to obtain relief

177.This section prevents the transfer of terminal losses in certain circumstances. It is an anti-avoidance provision. It is based on section 393A(2E) of ICTA.

Section 42: Ring fence trades: further extension of period for relief

178.This section extends the period of relief for ring fence trades in certain circumstances. It is based on section 393B of ICTA.

179.For the section to apply a claim must have been made under section 39 (terminal losses: extension of periods for which relief may be given) or section 40 (ring fence trades: extension of periods for which relief may be given). The normal relief period is therefore already extended from twelve months to three years.

180.If there are insufficient profits in the three year relief period this section allows the unrelieved loss to be carried back to earlier periods.

181.The intention is to provide relief for losses arising as a consequence of incurring expenditure on decommissioning costs.

182.If decommissioning expenditure is incurred and a loss arises after the ring fence trade has ceased then no claim to relief would at first sight appear to be possible. A claim under section 39 would fail as the loss did not arise in an accounting period that commenced in the final twelve months of a company’s trade. A claim under section 40 would fail as the loss did not arise in a ring fence trade (that trade having ceased). But that analysis of section 39 overlooks section 165 of CAA. This treats post-cessation decommissioning expenditure as having been incurred in the chargeable period in which the trader ceased to carry on the trade. As a result a claim under section 39 (terminal losses: extension of periods for which relief may be given) is possible.

Section 43: Claim period in case of ring fence or mineral extraction trades

183.This section extends the time limit for making claims under section 37 where the company has carried on a ring fence trade or a mineral extraction trade and certain conditions are met. It is based on section 393A(11) to (12) of ICTA.

Section 44: Trade must be commercial or carried on for statutory functions

184.This section denies relief in relation to losses arising from trades which are not commercial. It is based on section 393A(3) and (4) of ICTA.

185.Subsection (1) refers to the making of a profit in the trade. “Profit” in this instance, as the context suggests, has its ordinary commercial meaning.

186.Subsection (2) provides for the case where the trade is carried on as part of a larger undertaking. In such a case the larger undertaking (that is, the undertaking as a whole) may be carried on with a view to the realisation of profits even if the trade itself is not.

187.In subsection (4)the reference to an Act includes Acts of the Scottish Parliament. See Change 6 in Annex 1.

Section 45: Carry forward of trade loss against subsequent trade profits

188.This section provides for trade losses which have not been relieved in accordance with section 37 to be carried forward and relieved against future trade profits. It is based on section 393 of ICTA.

189.Subsection (6) provides that relief is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts. Examples of such restrictions or modifications are to be found in:

  • the rest of the Chapter;

  • Chapter 7 of this Part (write-off of government investment in a company); and

  • Chapter 3 of Part 22 (relief for losses if company is a member of a partnership and certain arrangements for transferring relief are in place).

190.Subsection (9) of section 393 has not been rewritten. The subsection dealt with excess trade charges. It is no longer possible for trade charges to arise and this subsection is therefore redundant.

191.The definition of charges in section 338A of ICTA was limited to qualifying donations to charity. To be added to trade losses (section 393(9) of ICTA) the charges must have beenpayments made wholly and exclusively for the purposes of the trade. Section 338A(3) stipulated that no payment that was deductible in computing profits should be treated as a charge. If a payment was made wholly and exclusively for the purposes of the trade it would be allowable as a deduction in computing profits. Hence, it could not be a charge.

Section 46: Use of trade-related interest and dividends if insufficient trade profits

192.This section provides that certain interest and dividends are treated as trade profits if the profits are otherwise insufficient to use some or all of a carry-forward trade loss. It is based on section 393(8) of ICTA.

193.It is only interest and dividends that would otherwise be treated as receipts of the trade that can attract this treatment.

Section 47: Registered industrial and provident societies

194.This section extends the scope of section 45 for registered industrial and provident societies. It is based on ESCC5.

195.The classes of income to which the section applies differ slightly from those in the concession. See Change 7in Annex 1.

Section 48: Farming or market gardening

196.This section restricts, in certain cases, loss relief in respect of losses arising from a trade of farming or market gardening. It is based on section 397(2) to (8) of ICTA.

197.It is the first of a group of sections (sections 48 to 51) which deal with the potential restriction of losses where the losses arise in respect of a trade of farming or market gardening. It establishes the basic rule. None of these sections applies to trades other than farming or market gardening.

198.Subsection (2) sets out the circumstances in which loss relief is restricted. Broadly, this happens once losses have arisen for six successive years.

199.Subsection (3) sets out the exceptions to the restriction. Subsection (3)(b) provides that if the trade meets the “reasonable expectation of profit” test then the loss restriction does not apply.

200.Definitions of the terms “farming” and “market gardening” are to be found in section 1125.

Section 49: Reasonable expectation of profit

201.This section sets out the “reasonable expectation of profit” test which, if met, enables relief to be given that would otherwise be restricted under section 48. It is based on section 397(3) and (5) of ICTA.

202.“Profit” in section 49 refers to profit in its ordinary commercial sense.

Section 50: Cessation of trades

203.This section sets out the circumstances under which a trade is treated as having ceased. This is necessary in order to determine the length of the period during which losses have arisen in that trade for the purposes of section 48. It is based on section 397(8), (9) and (10) of ICTA.

204.Subsection (4) sets out the rules for determining whether certain individuals or companies are to be treated as the same person for the purposes of determining if subsection (1) applies.

Section 51: Companies treated as same person as individual

205.This section explains how to calculate losses for the purposes of section 48 where a trade has been transferred from an individual to a company but that individual and that company are treated as the same person by virtue of section 50. It is based on section 397(10) of ICTA.

206.Subsection (4) adapts rules in section 70 of ITA and section 203 of ITTOIA to deal with cases where profits or losses have not actually been calculated by reference to tax years. In such cases, the calculation of profits or losses for tax years is an arithmetical exercise, involving apportioning (on a time basis) the profits or losses of periods falling partly within the tax year, and combining these with the profits or losses of any periods falling completely within the tax year.

Section 52: Dealings in commodity futures

207.This section denies relief where losses have been made in a trade of dealing in commodity futures and certain other conditions are met. It is an anti-avoidance provision. It is based on section 399(2), (3) and (5) of ICTA.

208.Subsection (5) refers to a “recognised futures exchange” as defined in section 288(6) of TCGA. That subsection is reproduced here to avoid the need to cross-refer to that Act.

(6)

In this Act “recognised futures exchange” means the London International Financial Futures Exchange and any other futures exchange which is for the time being designated for the purposes of this Act by order made by the Board.

Section 53: Leasing contracts and company reconstructions

209.This section restricts relief in respect of certain leasing arrangements. It is anti-avoidance legislation. It is based on section 395 of ICTA.

Section 54: Non-UK resident company: receipts of interest, dividends or royalties

210.This section prohibits the deduction of losses under section 37 or45 or under section 436A of ICTA to the extent that such losses arise to a non-UK resident company as a result of excluding certain kinds of tax exempt income from the company’s profits. It is based on section 808 of ICTA.

211.The source legislation was in Part 18 of ICTA (double taxation relief). The rewritten section is with other sections which restrict or otherwise affect the use of losses.

212.A non-UK resident company may utilise any losses that arise under section 37 or 45 provided that those losses are calculated on the basis that receipts of tax-exempt interest, dividends or royalties are included in the company’s profits.

Chapter 3: Limited partners and members of limited liability partnerships
Section 55: Introduction to Chapter

213.This section provides an overview of the Chapter. It is new.

214.The Chapter applies to companies that are either limited partners or member of limited liability partnerships. It limits the amount of relief that may be given under section 37(other than against profits of the trade) or in respect of group relief. Carry-forward losses under section 45 are not affected.

215.Broadly, relief given must not exceed the amount that the company stands to lose commercially.

216.The source legislation expressed the amount that a partner stands to lose commercially by reference to the partner’s contribution to the trade that a partnership carries on (the “contribution to the trade”). But, in such cases, the amount that a partner stands to lose commercially is more likely to be reflected in the partner’s contribution to the partnership that carries on the trade.

217.So this Chapter makes a change by expressing the amount that a partner stands to lose commercially in terms of the partner’s contribution to the partnership (the “contribution to the firm”). The change to “contribution to the firm” requires that the possibility of there being partnerships with more than one trade is addressed; and, for consistency with other partnerships, the possibility of a limited liability partnership carrying on more than one trade is also addressed.

218.This change also makes a number of clarifications as to what is included in a partner’s contribution. See Change 8 in Annex 1.

Section 56: Restriction on reliefs for limited partners

219.This section restricts certain reliefs available to a company that is a limited partner to the amount of the company’s contribution to the firm. It is based on section 118 of ICTA.

220.Subsection (3) refers to a “contribution to the firm” whereas the source legislation refers to a “contribution to the trade”. See Change 8 in Annex 1.

221.Subsection (6) sets out how to apply subsection (4) and so limit relief if the firm is carrying on more than one trade. See Change 8 in Annex 1.

Section 57: Meaning of “contribution to the firm”

222.This section defines “contribution to the firm” for the purposes of section 56. It is based on section 118(3) of ICTA.

223.The subsections set out the steps necessary to calculate the “contribution to the firm”. The source legislation refers to a “contribution to the trade”. This change and some points of clarification are covered in the change note. See Change 8 in Annex 1.

224.Subsection (5) explains how amounts that have been drawn out or received back by the company but have been taxed as profits of a trade are to be excluded from the calculation. See Change 9 in Annex 1.

Section 58: Meaning of “limited partner”

225.This section defines “limited partner” for the purposes of sections 56 and 57. It is based on section 118(2) of ICTA.

226.A limited partner of a limited partnership registered under the Limited Partnership Act 1907 is someone who is not entitled to take part in the management of the firm’s business and is not liable for the debts or obligations of the firm beyond a certain limit. A limited partner of any other firm is someone who is similarly not entitled to take part in management and not liable for debts or obligations in accordance with the rules applying to the firm in question.

227.Subsection (4) is introduced as part of drafting in terms of a company’s “contribution to the firm” in place of “contribution to the trade”. See Change 8 in Annex 1.

Section 59: Restriction on relief for members of LLPs

228.This section restricts certain reliefs available to a company that is a member of a limited liability partnership (LLP) to the amount of the company’s contribution to the LLP. It is based on sections 118 and 118ZB of ICTA.

229.Subsection (6) sets out how to apply subsection (4) and so limit relief if the firm is carrying on more than one trade. See Change 8 in Annex 1.

Section 60: Meaning of “contribution to the LLP”

230.This section defines “contribution to the LLP” for the purposes of section 59. It is based on sections 118ZB and 118ZC of ICTA.

231.An LLP formed under the Limited Liability Partnership Act 2000 is an entity with separate legal personality. That Act defines what is meant by contribution to a limited liability partnership.

232.Subsection (3) makes explicit the fact that capitalised undrawn profits are to be included in a company’s contribution. See Change 8 in Annex 1.

233.Subsection (6) explains how amounts that have been drawn out or received back by the company but have been taxed as profits of a trade are to be excluded from the calculation. See Change 9 in Annex 1.

Section 61: Unrelieved losses brought forward

234.This section provides that relief may be given in a later accounting period for losses restricted in accordance with section 59, if certain conditions are met. It is based on section 118ZD of ICTA.

Chapter 4: Property losses
Overview

235.This Chapter deals with property business losses both from UK property businesses and from overseas property businesses.

Section 62: Relief for losses made in UK property business

236.This section provides relief for losses arising from a UK property business. It is based on sections 6(4), 392A and 834(2) of ICTA.

237.“UK property business” is defined in section 205 of CTA 2009. This definition is reproduced here in order to avoid the need to cross-refer:

A company’s UK property business consists of—

(a)

every business which the company carries on for generating income from land in the United Kingdom, and

(b)

every transaction which the company enters into for that purpose otherwise than in the course of such a business.

238.Subsections (4) and (5) provide that any unused losses are to be carried forward and treated as UK property business losses of later periods. In other words such unused losses may be set against total profits of later periods.

239.Subsection (6) provides that relief is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts. Examples of such restrictions or modifications are to be found in:

  • Sections 56 (restriction on relief for limited partners), 57 (meaning of “contribution to the firm”) and 58 (meaning of “limited partner”);

  • Chapter 7 of this Part (write off of government investment in a company).

Section 63: Company with investment business ceasing to carry on UK property business

240.This section provides a relaxation of the loss carry-forward rules where a company ceases to carry on a UK property business but continues to carry on an investment business. It is based on section 392A(3) of ICTA.

241.A company with investment business is defined in section 1218 of CTA 2009. This definition is reproduced here to avoid the need to cross-refer:

“company with investment business” means a company whose business consists wholly or partly of making investments.

242.Subsection (3) refers to an unrelieved UK property business loss being carried forward to periods beyond the accounting period subsequent to that in which the UK property business ceased. Once the loss has been carried forward to the accounting period following the cessation period it loses its character as an unrelieved loss and becomes an expense of management. Hence there is no difficulty in carrying the amount forward to later accounting periods providing the investment business continues.

Section 64: UK property business to be commercial or carried on for statutory functions

243.This section provides that sections 62 and 63 only apply when a UK property business is carried on on a commercial basis or in the exercise of functions conferred by or under an Act. It is based on section 392A(5) to (7) of ICTA.

244.The reference to an Act in subsection (1) includes an Act of the Scottish Parliament. See Change 6 in Annex 1.

245.The reference to “profit” in subsection (2) is to profit in its ordinary commercial sense.

Section 65: UK furnished holiday lettings business treated as trade

246.This section provides that a UK furnished holiday lettings (UKFHL) business is treated as a trade for loss relief purposes. It is based on section 503 of ICTA.

247.If a company carries on a UKFHL business and is a member of a partnership that also carries on a UKFHL business then the two businesses must be accounted for separately as section 1270(2) of CTA 2009 provides that the firm’s UK property business cannot include business or transactions undertaken by the firm’s individual partners.

Section 66: Relief for losses made in overseas property business

248.This section sets out the rules for relieving losses made in an overseas property business. It is based on section 392B of ICTA.

249.“Overseas property business” is defined in section 206 of CTA 2009. This definition is reproduced in order to avoid the need to cross-refer:

(a)

every business which the company carries on for generating income from land outside the United Kingdom, and

(b)

every transaction which the company enters into for that purpose otherwise than in the course of such a business.

250.Subsection (3) provides that a loss from an overseas property business may be carried forward and set against future profits of that business. Such profits do not include chargeable gains.

251.Subsection (6) provides that relief is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts. Examples of such restrictions or modifications are to be found in:

  • Section 60 (meaning of “contribution to the LLP”); and

  • Chapter 7 of this Part (write off of government investment in a company).

Section 67: Overseas property business to be commercial or carried on for statutory functions

252.This section provides that section 66 only applies when an overseas property business is carried on on a commercial basis or in the exercise of functions conferred by or under an Act. It is based on sections 392A(5) to (7) and 392B(2) of ICTA.

253.The reference to an Act in subsection (1) includes an Act of the Scottish Parliament. See Change 6 in Annex 1.

254.Subsection (1) also refers to functions conferred by the law of a territory outside the United Kingdom. See Change 10 in Annex 1.

255.The reference to “profit” in subsection (2) is to profit in its ordinary commercial sense.

Chapter 5: Losses on disposal of shares
Overview

256.This Chapter provides that, if an investment company incurs an allowable loss for the purposes of corporation tax on chargeable gains on the disposal of ordinary shares in a qualifying trading company for which it has subscribed, it may claim to set off the loss against its income for corporation tax purposes. It is based on Chapter 5A of Part 13 of ICTA.

Section 68: Share loss relief

257.This section introduces share loss relief. It is based on sections 573(1) and 575(1) and (3) of ICTA.

258.Subsection (1) outlines the basic structure of the relief, namely that a company (“the investor company”) is eligible for share loss relief if the following conditions are met:

  • the investor company has “subscribed for” shares in another company (“the investee company”) (see the commentary on section 73),

  • the investee company is a “qualifying trading company” (see the commentary on section 78),

  • the investor company incurs an allowable loss for the purposes of corporation tax on chargeable gains on the disposal, and

  • the investor company meets the eligibility conditions (see the commentary on section 69).

259.Subsection (2) provides that relief is only available if the disposal is of one of the kinds specified in paragraphs (a) to (d).

260.Subsection (2)(a) is based on section 575(1)(a) of ICTA which specifies as one of the kinds of disposal:

  • a disposal by way of a bargain made at arm’s length for full consideration.

261.The words “for full consideration” have been omitted from subsection (2)(a) on the basis that they add nothing. See Change 11in Annex 1.

Section 69: Eligibility conditions

262.This section sets out the conditions in relation to the investor company which must be met in order for the investor company to be eligible for share loss relief. It is based on section 573(1) and (5) of ICTA.

263.This section provides that the investor company must be an investment company (as defined in section 90) on the date of the disposal and for a continuous period ending on that date and must not be associated with the investee company or any member of its group.

Section 70: Entitlement to claim

264.This section deals with the making of a claim for share loss relief. It is based on section 573(2) and (3) of ICTA.

265.Share loss relief is obtained by way of a deduction in calculating the investor company’s income for corporation tax purposes.

266.Subsection (3) makes clear that the words “if the company was then an investment company”in section 573(2)(b) of ICTA require that the company is an investment company throughout the relevant accounting period.

Section 71: How relief works

267.This section explains how the loss is to be deducted from income. It is based on section 573(2), (3) and (4A) of ICTA.

268.Section 573(4) of ICTA provides that share loss relief must be claimed before any deduction for “charges on income, expenses of management or other amounts which can be deducted from or set against or treated as reducing profits of any description”.It has not been rewritten in this Chapter, but instead the order of priority is achieved in CTA 2009 and this Act in the following way.

269.Because share loss relief operates against the company’s income (see subsection (1)), it falls to be deducted at Step 1 in section 4(3), i.e. on the way to finding the amount of the company’s total profits. Charges on income, rewritten as charitable donations relief in Part 6, and expenses of management are to be deducted from the company’s total profits at Step 2 in section 4(2). See section 189(1) of this Act and section 1219(1) of CTA 2009 (as amended by Schedule 1 to this Act). For another example of a deduction from total profits, seesection 37(3) (relief for trade losses against total profits).

270.This section provides that the amount not deducted from income of the accounting period in which the loss is incurred may be deducted from the income of earlier accounting periods ending within the immediately preceding period of 12 months (see Step 2 in subsection (1)). The extent to which a deduction may be made at Step 2 from an accounting period which falls only partly within that period of 12 months is limited in accordance with section 72.

271.Subsection (6) is new. It has been included to make explicit that the balance of any allowable loss for which share loss relief is not obtained continues to be capable of being claimed as a deduction under TCGA.

Section 72: Limit on deduction if accounting period falls partly within 12 month period

272.This section applies where an accounting period ends within 12 months before the accounting period in which the loss is incurred but begins before the beginning of that 12 month period. It is based on section 573(3) of ICTA.

273.This section ensures that a deduction can only be made at Step 2 in section 71(1) from that part of the income of the accounting period that is proportionate to the part of the accounting period falling within the 12 month period.

Section 73: Subscription for shares

274.This section sets out the requirements relating to the subscription for shares in a qualifying trading company. It is based on sections 573(6) and 576K(3) of ICTA and includes a new provision relating to bonus shares.

275.Subsection (2) provides that shares are subscribed for by the investor company if they have been issued to the investor company in consideration of money or money’s worth.

276.The shares must form part of the ordinary share capital of the investee company. See the definition of “shares” in section 90 and the commentary on that section.

277.Subsection (3) is new and treats “corresponding bonus shares” issued in respect of shares which have been subscribed for as themselves having been subscribed for. See Change 12 in Annex 1.

278.Subsection (4) is new and provides that corresponding bonus shares are treated as subscribed for at the same time as the original shares were subscribed for. See Change 12 in Annex 1.

Section 74: Disposals of new shares

279.This section denies or restricts share loss relief on the disposal of shares which are identified by virtue of section 127 of TCGA with other shares previously held by the investor company, unless certain conditions are met. It is based on section 575(2) and (4) of ICTA.

280.The reference to section 87(3) at the end of subsection (2) makes clear that this section does not apply to an exchange of shares to which section 87(1) applies. See the commentary on section 87 and Change 19 in Annex 1.

Section 75: Limits on relief

281.This section deals with the calculation of the amount of share loss relief. It is based on section 576(1) of ICTA.

282.Section 576(1) of ICTA provides that, if the investor company disposes of shares for which it has subscribed and which form part of a holding, the share loss relief in relation to those shares is not to exceed the sums which would have been allowable as deductions in computing the allowable loss for the purposes of corporation tax on chargeable gains if the shares had not formed part of the holding.

283.Section 75 refines the circumstances in which the provision applies in connection with the changes in section 76 described in Change 16 in Annex 1. See Change 13 in Annex 1.

284.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 of section 76. Change 14 in Annex 1 contains a detailed explanation of why a mixed holding is defined for the purposes of section 76 in terms of a holding which includes such shares.

285.Subsection (9) extends this meaning for the purposes only of subsection (5) to cover reorganisations involving the issue of shares of a different class.

Section 76: Disposal of shares forming part of mixed holding

286.This section deals with the identification of shares disposed of where those shares form part of a “mixed holding”. It is based on section 576 of ICTA, with a number of changes.

287.Section 576 of ICTA is concerned with a holding which comprises shares for which a person has subscribed and shares which the person has acquired otherwise than by subscription.

288.Subsection (1) provides that this section applies to a holding in which some only of the shares are shares “that are not capable of being qualifying shares” (as defined in section 75(8)). See Change 14in Annex 1 which contains a detailed explanation of why a mixed holding has been defined in terms of a holding which includes such shares.

289.Subsection (2) provides that the section applies for the purpose of determining the questions:

  • whether the shares disposed of are qualifying shares (as defined in section 75); and

  • which of any qualifying shares acquired at different times are disposed of.

290.This is a change from section 576(1) of ICTA, which is not expressed to apply for the purpose of determining which of any qualifying shares are disposed of. See Change 15in Annex 1.

291.Subsection (3) introduces the rules for determining the questions in subsection (2), including in subsection (4) the application of the identification rules in sections 105 and 107 of TCGA. See Change 16in Annex 1.

292.Subsection (7) is new and puts on a statutory basis the practice under which questions which cannot be determined by the specific provisions of this section are to be determined on a just and reasonable basis. This subsection is principally required in cases where qualifying shares and shares which are not qualifying shares were acquired, or are treated as having been acquired, on the same day. See Change 16in Annex 1.

293.Subsection (8) (defining “holding”) omitssection 576(1D)(b) of ICTA, which applies subsection (4) of section 104 of TCGA. That subsection can apply only to employees and is, therefore, otiose in relation to an investment company.

Section 77: Section 76: supplementary

294.This section supplements section 76. It is new.

295.Subsection (1) determines the time of acquisition for the purposes of section 76 of shares issued in a reorganisation within the meaning of section 126 of TCGA to which section 127 of that Act applies. See Change 17in Annex 1.

296.Subsection (2) clarifies that shares held or disposed of by a nominee or bare trustee for a company are part of the company’s holding for the purposes of section 76. See Change 18in Annex 1.

Section 78: Qualifying trading companies

297.This section defines what is a qualifying trading company and introduces sections 79 to 85, which set out six specific requirements to be met by a company if it is to be a qualifying trading company. It is based on section 576A of ICTA.

298.Four of the requirements are to be met on the date of the disposal or, subject to certain conditions, at a time which is not more than three years before that date (see subsection (2)) and for a continuous period ending on that date or, subject to those conditions, at that time (see subsection (3)).

299.Two of the requirements are to be met only at or around the time of issue of the shares in respect of which the share loss relief is claimed (see subsection (4)).

Section 79: The trading requirement

300.This section sets out the first of the four requirements to be met throughout the period mentioned in section 78(3). It is based on section 576B of ICTA.

Section 80: Ceasing to meet trading requirement because of administration etc

301.This section supplements section 79 and deals with the consequences for the trading requirement of administration, receivership or winding up. It is based on section 576C of ICTA.

Section 81: The control and independence requirement

302.This section sets out the second of the four requirements to be met throughout the period mentioned in section 78(3). It is based on section 576D of ICTA.

303.Section 576D(3A) of ICTA, which applies section 839 of ICTA (connected persons) for the purposes of that section, has not been rewritten. Section 839 of ICTA is rewritten in section 1122 for the purposes of the Corporation Tax Acts and section 1176(1) applies that definition generally for the purposes of this Act.

Section 82: The qualifying subsidiaries requirement

304.This section sets out the third of the four requirements to be met throughout the period mentioned in section 78(3). It is based on section 576E of ICTA.

Section 83: The property managing subsidiaries requirement

305.This section sets out the last of the four requirements to be met throughout the period mentioned in section 78(3). It is based on section 576F of ICTA.

Section 84: The gross assets requirement

306.This section sets out the requirement to be met only at the times mentioned in section 78(4)(a). It is based on section 576G of ICTA.

Section 85: The unquoted status requirement

307.This section sets out the requirement to be met only at the time mentioned in section 78(4)(b). It is based on section 576H of ICTA.

Section 86: Power to amend requirements by Treasury order

308.This section enables the requirements in sections 79 to 85 to be amended by secondary legislation. It is based on section 576I of ICTA.

Section 87: Relief after an exchange of shares for shares in another company

309.This section and section 88 provide for continuity of the application of the requirements in sections 79 to 85 in the case of certain reconstructions which result in the issue of shares in a new company in exchange for shares in another company but do not involve any change in ownership of the underlying business. This section is based on section 576J of ICTA.

310.Subsection (3)(a) is new and resolves the apparent conflict between section 74 and this section. See Change 19 in Annex 1.

Section 88: Substitution of new shares for old shares

311.This section sets out the consequences for the application of the requirements in sections 79 to 85 of an exchange to which section 87 applies. It is based on section 576K of ICTA.

312.The words “in relation to any subsequent disposal or other event” in section 304A(4) of ICTA on which section 576K(2) of ICTA is based were inadvertently omitted from section 576K(2) by ITA. They have been included in subsection (2) in conformity with section 146(2) of ITA, also based on section 304A(4) of ICTA.

Section 89: Deemed time of issue for certain shares

313.This section determines the time of issue of corresponding bonus shares for the purposes of the provisions listed in subsection (1). It is new.

314.Subsection (2) mirrors section 73(4). See Change 20in Annex 1.

Section 90: Interpretation of Chapter

315.This section explains the meaning of expressions used in this Chapter. It is based on sections 130 and 576L of ICTA.

316.Subsection (1) includes the definition of “corresponding bonus shares”. Subsection (2) amplifies that definition. See Change 12 in Annex 1.

317.The definition of “investment company” is set out in full in subsection (1) rather than by cross–referring to and modifying the definition in section 130 of ICTA. References to savings banks and banks for savings have been omitted. See Change 21in Annex 1.

318.Subsection (7) is new and clarifies that the date of disposal is the time when the disposal is made or treated as made for the purposes of corporation tax on chargeable gains. See Change 22in Annex 1.

Chapter 6: Losses from miscellaneous transactions
Overview

319.This Chapter deals with loss relief in respect of miscellaneous transactions.

Section 91: Relief for losses from miscellaneous transactions

320.This section provides relief for losses arising from transactions that, had they resulted in gains, would have been treated as miscellaneous income. It is based on section 396 of ICTA.

321.Subsections (4), (5) and (6) ensure that such losses may only be relieved against miscellaneous income.

Chapter 7: Write–off of government investment
Overview

322.This Chapter restricts losses where there has been a write-off of an amount of government investment in a company.

Section 92: Loss relief to be reduced if government investment is written off

323.This section provides that if an amount of government investment in a company is written off that company’s carry-forward losses are restricted by the amount written off. It is based on section 400(1) and (10) of ICTA.

Section 93: Groups of companies

324.This section sets out the further rules that apply if section 92 applies and the company is a member of a group of companies. It is based on section 400(5) and (10) of ICTA.

325.In these circumstances subsection (2) provides that the restriction may be to the carry-forward losses of any of the group companies provided that the restriction is on a just and reasonable basis. For example, if the government investment had been in a holding company and that company had lent the money to a subsidiary then it would be appropriate to restrict the carry-forward losses of the subsidiary.

Section 94: Cases in which government investment is written off

326.This section sets out the three circumstances which constitute a write-off of government investment. It is based on section 400(7), (8), (9) and (10) of ICTA.

Section 95: Meaning of “carry-forward losses”

327.This section defines the five types of “carry-forward losses”. It is based on section 400(2) to (4) of ICTA.

328.Subsection (2) provides that certain amounts are not to be included in the calculation of “carry-forward losses”. The effect of this is to limit the reduction of loss relief provided for by section 92.

329.Subsection (4) sets out the order in which losses are to be set off against the various “carry-forward losses” set out at subsection (1).

Section 96: Interaction with other tax provisions

330.This section ensures that a company is not prevented from deducting an amount in calculating its profits of a trade simply because an amount of government investment in the company has been written off. It is based on section 400(6) and (9A) of ICTA.

Part 5: Group relief

Overview

331.This Part sets out the rules for group relief.

332.In the diagrams to the right of the text of this commentary, surrendering companies are shown in black; claimant companies are shown in white; and other companies are shown in grey.

Groups

333.The basic idea of group relief is to allow an enterprise to be taxed as a single unit even if it is carried on by more than one company. So, in the simplest case, a loss made by a parent company (P) may be set off against the profits of a wholly-owned subsidiary (S). Similarly, a loss made by the subsidiary may be set off against the parent’s profits.

334.If one company is to surrender its losses to another, the two companies must be in the same group. In the case of a simple parent/subsidiary relationship, the definition in section 152 specifies that one company must be a “75% subsidiary” of the other.

335.In a less simple case, more than two companies may be involved. The group comprises all the companies that are 75% subsidiaries of a parent company, and the parent itself. For this purpose Chapter 3 of Part 24 of this Act makes clear that the necessary degree of ownership may be indirect. So, for instance, if P owns 75% of the shares in S and S owns all the shares in T, T is a 75% subsidiary of P and all three companies are members of a group.

Consortiums

336.If the shares in a single company (C) are held by other companies (M1, M2 etc), C may be a “company owned by a consortium”. In that case, losses of C may be set off against the profits of M1, M2 etc. And the losses of M1, M2 etc may be set off against the profits of C.

337.If C is also a member of a group (with its subsidiary S) it may be possible for losses to flow between members of the group and M1, M2 etc. And if M1 is a member of a group (with its parent P) it may be possible for losses to flow between members of that group and C.

International

338.In the simplest case, all the companies involved are resident in the United Kingdom and carry on their businesses wholly in the United Kingdom. But the relief is extended to includethe losses of:

  • some companies not resident in the United Kingdom that carry on a trade through a permanent establishment in the United Kingdom; and

  • some companies resident in the EEA (or carrying on a trade through a permanent establishment there).

339.And the relief is restricted in some cases if a UK resident company’s business is not carried on wholly in the United Kingdom.

Other reliefs

340.In addition to trading losses, some other reliefs may be surrendered by one company to another. The other reliefs are listed in section 99(1).

Equity holders

341.In some cases a simple test of shareholding does not accurately reflect the economic reality of the relationship between companies. So there are rules in Chapter 6 of this Part to establish the true economic relationship.

Chapter 1: Introduction
Overview

342.This Chapter introduces the Part.

Section 97: Introduction to Part

343.This section sets out the structure of the Part and introduces the expression “group relief”. It is based on section 402(1) of ICTA.

Chapter 2: Surrender of company’s losses etc for an accounting period
Overview

344.This Chapter sets out what relief is available and the main restrictions on relief.

Section 98: Overview of Chapter

345.This section sets out the structure of the Chapter. It is new.

Section 99: Surrendering of losses and other amounts

346.This section lists the losses and other amounts that may be surrendered as group relief. It is based on sections 402, 403, 403ZC and 403ZD of ICTA.

347.In ICTA the amounts are referred to as “trading losses and other amounts eligible for relief”. The trading losses are explained in section 403ZA of ICTA. The “other amounts” are explained in sections 403ZB (excess capital allowances), 403ZC (non-trading deficit on loan relationships) and 403ZD (charges, Schedule A losses, management expenses and non-trading loss on intangible fixed assets).

348.This section adopts a similar approach by specifying the losses and other amounts that may be subject to a group relief claim. There is a more detailed explanation of each of those losses and other amounts in sections 100 to 104.

349.Subsection (2) uses a test of whether the losses and other amounts are “eligible for corporation tax relief”.

350.Subsections (3) and (4) contrast the treatments of:

  • amounts within paragraphs (a) to (c) of subsection (1), which may be surrendered whatever the profits of the surrendering company; and

  • amounts within paragraphs (d) to (g) of subsection (1), which may be surrendered only to the extent that they exceed the surrendering company’s total profits (see section 105(3)).

351.Subsection (5) refers to the other restrictions on amounts that may be surrendered in sections 106 to 110. It also refers to the restrictions (mentioned in section 403(4) of ICTA) that operate by making amounts not available for set off.

352.Subsection (6) cross-refers the requirement (in Schedule 18 to FA 1998) that the surrendering company must consent to the surrender.Section 130(2) requires that there is also a claim.

353.Subsection (7) introduces the label “surrenderable amounts” to refer to the losses and other amounts that may be surrendered.

Section 100: Meaning of “trading loss”

354.This section explains which trading losses are available for relief. It is based on section 403ZA of ICTA.

355.Subsection (1) is the link to the basic rule in section 99(1)(a).

356.Subsection (2) excludes from the available losses:

  • losses made in a trade carried on wholly outside the United Kingdom (the profits of which were historically charged to tax under Schedule D Case V); and

  • non-commercial losses for which relief would not be available to the surrendering company under the loss relief rules (see Part 4).

357.This section does not rewrite the requirement in section 403ZA(1) of ICTA that a trading loss is calculated in the same way as a loss within section 393A of ICTA. This is because the requirement is already rewritten in section 47 of CTA 2009.

Section 101: Meaning of “capital allowance excess”

358.This section explains which capital allowances are available for relief. It is based on section 403ZB of ICTA.

359.Subsection (1) is the link to the basic rule in section 99(1)(b). It identifies the capital allowances as those to be given in a qualifying activity of “special leasing”.

360.A company may surrender the allowances which would otherwise be available for relief against its total profits under section 260 of CAA.

361.Subsections (3) and (4) set out how to deal with “special leasing” allowances that are brought forward:

  • the amount to be surrendered is limited to the allowances for the current period, without regard to any allowances brought forward; and

  • in calculating the excess of allowances over the leasing income of the current period, the amount of the income is not reduced by allowances brought forward.

Section 102: Meaning of “UK property business loss”

362.This section explains which property income losses are available for relief. It is based on section 403ZD(3) of ICTA.

363.Subsection (1) is the link to the basic rule in section 99(1)(e).

364.Subsection (2) makes clear that a loss brought forward under the loss relief rules (see Part 4) is not available even though those rules treat the loss as made in the surrender period.

365.A non-commercial property loss is not eligible for relief under the loss relief rules (see Part 4). So it is not “eligible for corporation tax relief (apart from this Part)” – see section 99(2). It follows that such a loss may not be surrendered as group relief and there is no need to rewrite section 403ZD(3)(b) of ICTA.

Section 103: Meaning of “management expenses”

366.This section explains which management expenses are available for relief. It is based on section 403ZD(4) of ICTA.

367.Subsection (1) is the link to the basic rule in section 99(1)(f).

368.Subsection (2) excludes from the available management expenses amounts brought forward from an earlier period under:

  • section 1223 of CTA 2009 (management expenses carried forward); or

  • the property loss rules (see Chapter 4 of Part 4 of this Act).

Section 104: Meaning of “non-trading loss on intangible fixed assets”

369.This section explains that a non-trading loss that is available for relief is one calculated under Part 8 of CTA 2009. It is based on section 403ZD(6) of ICTA.

370.Subsection (1) is the link to the basic rule in section 99(1)(g).

371.Subsection (2) excludes from the available loss amounts brought forward from an earlier period.

Section 105: Restriction on surrender of losses etc within section 99(1)(d) to (g)

372.This section sets out a special rule which applies only to “relevant amounts”. They are:

  • qualifying charitable donations;

  • a UK property business loss;

  • management expenses; and

  • a non-trading loss on intangible assets.

373.The section is based on sections 403 and 403ZE of ICTA.

374.Subsection (1) introduces the “relevant amounts” to which the section applies.The “relevant amounts” do not include the main reliefs (trading losses, excess capital allowances and non-trading loan relationships deficits), which may be surrendered even if the surrendering company has profits against which the main reliefs may be set.

375.Subsections (2) and (3) are the main rule: the relevant amounts are available only to the extent that they cannot be deducted from the surrendering company’s own profits.

376.Subsection (4) deals with the case where the reliefs are restricted. In that case, the subsection determines the make-up of the relief that is surrendered.

377.The rule in this section compares the amounts within section 99(1)(d) to (g) with the “surrendering company’s gross profits”. Subsection (5) defines “gross profits” for the purposes of this section.

378.Subsection (6) refers to one of the restrictions mentioned in section 403(4) of ICTA. The other restrictions are in sections 99(5) and 137(3)(e).

Section 106: Restriction on losses etc surrenderable by UK resident

379.This section eliminates from group relief some amounts that are attributable to a foreign permanent establishment. It is based on section 403E of ICTA.

380.In most cases the profits of a foreign permanent establishment are taxed in the country where the permanent establishment is. The profits remain chargeable to United Kingdom tax but credit is given for foreign tax on the profits. If the permanent establishment is not profitable relief may be available for the loss etc in the foreign country. This section prevents relief being given for the same loss etc both in the foreign country and in the United Kingdom.

381.Subsection (1) restricts the operation of the section to companies resident in the United Kingdom.

382.Subsection (2) sets out the basic rule: a loss or other amount attributable to a foreign permanent establishment is not available for group relief if it qualifies for relief from non-UK tax.

383.Subsections (3) and (4) set out how to calculate the loss etc of a foreign permanent establishment. The calculation is done on the same basis as that for the calculation of the losses etc of a United Kingdom permanent establishment.

384.Subsection (5) explains the sort of relief from non-UK tax with which the section is concerned: it is relief from tax in the country where the permanent establishment is; and the relief is against the non-UK profits (defined in section 108) of any person other than the surrendering company. In other words, the section is concerned with foreign group relief.

385.Subsections (6) and (7) resolve a potential circularity in the rules. Foreign tax rules may deny relief for an amount if it qualifies for relief from United Kingdom tax. In that case, it would not be clear how the rule in subsection (5) operates.

386.The circularity is resolved by giving relief where the company is resident (that is, in the United Kingdom). But there is an exception to this rule if the company is also resident in the country where the permanent establishment is. In that case, United Kingdom relief is denied.

Section 107: Restriction on losses etc surrenderable by non-UK resident

387.This section eliminates from group relief amounts that arise from activities that are not within the United Kingdom tax net, or are relieved abroad. It is based on section 403D of ICTA.

388.Subsection (1) restricts the operation of the section to companies not resident in the United Kingdom that carry on a trade through a permanent establishment in the United Kingdom.

389.Subsection (2) introduces the three conditions (A, B and C) that have to be met if the non-UK resident company is to be able to surrender group relief.

390.Subsection (3) sets out condition A. The activities of the company must bring it within the charge to corporation tax. So its business must be a trade carried on through a permanent establishment in the United Kingdom (see section 19 of CTA 2009).

391.Subsection (4) sets out condition B. A company may be within the charge to corporation tax because it carries on its business through a permanent establishment in the United Kingdom but those activities (for instance, those of an airline) may be exempt from United Kingdom tax as a result of a DTA. In that case, any losses arising from the exempt activities may not be surrendered as group relief.

392.Subsections (5) and (6) set out condition C. A loss or other amount attributable to a United Kingdom permanent establishment is not available for group relief if it qualifies for relief from non-UK tax.

393.Subsection (7) explains how Condition C works if a foreign tax system (such as those of France and Australia) operates by exempting foreign (in this case, United Kingdom) profits from tax in the foreign country. Such a system may need to calculate the United Kingdom profits in order to exempt them. But that calculation does not mean that the profits in question are the subject of foreign tax relief.

394.Subsections (8) and (9) resolve a potential circularity in the rules. Foreign tax rules may deny relief for an amount if it qualifies for relief from United Kingdom tax. In that case, it would not be clear how condition C operates.

395.The section changes the approach of section 403D(6) of ICTA. Instead of ignoring the condition in foreign tax law the section sets out the result. That is that the loss etc is treated as allowable for foreign tax.

396.Section 403D(11) of ICTA serves only to clarify the interface between relief under that section and relief under the EEA rules in sections 403F and 403G of ICTA. In this Act it is clear that relief under Chapter 2 of this Part is separate from, and (potentially) in addition to, relief under Chapter 3 of this Part. So section 403D(11) is not rewritten.

Section 108: Meaning of “non-UK profits”

397.This section defines “non-UK profits”for sections 106 and 107. It is based on sections 403D and 403E of ICTA.

398.Subsections (1) and (2) set out the basic rule. The profits are those that are charged to “non-UK tax” (see section 187). The definition includes amounts that are taken into account in calculating those profits. But it does not include any profits that are taken into account in calculating the profits of any person for United Kingdom tax purposes.

399.Subsection (3) deals with profits that are exempted from United Kingdom tax by a DTA. Such profits may be non-UK profits. Subsection (2) refers to the “total profits” of any person. Section 4(3) defines that expression to include only amounts charged to corporation tax. So there is no need to exclude non-chargeable profits and section 403D(2)(a) of ICTA is not rewritten in this section.

Section 109: Restriction on losses etc surrenderable by dual resident

400.This section restricts the relief available to dual resident investing companies. It is based on section 404 of ICTA.

401.Subsections (1) and (2) are the basic rule. A company that is resident both in the United Kingdom and in another country may not surrender losses etc as group relief. But the rule applies only to investing companies, a concept that is defined in the following subsections.

402.Subsection (3) defines the first sort of company to which the section applies. It is a company that does not carry on a trade.

403.Subsection (4) defines the second sort of company to which the section applies. It is a trading company whose activities are of a sort more usually associated with an investment business.

404.Subsection (5) defines the third sort of company to which the section applies. The rule prevents an investing company being “dressed up” as a trading company.

Section 110: Restriction on surrender of losses etc from alternative finance arrangements

405.This section denies group relief if a deduction is disallowed by section 520 of CTA 2009. It is based on section 411ZA of ICTA.

Chapter 3: Surrendersmade by non-UK resident company resident or trading in the EEA
Overview

406.This Chapter makes the United Kingdom group relief rules compatible with European Community law following the judgment in Marks and Spencer plc v Halsey, C446/03(1). That case decided that in some circumstances it is contrary to the provisions of the EC Treaty on freedom of establishment to deny group relief to a UK resident parent for the losses of a non-UK resident subsidiary.

407.So this Chapter allows relief for foreign losses. But there are two main restrictions:

  • the surrendering company must be resident in (or otherwise “related” to) an EEA territory; and

  • the losses must not qualify for relief in the EEA territory.

Section 111: Overview of Chapter

408.This section sets out the structure of the Chapter. It is new.

Section 112: EEA related definitions

409.This section defines the expressions that are used in the Chapter to describe the connection of companies and their profits to the EEA. It is based on section 402 of, and Schedule 18A to, ICTA. The EEA comprises:

AustriaGreeceNetherlands
BelgiumHungaryNorway
BulgariaIcelandPoland
CyprusIrelandPortugal
Czech RepublicItalyRomania
DenmarkLatviaSlovak Republic
EstoniaLiechtensteinSlovenia
FinlandLithuaniaSpain
FranceLuxembourgSweden
GermanyMaltaUnited Kingdom
Section 113: Steps to determine extent to which loss etc can be surrendered

410.This section sets out how to calculate how much of an “EEA amount” may be surrendered. It is based on section 403F of, and paragraph 11 of Schedule 18A to, ICTA.

411.Subsection (2) is a method statement.

412.Step 1 eliminates any amount that is within the United Kingdom tax net and available for surrender under the rules in Chapter 2.

413.Step 2 sets out the conditions that the EEA amount has to meet. The detail of the conditions is set out in sections 114 to 121. To the extent that the EEA amount meets these conditions it is the “qualifying part of the EEA amount”.

414.Step 3 requires the EEA amount to be recalculated using United Kingdom tax rules and the assumptions set out in sections 123 to 126.

415.In paragraph 11(4) of Schedule 18A to ICTA the assumptions are made in relation to “the provisions of this Chapter” (that is, Chapter 4 of Part 10 of ICTA). In fact the assumptions are used only for the purpose of recalculating the EEA amount. So in this Act they apply only for that restricted purpose.

416.Step 4 compares the qualifying part of the EEA amount with the same proportion of the EEA amount recalculated in Step 3. The lower amount is the amount that may be surrendered.

417.Step 5 requires a restriction for any amount excluded from relief by section 127 (arrangements).

418.Subsection (3) deals with the possibility that the accounting period assumed by section 125 does not coincide with the accounting period of the surrendering company. The subsection makes clear that the total of the recalculated amounts is compared with the qualifying part of the EEA amount. See Change 23 in Annex 1.

419.Subsection (4) cross-refers to the need for consent to the surrender. This rule corresponds to the rule in section 99(6) for UK related companies.

Section 114: The equivalence condition

420.This section requires the EEA amount to correspond to an amount that would qualify for United Kingdom group relief. It is based on paragraph 2 of Schedule 18A to ICTA.

Section 115: The EEA tax loss condition: companies resident in EEA territory

421.This section identifies the EEA amount as one calculated in accordance with the relevant foreign tax law. It is based on paragraph 3 of Schedule 18A to ICTA.

422.Subsection (1) applies the section to companies resident in the EEA. The other sort of EEA related companies (those with an EEA permanent establishment) are dealt with in section 116.

423.Subsection (2) sets out the main condition: it establishes that the Chapter is concerned with an amount that has arisen for tax purposes in an EEA territory.

424.Subsection (3) excludes an amount that is attributable to a permanent establishment in the United Kingdom. Such an amount may qualify for relief under the rules in Chapter 2.

Section 116: The EEA tax loss condition: companies not resident in EEA territory

425.This section identifies the EEA amount in the case of a company with a permanent establishment in the EEA. It is based on paragraph 4 of Schedule 18A to ICTA.

426.Subsection (1) applies the section to companies not resident in the EEA. The other sort of EEA related companies (thoseresident in the EEA) are dealt with in section 115.

427.Subsection (2) sets out the main condition: it establishes that the Chapter is concerned with an amount that has arisen for tax purposes in an EEA territory.

428.Subsection (3) excludes an amount that arises from activities the profits of which would be exempt under a DTA.

429.Subsection (4) introduces subsections (5) and (6), which explain the sort of arrangements with which subsection (3) is concerned.

430.Subsection (5) sets out the relevant arrangements. They are arrangements between the EEA territory where the permanent establishment is and:

  • the United Kingdom (paragraph (b)); or

  • any other territory (paragraph (a)).

431.Subsection (6) identifies the effect of the DTA: it is that any profits from the activities in question would be exempt from tax in the EEA territory.

Section 117: The qualifying loss condition: general

432.This section introduces the rules which exclude from the EEA amount any amount that qualifies for relief abroad. It is based on paragraphs 5 to 7 of Schedule 18A to ICTA.

433.Subsection (1) makes clear that the EEA amount must meet the conditions in all of sections 118 to 120. Those conditions are expressed in the negative. So the conditions are met if foreign relief is not available.

434.Subsection (3) identifies the “relevant non-UK tax” as any foreign tax charged in the relevant EEA territory or in any territory where the surrendering company is resident.

435.Subsection (4) identifies the “resident territory” as any territory in which the surrendering company is resident, apart from the EEA territory to which the EEA company is related.

Section 118: The qualifying loss condition: relief for current and previous periods

436.This section sets out the condition that relief is not available for the current period or for a previous period. It is based on paragraph 6 of Schedule 18A to ICTA.

437.Subsection (1) introduces the section.

438.Subsection (2) deals with any part of the EEA amount that is deductible in calculating profits. The profits are those of any person (not just the surrendering company). And, for the purpose of this section, one looks at the current period and any previous period.

439.Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.

440.Subsection (4) makes clear that the section is concerned with whether the relief is available, not with whether it is actually given: the condition cannot be met simply by failing to make any necessary claim for relief.

Section 119: The qualifying loss condition: relief for future periods

441.This section sets out the condition that relief is not available for subsequent periods. It is based on paragraph 7 of Schedule 18A to ICTA.

442.Subsection (1) introduces the section.

443.Subsection (2) deals with any part of the EEA amount that may be deductible in calculating profits in any future period. The profits are those of any person (not just the surrendering company).

444.Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.

445.Subsection (4) determines that the possibility of foreign tax relief is to be considered as at the end of the period in which the EEA amount arises.

Section 120: The qualifying loss condition: non-UK tax relief in another territory

446.This section sets out the condition that relief is not available in any territory. It is based on paragraph 8 of Schedule 18A to ICTA.

447.Subsection (1) introduces the section.

448.Subsection (2) deals with any part of the EEA amount that may be deductible in calculating profits. The profits are those of any person (not just the surrendering company). Unlike sections 118 and 119, this section deals with tax relief in a territory which is neither the EEA territory where the EEA amount arises nor the territory where the surrendering company is resident. And it is concerned only with relief that has been given, not with relief that may be given.

449.Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.

Section 121: The precedence condition

450.This section deals with the possibility that relief is available in more than one territory. It is based on paragraph 9 of Schedule 18A to ICTA.

451.Suppose there is a chain of companies with a “top” holding company, a “bottom” trading company and a series of other companies each of which is both a subsidiary and a holding company. If the companies are resident in a variety of territories, where there are rules equivalent to those in this Chapter of the Act, it is possible for the losses of the “bottom” trading company to be relievable in several territories.

452.The section resolves the problem by providing that relief is assumed to be given at the lowest possible level in the chain. If the company at that level is UK resident, group relief is available.

453.Subsection (1) introduces the idea that relief may be available in a territory that is neither the United Kingdom nor the territory where the EEA amount arises.

454.Subsection (2) describes the chain of companies. Paragraph (a) establishes that the company in question is in the chain. Paragraph (b) establishes that higher in the chain there is a UK resident company. Paragraph (c) establishes that the surrendering company is a 75% subsidiary of that UK resident company. Paragraph (d) establishes that there is no other UK resident company in the chain between the surrendering company and the company in question.

455.If relief is available to the company in question it is excluded from the EEA amount.

456.Subsection (3) sets out the sorts of relief with which the section is concerned: they are the same as those in section 118(2) (a direct deduction) and (3) (other relief).

Example

A UK resident company U1 owns all the share capital in N, a company resident in the Netherlands.

N owns all the share capital in U2, a UK resident company.

U2 owns all the share capital in G, a company resident in Germany.

G owns all the share capital in F, a company resident in France.

U1 claims group relief for F’s losses.

Subsection (2) of the section applies to G because:

(a)

it is resident in Germany (not the relevant EEA territory, which is France);

(b)

U2 owns (directly) share capital in G;

(c)

F is a 75% subsidiary of U2; and

(d)

F is not a subsidiary of U2 as a result of its being a 75% subsidiary of another UK resident company.

So Germany is a territory within subsection (2). If relief for F’s loss is available in Germany no United Kingdom group relief is available. G’s potential claim takes precedence over U1’s claim because G is lower in the chain.

But, in relation to N:

(a)

it is resident in the Netherlands (not the relevant EEA territory, which is France);

(b)

the only UK resident company that owns share capital in N is U1;

(c)

F is a 75% subsidiary of U1; but

(d)

F is a subsidiary of U1 only as a result of its being a 75% subsidiary of another UK resident company (U2).

So the Netherlands is not a territory within subsection (2). Even if relief for F’s loss is available in the Netherlands, United Kingdom group relief may be available to U2. U2’s potential claim takes precedence over N’s because U2 is lower in the chain.

Section 122: Assumptions to be made in recalculating EEA amount

457.This section introduces sections 123 to 126. It is new.

Section 123: Assumptions as to UK residence

458.This section is the first of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules. It is based on paragraph 12 of Schedule 18A to ICTA.

459.Subsection (1) requires the assumption that the surrendering company is resident in the United Kingdom.

460.Subsection (2) makes clear that the assumption in subsection (1) does not:

  • affect where the company’s activities are carried on (but section 124 may make an assumption about that); or

  • treat the company as ceasing to be UK resident at the end of the EEA accounting period (but section 125 treats the company’s accounting period as ending then).

461.Subsection (3) requires the assumption that the surrendering company becomes UK resident at the beginning of the EEA accounting period.

Section 124: Assumptions as to places in which activities carried on

462.This section is the second of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules.It is based on paragraph 13 of Schedule 18A to ICTA.

463.Subsection (1) requires the assumption that the company’s activities are carried on in the United Kingdom instead of in the EEA territory. So any special rules about foreign income do not apply.

464.Subsection (2) makes clear that the assumption in subsection (1) includes the assumption that any land held by the surrendering company is in the United Kingdom.

465.Subsection (3) explains how the United Kingdom concepts of law in subsection (2) (“estate”, “interest” and “rights”) are to be applied to land that is outside the United Kingdom.

Section 125: Assumptions as to accounting periods

466.This section is the third of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules.It is based on paragraph 14 of Schedule 18A to ICTA.

467.Subsection (1) determines the start of the accounting period for recalculating the surrendering company’s EEA amount.

468.Subsections (2) to (4) determine when the accounting period ends. As in section 10 of CTA 2009, the accounting period ends at the end of the EEA accounting period or, if earlier, after 12 months.

469.The section clarifies the position if, exceptionally, the EEA accounting period is longer than two years. Paragraph 14 of Schedule 18A to ICTA does not explicitly cater for this possibility butthe only logical interpretation involves treating the process in sub-paragraphs (2) to (4) as iterative. So this section does not change the law.

Section 126: Assumptions in relation to capital allowances

470.This section is the last of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules. It is based in paragraph 15 of Schedule 18A to ICTA.

471.Subsection (1) sets out when the section applies.

472.Subsection (2) invokes section 13 of CAA. So the surrendering company is treated as having incurred expenditure on the plant or machinery on the first day of the EEA accounting period. The amount of the expenditure is the market value of the plant or machinery.

473.Subsection (3) ensures that all the relevant rules in the plant and machinery Part of CAA apply in the recalculation of the EEA amount.

Section 127: Amounts excluded because of certain arrangements

474.This section is a rule to deal with contrived situations. It is based on section 403G of ICTA.

475.Subsection (1) excludes from the EEA amount any amount that arises from an “arrangement”. The exclusion is mentioned in Step 5 of section 113(2). Subsection (1)(a) of the section ensures that the rule does not apply to any part of the EEA amount that is attributable to a United Kingdom permanent establishment. That part is dealt with under section 107.

476.Subsection (2) identifies the excluded amount by reference to “arrangements”.

477.Subsection (3) tests the purpose of the arrangements. They are within this section if their main purpose is to secure group relief.

Section 128: Rules for recalculating EEA amount

478.This section requires the EEA amount to be recalculated using United Kingdom tax rules. It is based on paragraph 16 of Schedule 18A to ICTA.

479.If the recalculation results in a lower amount, the recalculated amount (or the relevant proportion of it) is the amount that may be surrendered as group relief (see Step 4 in section 113(2)).

480.Subsection (1) is the basic rule. The EEA amount is recalculated. Furthermore, any rule that would disallow the amount for United Kingdom tax purposes (such as the rule about non-commercial losses) is applied.

481.Subsections (2) to (4) allow the Treasury to make regulations about the recalculation of the EEA amount.

Chapter 4: Claims for group relief
Overview

482.This Chapter sets out the conditions for relief involving UK related companies (under Chapter 2) and EEA related companies (under Chapter 3). It also sets out restrictions on relief that may be given on claims.

Section 129: Overview of Chapter

483.This section sets out the structure of the Chapter. It is new.

Section 130: Group relief claims on amounts surrenderable under Chapter 2

484.This section sets out the basic rules for claims for group relief surrendered by UK related companies. It is based on section 402 of ICTA and paragraph 70 of Schedule 18 to FA 1998.

485.The corresponding rules for EEA related companies are in section 135.

486.Subsection (2) requires a claim by the claimant company. The surrender is required by section 99(6). The subsection goes on to set out three conditions for a claim.

  • There must be a consent (see section 99(6)).

  • There must be an overlapping period (see section 142).

  • The relief must be available as a result of the existence of:

    • a group (see section 131);

    • a consortium, not involving a “link” company (see section 132); or

    • a consortium involving a “link” company (see section 133).

487.The detail of each part of the third condition includes a requirement that the companies concerned are “UK related” (defined in section 134). That requirement in the case of a group is based on section 402(2) of ICTA.

488.In the case of a consortium it is explicit in section 402(3A) and (3B) of ICTA that the claimant and surrendering companies must be UK related.

489.In the case of a claim for the losses of a company (C) owned by a consortium, section 406(2) of ICTA applies only if the link company (L) could make a claim. That is the case only if L is UK related.

490.In the case of a claim by a company (C) owned by a consortium there is no explicit rule in section 406(5) of ICTA that is equivalent to the rule in section 406(2). But it is implicit in the section: indeed, subsection (8) can work only if the link company (L) is UK related; otherwise section 402(3A) and (3B) of ICTA would prevent L from being the surrendering company.

491.So each of the conditions in sections 131 to 133 is explicit in requiring that all of the surrendering, claimant and link companies are UK related.

492.Subsection (3) makes clear that more than one company may claim the relief available in the surrendering company. But the total claimed cannot exceed the relief available (see section 137(7)).

Section 131: The group condition

493.This section deals with straightforward claims for group relief (that is, claims not involving consortiums) surrendered by a UK related company. It is based on section 402 of ICTA.

494.The corresponding rule for EEA related companies is in section 136.

Section 132: Consortium condition 1

495.This section allows claims involving companies owned by a consortium. It is based on section 402 of ICTA.

496.Subsection (2) allows group relief to go “upwards” from a company owned by a consortium to a member of the consortium.

497.Subsection (3) allows group relief to go “downwards” from a member of a consortium to a company owned by the consortium.

498.Subsections (4) and (5) deny relief if the consortium relationship depends on shares that are held by a share-dealing company as part of its circulating capital.

Section 133: Consortium conditions 2 and 3

499.This section extends the relief that is available to consortiums. It is based on sections 402 and 406 of ICTA.

500.The extension involves a company (“the link company”) that is a consortium member and is also a member of a group. There are special rules for companies in the same group as the company owned by a consortium in sections 148 and 149.

501.Subsection (1) allows relief to go “upwards” from a company (C) owned by a consortium to a company (P) that is in the same group as the link company (L).

502.Subsection (2) allows relief to go “downwards” from a company (P) that is in the same group as the link company (L) to a company (C) owned by the consortium.

503.Subsections (3) and (4) deny relief if the consortium relationship depends on shares that are held by a share-dealing company as circulating capital.

504.The rule in subsections (3) and (4) is not explicit in the source legislation. If shares in C are held by L as circulating capital, section 402(4) of ICTA prevents a consortium claim by L. Similarly, C may not claim L’s losses etc. It follows that when P steps into the shoes of L in accordance with section 406(2) or (5) of ICTA P may not claim C’s losses etc and C may not claim P’s losses etc.

Section 134: Meaning of “UK related” company

505.This section defines “UK related”. It is based on section 402 of ICTA.

Section 135: Group relief claims on amounts surrenderable under Chapter 3

506.This section gives the rules for claims for group relief surrendered by EEA related companies. It is based on section 402 of ICTA and paragraph 70 of Schedule 18 to FA 1998.

507.The corresponding rules for UK related companies are in section 130.

508.Subsection (2) requires a claim by the claimant company. The surrender is required by section 99(6). The subsection goes on to set out three conditions for a claim.

  • There must be a consent (see section 99(6)).

  • There must be an overlapping period (see section 142).

  • The relief must be available as a result of the existence of a group (see section 136).

509.Subsection (3) makes clear that more than one company may claim the relief available in the surrendering company. But the total claimed cannot exceed the relief available (see section 137(7)).

Section 136: The EEA group condition

510.This section sets out the condition for group relief to be surrendered by an EEA related company. It is based on section 402 of ICTA.

511.Subsections (2) and (3) set out the condition, that either the claimant company or the company that owns both it and the surrendering company is UK resident.

Section 137: Deduction from total profits

512.This section explains how group relief is given to the claimant company. It is based on sections 403, 407 and 411 of ICTA.

513.Subsection (1) is the link to section 4.

514.Subsection (2) makes clear that the claimant company may claim all or part of the surrendering company’s surrenderable amounts.

515.Subsection (3) subjects subsection (2) to the restrictions later in the Chapter. Paragraph (e) refers to one of the restrictions mentioned in section 403(4) of ICTA. The other restrictions in that subsection are referred to in sections 99(5) and 105(5) or are rewritten in section 109.

516.Subsection (4) is the rule that group relief is the final deduction to be given in arriving at a company’s taxable profits, subject only to the exceptions set out in subsection (5).

517.Subsection (5) sets out the reliefs that are to be given after group relief. So, for instance, group relief may reduce a company’s profits for an accounting period to an extent that there is a restriction to relief for losses carried back to that accounting period.

518.Subsection (6) makes clear that each relief in subsection (4) that depends on the making of a claim is to be taken account of on the assumption that the relevant claim is made. But there is an exception in the case of relief for non-trading loan relationship deficits: that relief is taken account of only if the relevant claim is actually made.

519.Subsection (7) ensures that an amount of relief is not given twice.

Section 138: Limitation on amount of group relief applying to all claims

520.This section restricts the amount of group relief to the profits available to absorb it. It is based on section 403A of ICTA.

521.It compares the “unused part of the surrenderable amounts” (defined in section 139) with the “unrelieved part of the claimant company’s available total profits” (defined in section 140). The amount of group relief is restricted to the lower of the two compared amounts.

Section 139: Unused part of the surrenderable amounts

522.This section defines “unused part of the surrenderable amounts” for the purpose of section 138. It is based onsections 403A and 403B of ICTA.

523.Subsection (1) introduces the rules for calculating the “unused part of the surrenderable amounts”. In particular, the rules cater for the cases where:

  • the surrendering company and the claimant company have different accounting periods; or

  • there are multiple claims for the surrendering company’s losses etc.

524.Subsection (2) sets out the restriction to be made if the surrendering company and claimant company have different accounting periods. In that case the “surrender period” (see section 99(7)) and “claim period” (see section 130(2)) are not the same. The loss etc is apportioned on a time basis to the “overlapping period” (see section 142).

525.Subsection (3) introduces the calculation that has to be made if there are multiple claims for the surrendering company’s loss etc. It considers what “prior claims” have been made and what “prior surrenders” have been made as a result.

526.Subsection (4) defines a “prior claim”.

527.Subsection (5) is a method statement for calculating the total amount of any “prior claims”. The overlapping period for any prior claim is given by section 142.

528.If no part of that overlapping period falls within the claim period of the current claim, that prior claim is ignored. But if part of theoverlapping period does fall within the claim period of the current claim a time-apportioned amount of the prior claim is taken into account.

529.The total of the amounts to be taken into account for prior claims is deducted to arrive at the usable amount of the surrenderable amounts.

Section 140: Unrelieved part of claimant company’s available total profits

530.This section defines “unrelieved part of the claimant company’s available total profits” for the purpose of section 138. It is based onsections 403A, 403B and 403D of ICTA.

531.Subsection (1) introduces the rules for calculating the “unrelieved part of the claimant company’s available total profits”. In particular, the rules cater for the cases where:

  • the surrendering company and the claimant company have different accounting periods; or

  • there are other claims by the claimant company for the claim period.

532.Subsection (2) sets out the restriction to be made if the surrendering company and claimant company have different accounting periods. In that case the “surrender period” (see section 99(7)) and “claim period” (see section 130(2)) are not the same. The claimant company’s available total profits are apportioned on a time basis to the “overlapping period” (see section 142).

533.Subsection (3) introduces the calculation that has to be made if there are other claims by the claimant company for the claim period. It considers what “prior claims” have been made and what “previously claimed group relief” has been given as a result.

534.Subsection (4) defines a “prior claim”.

535.Subsection (5) is a method statement for calculating the total amount of any “prior claims”. The overlapping period for any relevant prior claim is given by section 142.

536.If no part of that overlapping period falls within the claim period of the current claim, that prior claim is ignored. But if part of theoverlapping period does fall within the claim period of the current claim a time-apportioned amount of the prior claim is taken into account.

537.The total of the amounts to be taken into account for relevant prior claims is deducted to arrive at the unrelieved amount of the claimant company’s total profits.

538.Subsection (6) apportions the previously claimed group relief to the period of the current claim.

539.Subsection (7) explains what is meant by “available total profits” in subsection (1). “Total profits” are defined in section 4 to include only amounts charged to corporation tax. So there is no need to exclude non-chargeable profits and section 403D(2)(a) of ICTA is not rewritten in this section.

540.Section 403A(2)(b) of ICTA refers to “total profits … reduced by … previously claimed group relief”. Such group relief can have been given only against profits “as reduced by any other relief” (section 407(1)(b) of ICTA). So subsection (7) of this section makes clear that the total profits must be reduced by such other relief before being further reduced by group relief.

541.Subsection (8) deals with the case of a claimant company that is not resident in the United Kingdom. Its available total profits do not include any profits that are “double taxation exempt” (see section 186).

Section 141: Sections 139 and 140:supplementary

542.This section sets out three rules about relevant prior claims. It is based on section 403A of ICTA.

543.Subsection (1) explains what happens if two or more claims are made at the same time. They are treated as made in whatever order the company or companies choose, by making an election.

544.The section does not specify that the election is to be made “by notice to any officer of the Board” (section 403A(7)(a) of ICTA). The rules in Schedule 18 to FA 1998 apply for the purposes of this Act. Either the election is to be made in a company’s return or it is to be made to “an officer of the Board” (paragraph 2(1) of Schedule 1A to TMA, applied by paragraph 59 of Schedule 18 to FA 1998).

545.If no such election is made, the choice is made by HMRC.

546.Subsection (2) introduces the second rule, about measuring a relevant prior claim. The amount of such a claim is determined when it is made. So it takes account of any earlier claims; and takes no account of any later claims.

547.The section does not rewrite the rule in section 403A(6) of ICTA about a claim becoming final. See Change 24 in Annex 1.

548.Subsection (3) sets out the third rule. It substitutes a “just and reasonable” apportionment for any time-apportionment prescribed by section 139 or 140.

Section 142: Meaning of “the overlapping period”

549.This section defines “the overlapping period” for Chapter 4 of this Part of the Act. It is based on section 403A of ICTA. The expression as defined in this section is used in sections 139, 140, 143 and 144.

550.Subsection (1) is the basic rule. The overlapping period is the period that is common to:

  • the surrender period (of the surrendering company – defined in section 99(7)); and

  • the claim period (of the claimant company – defined in section 130(2)).

551.Subsection (2) excludes from the overlapping period any part of it during which the conditions for relief are not satisfied.

552.Subsection (3) sets out the conditions for relief that have to be satisfied during the overlapping period. Only one of the conditions is relevant to any claim. They are the conditions set out in sections 131 to 133 (for UK related companies) and 136 (for EEA related companies).

Section 143: Condition 1: surrendering company owned by consortium

553.This section is the basic rule about relief surrendered by a company to a member of the consortium that owns it. It is based on section 403C of ICTA.

554.Subsection (1) ties the section to consortium condition 1: that is, a case that does not involve a link company. Cases involving link companies are dealt with in sections 145 and 146.

555.Subsection (2) restricts the relief by reference to the consortium member’s interest in the surrendering company.

556.Subsection (3) sets out what that interest is. Usually it is the proportion represented by the consortium member’s shareholding in the surrendering company. But if that shareholding entitles the consortium member to a lower proportion of the surrendering company’s profits or assets the lower proportion is used.

557.Subsection (4) deals with the case where the consortium member’s interest in the surrendering company varies in the overlapping period (see section 142). In that case an average is taken.

558.Subsection (5) deals with the case where a trading company (T) is indirectly owned by a consortium through a holding company (H) (see section 185). In that case the various proportions referred to in the section are calculated by reference to the consortium member’s (M1’s) interest in H.

Section 144: Condition 1: claimant company owned by consortium

559.This section is the basic rule about relief surrendered by a member of a consortium to a company that is owned by the consortium. It is based on section 403C of ICTA.

560.Subsection (1) ties the section to consortium condition 1: that is, a case that does not involve a link company. Cases involving link companies are dealt with in sections 145 and 146.

561.Subsection (2) restricts the relief by reference to the consortium member’s interest in the claimant company.

562.Subsection (3) sets out what that interest is. Usually it is the proportion represented by the consortium member’s shareholding in the claimant company. But if that shareholding entitles the consortium member to a lower proportion of the surrendering company’s profits or assets the lower proportion is used.

563.Subsection (4) deals with the case where the consortium member’s interest in the claimant company varies in the overlapping period (see section 142). In that case an average is taken.

564.Subsection (5) deals with the case where a trading company (T) is indirectly owned by a consortium through a holding company (H) (see section 185). In that case the various proportions referred to in the section are calculated by reference to the consortium member’s (M1’s) interest in H.

Section 145: Conditions 2 and 3: limitations in sections 143 and 144

565.This section is the basic rule about relief involving a link company (see section 133). It is based on section 406 of ICTA.

566.Subsection (2) deals with a claim by a company that is a member of the same group as the link company for relief from a company owned by the consortium.

567.The overlapping period for the claim is still determined by reference to the accounting periods of the actual claimant company (P) and the surrendering company (C). But the subsection treats the link company (L) as if it were the claimant company for the purpose of section 143(3). So the “applicable proportion” of the surrenderable amounts is based on L’s interest in Cin the overlapping period (if necessary, based on an average of that period – see section 143(4)(b)).

568.Subsection (3) deals with a claim by a company owned by a consortium for relief from a company that is a member of the same group as the link company.

569.The overlapping period for the claim is still determined by reference to the accounting periods of the claimant company (C) and the actual surrendering company (P). But the subsection treats the link company (L) as if it were the surrendering company for the purpose of section 144(3). So the “applicable proportion” of C’s profits is based on L’s interest in C in the overlapping period (if necessary, based on an average of that period – see section 144(4)(b)).

Section 146: Conditions 2 and 3: companies in link company’s group

570.This section restricts the amount of relief that can be claimed in cases involving link companies. It is based on section 406 of ICTA.

571.Subsections (1) to (3) deal with the case of the surrender of relief by a company owned by a consortium. The link company’s group, as a whole, cannot claim more relief than would have been available to the link company alone.

572.Subsections (4)> to (6) deal with the case of the surrender of relief by the link company and members of its group to a company owned by the consortium. The claimant company cannot claim relief in an amount greater than its profits that would be available to absorb relief surrendered by the link company alone.

573.Subsection (7) explains how to operate the restriction in subsection (6) if the link company and claimant company have different accounting periods. The tests in section 144 are applied in the claimant company’s accounting period.

574.Subsection (8) supplies definitions for the section.

Section 147: Conditions 1 and 2: surrenderable amounts including trading loss

575.This section restricts the amount of trading losses that can be surrendered by a company owned by a consortium. It is based on section 403ZA of ICTA.

576.Subsection (1) applies the section to consortium condition 1: that is, a case that does not involve a link company.

577.Subsection (2) extends the section to consortium condition 2: that is, cases involving a link company (L) where the surrendering company (C) is owned by a consortium.

578.Subsection (3) is the rule that a trading loss within section 37 (“sideways relief”) is not available for group relief to the extent that relief could be given for it within the surrendering company.

579.Subsection (4) explains how the rule in this section interacts with the rule in section 148: this section applies first to reduce the surrenderable losses.

Section 148: Conditions 1 and 2: surrendering company in group of companies

580.This section treats the company owned by a consortium and any companies in its group as a single company for the purposes of surrenders by companies in the group. It is based on sections 405 and 406 of ICTA. The rule about companies in the same group as the consortium member is in section 146.

581.Subsection (1) applies the section to consortium condition 1: that is, a case that does not involve a link company.

582.Subsection (2) extends the section to consortium condition 2: that is, cases involving a link company (L) where the surrendering company (S) is owned by a consortium (or is a member of the same group as the company owned by the consortium).

583.Subsections (3) and (4) restrict the relief available to any excess of the surrenderable amounts over the “group’s potential relief”.

584.Subsection (5) sets out how to calculate the “group’s potential relief”. This is the amount of profits that could be covered by all the available losses etc within the group. As section 147(3) makes clear, within the individual companies in the group, trading losses are treated as set off first against other profits.

585.If the consortium company C and its subsidiary S have different accounting dates, it may be necessary to apportion a loss to the surrender period in determining the “group’s potential relief”. See Change 25 in Annex 1.

586.Subsection (6) clarifies the basis on which the group relief claims are assumed to be made within the group.

Section 149: Conditions 1 and 3: claimant company in group of companies

587.This section treats the company (C) owned by a consortium and any companies (S etc) in its group as a single company for the purposes of claims by companies in the group. It is based on section 405 of ICTA. The rule about companies in the same group as the consortium member is in section 146.

588.Subsection (1) applies the section to consortium condition 1: that is, a case that does not involve a link company.

589.Subsection (2) extends the section to consortium condition 3: that is, cases involving a link company (L) where the claimant company (S) is owned by a consortium (or is a member of the same group as the company owned by the consortium).

590.Subsection s (3) to (5) restrict the relief available to the amount that remains after relief is notionally given by way of group relief for all the available losses etc within the group. But those available losses etc may already have been reduced by actual claims within the group.

591.Subsection (6) clarifies the basis on which the group relief claims are treated as already made within the group.

Chapter 5: Subsidiaries, groups and consortiums
Overview

592.This Chapter sets out the rules for determining the relationships between companies for the purpose of group relief.

Section 150: Overview of Chapter

593.This section introduces the Chapter. It is new.

Section 151: Meaning of “75% subsidiary” and “90% subsidiary”

594.This section explains what is meant by “75% subsidiary” and “90% subsidiary”. It is based on section 413 of ICTA.

595.Subsection (1) imports the definitions in Chapter 3 of Part 24 of this Act.

596.Subsection (2) includes the share capital of a registered industrial or provident society in “ordinary share capital”.

597.Subsection (3) excludes shares held as circulating capital by a company that deals in shares.

598.The section simplifies the rule in section 413(5) of ICTA by not dealing separately with indirect share holdings. If any of the companies in the ownership chain holds the relevant shares as circulating capital the chain is broken for the purposes of this section.

599.Subsection (4) introduces the additional tests for a company to be treated as a 75% subsidiary of another. They are that “equity holders” in the subsidiary must be beneficially entitled to:

  • at least 75% of the subsidiary’s profits; and

  • at least 75% of the subsidiary’s assets in a winding up.

600.The test for a “90% subsidiary” is in similar terms.

601.The detail of the rules about equity holders is set out in Chapter 6 of this Part of the Act.

Section 152: Groups of companies

602.This section sets out the conditions for companies to be treated as members of the same group. It is based on section 413 of ICTA.

603.In regulation 17 of the Taxation of Securitisation Companies Regulations 2006 (SI 2006/3296) there is a rule that a securitisation company (defined in regulation 4) is not to be treated as a member of a group or consortium. And regulation 8 of the Taxation of Insurance Securitisation Companies Regulations 2007 (SI 2007/3402) has a similar rule about insurance securitisation companies (defined in regulation 4). The regulations continue to apply for the purposes of this Part of this Act as they apply for the purposes of Chapter 4 of Part 10 of ICTA.

604.Similar regulations relating to property securitisation companies have been published in draft for consultation.

Section 153: Companies owned by consortiums and members of consortiums

605.This section sets out the conditions for a company to be “owned by a consortium”. It is based on sections 402 and 413 of ICTA.

606.Subsection (1) sets out the two basic conditions.

607.Subsection (3) extends the relief that is available to consortiums. The extension involves trading companies in the same group as a holding company owned by a consortium. The corresponding extension to companies in the same group as a consortium member is in section 133(1) and (2).

608.“Holding company” is defined in section 185(2).

Section 154: Arrangements for transfer of member of group of companies etc

609.This section counteracts arrangements designed to obtain group relief. It is based on section 410 of ICTA.

610.It is possible to arrange for a loss-making company in a group to become temporarily a member of a second group while the economic reality is that it remains a member of the first group. The section operates as soon as arrangements are made for the ownership of the company to change.

611.Subsection (1) appliesthe section potentially to any case involving two companies in a group.

612.Subsection (2) denies group relief (by treating the companies as not members of the same group) if “arrangements” are in place.

613.Subsection (3) sets out the three “effects” which bring arrangements within the section. They all involve a change in the control of one of the companies or of a trade that it carries on.

Section 155: Arrangements for transfer of company owned by consortium etc

614.This section counteracts arrangements designed to obtain consortium relief. It is based on section 410 of ICTA.

615.It is possible to arrange for a loss-making company to become temporarily:

  • a member of a consortium; or

  • owned by a consortium

while the economic reality is that it is neither of these things. The section operates as soon as arrangements are made for the ownership of the company to change.

616.Subsection (1) appliesthe section potentially to any case involving a trading company and a consortium.

617.Subsection (2) denies group relief (by treating the trading company as not owned by a consortium) if “arrangements” are in place.

618.Subsection (3) sets out the four “effects” which bring arrangements within the section. They all involve a change in the control of the trading company or of a trade that it carries on.

619.Subsection (5) extends the operation of the section to cases where the trading company is owned indirectly by a consortium.

Section 156: Sections 154 and 155: supplementary

620.This section explains some of the terms used in the two previous sections. It is based on section 410 of ICTA.

621.The reference to Scottish Ministers in subsection (2)(b) reflects section 117 of the Scotland Act 1998.

622.The definitions of “connected persons” and “control” applied by section 410(5) of ICTA are not rewritten in this section. There are Act-wide definitions in section 1176.

Chapter 6: Equity holders and profits or assets available for distribution
Overview

623.This Chapter sets out how the rights of equity holders are determined in this Part. These rights (to profits and assets of a company) are used as alternatives to simple shareholding for determining interests in a company:

  • in determining the proportion of a company’s loss etc that can be surrendered to a member of a consortium that owns the company (section 143(3));

  • in determining the proportion of a company’s profits that can used to absorb losses etc surrendered by a member of a consortium that owns the company (section 144(3)); and

  • in the tests as to whether or not a company is a 75% subsidiary (or a 90% subsidiary) of another (section 151(4)).

Section 157: Introduction to Chapter

624.This section sets out the structure of the Chapter. It is based on Schedule 18 to ICTA.

625.Subsection (2) gives two rules of interpretation for the Chapter.

Section 158: Meaning of “equity holder”

626.This section defines “equity holder”. It is based on paragraph 1 of Schedule 18 to ICTA.

627.Subsection (1) establishes that an equity holder may be:

  • a shareholder (but only in relation to “ordinary shares” – see section 160); or

  • a loan creditor (but only in relation to loans that are not “normal commercial loans” – see section 162).

628.Subsection (2) sets out the tests in section 417 of ICTA (also rewritten in section 453) to determine whether a person is a loan creditor of a company.

Section 159: Use of relevant company’s assets

629.This section extends the meaning of “equity holder”. It is based on paragraph 1 of Schedule 18 to ICTA.

630.The section treats as an equity holder a person who provides money to a company so that it can acquire an asset which is used in a trade by the person who provided the money. The company claims capital allowances on the asset.

631.In this case the person who provides the money has an economic stake in the company, whose results depend on the profits of the trade in which the asset is used. And this is the case even if the money is provided by way of, say, restricted preference shares which would not otherwise count towards the investor’s stake in the company (see section 160).

632.Subsection (1) sets the scene, specifying the conditions to be met for the section to apply.

633.Subsection (2) is the main rule: the person who provides the money is treated an equity holder.

634.Subsection (3) sets out the capital allowances to which the company must be entitled if the section is to apply.

635.Subsection (4) excludes from the application of the section a normal commercial loan made in the course of a banking business. The exclusion applies only to the extent that the amount of the commercial loan exceeds the cost of the assets.

Section 160: Meaning of “ordinary shares”

636.This section defines “ordinary shares” by excluding restricted preference shares from the holdings that are to be considered for the purposes of this Chapter. It is based on paragraph 1 of Schedule 18 to ICTA.

637.Subsection (2) introduces the five conditions that have to be met if the shares are to be excluded as restricted preference shares.

638.Subsection (3) is the first condition. There must be new consideration. “New consideration” is defined in section 157(2) by reference to section 1115.

639.Subsections (4) to (7) set out the other conditions.

Section 161: Meaning of “restricted right to dividends”

640.This section defines restricted right to dividends for use in condition D in section 160(6). It is based on paragraph 1A of Schedule 18 to ICTA.

641.Subsection (1) sets out the condition that dividends should not represent more than a reasonable commercial rate of return. This condition must be met whichever of the other conditions is relied on.

642.Subsection (2) rewrites condition A in paragraph 1A(2) of Schedule 18 to ICTA. It relates to fixed rate shares.

643.Subsection (3) rewrites condition B in paragraph 1A(3) of Schedule 18 to ICTA. It relates to shares that carry a dividend based on a published index (see subsection (5)).

644.Subsection (4) rewrites condition C in paragraph 1A(4) of Schedule 18 to ICTA. It relates to shares that carry a dividend that may be reduced or not paid in special circumstances (see subsection (6)).

645.Subsections (5) to (8) provide interpretative rules for the section, including a Treasury power in relation to “special circumstances” for the purpose of subsection (4).

Section 162: Meaning of “normal commercial loan”

646.This section defines normal commercial loans so that they can be excluded from the loansthat are to be considered for the purposes of this Chapter. It is based on paragraph 1 of Schedule 18 to ICTA.

647.Subsection (1) requires that the loan includes new consideration. “New consideration” is defined in section 157(2) by reference to section 1115.

648.The subsection also introduces the four further conditions for a loan to be excluded. The details of the conditions are in subsections (2) to (5).

Section 163: Normal commercial loans: company’s results or value of assets

649.This section explains some of the concepts used in section 162. It is based on paragraph 1 of Schedule 18 to ICTA.

650.Subsection (1) allows a “fixed” rate of interest to include a rate that depends inversely on the company’s results. Interest at a rate that increases when the company’s results improve is like a dividend. But there is no need to treat interest as a dividend if its rate reduces when the company’s results improve.

651.Subsection (2) allows a “fixed” rate of interest to include a rate that depends inversely on the value of the company’s assets. Interest at a rate that increases when the company’s assets increase in value is like a dividend. But there is no need to treat interest as a dividend if its rate reduces when the company’s assets increase in value.

652.Subsections (3) to (6) make clear that a loan is not treated as depending on the value of any of the company’s assets (see section 162(4)(b)) simply because it is secured by a charge over land acquired with the loan.

Section 164: Sections 160 and 162: supplementary

653.This section explains how the “quoted parent company” test is applied. It is based on paragraph 1 of Schedule 18 to ICTA.

654.In accordance with section 158 a holder of restricted preference shares does not count as an equity holder. Such shares may carry the right to conversion into shares or securities in the company’s “quoted parent company” (see section 160(4)(c)). In order to establish whether the company (S) is a 75% subsidiary of the possible quoted parent company (P) it may be necessary to know whether P is an equity holder in S (see section 151(4)). So the process becomes circular.

655.A similar circularity can result from consideration of whether a loan is a normal commercial loan. The loan may carry the right to conversion into shares or securities in the company’s “quoted parent company” (see section 162(2)(c)). Again, it is necessary to establish whether the company is a 75% subsidiary of the possible quoted parent company.

656.Subsection (1) deals with shares. It applies if all the conditions in section 160 are met, apart from the one (B) which may depend on conversion to shares or securities in a quoted parent company.

657.Subsection (2) deals with securities. It applies if all the conditions in section 162 are met, apart from the one (A) which may depend on conversion to shares or securities in a quoted parent company.

658.Subsection (3) sets out the main condition for a company having a quoted parent company: it must be a 75% subsidiary; and the parent’s shares must be quoted on a stock exchange.

659.Subsection (6) sets the scope of the rule which breaks the circularity. It applies only for the purposes of sections 160 and 162 and this section.

660.Subsection (7) is the rulewhich breaks the circularity: the “candidate company” is assumed to be a quoted parent company.

Section 165: Proportion of profits available for distribution to which company is entitled

661.This section sets out how to apply the tests in this Part that are based on an entitlement to a distribution of profits. It is based on paragraph 2 of Schedule 18 to ICTA.

662.The tests in this Part, based on an entitlement to a distribution of profits, are in sections 143(3)(b), 144(3)(b) and 151(4)(a). The tests are also applied, by cross-reference, in, for example, the rules about small profits relief (see section 33(7)).

663.Subsection (1) sets the scope of the section and introduces company A (the parent) and company B (the subsidiary).

664.Subsection (2) is the basic rule: the proportion of the profits to which company A is entitled is based on what it would get if all company B’s profits of an accounting period were distributed to its equity holders. If there are no profits in that accounting period a notional profit of £100 is assumed.

665.Subsection (3) clarifies the position in the case where some of company B’s profits are in fact distributed. The section is still concerned with the whole of its profits.

666.Subsection (4) requires that company B’s profits are calculated in accordance with United Kingdom tax rules, wherever it is resident.

667.Subsection (5) makes clear that the section is not concerned with any payments that are repayments of capital.

668.Subsection (6) includes in company A’s entitlement any payment which it gets as an equity holder even if the payment would not otherwise count as a distribution.

Section 166: Proportion of assets available for distribution to which company is entitled

669.This section sets out how to apply the tests in this Part that are based on an entitlement to a distribution of assets in a winding up. It is based on paragraph 3 of Schedule 18 to ICTA.

670.The tests in this Part, based on an entitlement to a distribution of assets in a winding up, are in sections 143(3)(c), 144(3)(c) and 151(4)(b). The tests are also applied, by cross-reference, in the rules about small profits relief (see section 33(7)).

671.Subsection (1) sets the scope of the section and introduces company A (the parent) and company B (the subsidiary).

672.Subsection (2) is the basic rule: the proportion of the assets to which company A is entitled is based on what it would get if company B’s net assets at the end of an accounting period were distributed to its equity holders in a winding up. If there are no net assets (or if there is no balance sheet) at the end of that accounting period net assets of a notional amount of £100 are assumed.

673.Subsection (3) identifies the gross assets of company B, from which its liabilities are deducted to arrive at its net assets.

674.Subsection (4) identifies the liabilities of company B, which are deducted from its gross assets to arrive at its net assets.

675.Subsection (5) includes in company A’s entitlement any payment which it would get as an equity holder even if the payment would not otherwise count as a distribution of assets.

676.Subsections (6) and (7) make clear that the section is not concerned with any payments that are repayments of capital. This exclusion affects the calculations of both company B’s gross assets and the amount to which the equity holder is entitled.

Section 167: Profits or assets available for distribution and entitlement: supplementary

677.This section includes three special rules for calculating an equity holder’s entitlements for the purposes of sections 143(3), 144(3) and 151(4). It is based on paragraphs 1 and 6 of Schedule 18 to ICTA.

Section 168: Meaning of “the relevant accounting period”

678.This section defines some expressions. It is based on paragraph 7 of Schedule 18 to ICTA.

679.The “relevant accounting period” is used for the calculation of a company’s entitlement to profits or assets. Such a calculation is used to determine whether or nota company:

  • is a member of a group; or

  • is owned by a consortium.

680.Subsections (2) and (3) explain how to make the calculations in the cases of non-UK resident companies.

Section 169: Application and interpretation of sections 170 to 182

681.This section introduces a group of sections that deal with shares and securities that have restricted or temporary rights. It is based on paragraphs 4, 5 and 5F of Schedule 18 to ICTA.

Section 170: Shares or securities with limited rights

682.This section requires an alternative calculation if an equity holder’s rights (either to profits or to assets in a winding up) are restricted. It is based on paragraph 4 of Schedule 18 to ICTA.

683.Subsection (1) introduces the section. The calculation is made at the “relevant time” (see section 169(2)).

684.Subsection (2) requires a calculation of the “alternative proportion” on the assumption that all the restricted rights are waived. So, if those rights belong to the company in question, its proportion is reduced. But if the rights belong to other equity holders its proportion is increased.

685.Subsection (3) substitutes the alternative proportion for the proportion worked out using the basic rules, but only if the alternative proportion is smaller.

686.Subsection (5) makes clear that any sort of restriction of the rights of an equity holder is to be taken into account for the purposes of the section.

687.Subsection (6) draws attention to the fact that restrictions based on profits or assets referable to a trade carried on in the United Kingdom by a non-UK resident company are dealt with in sections 179 to 182 and not in this section.

Section 171: Shares or securities with temporary rights

688.This section and section 172 require an alternative calculation if an equity holder’s rights (either to profits or to assets in a winding up) are capable of changing. Both sections are based on paragraph 5 of Schedule 18 to ICTA.

689.Subsection (1) sets the scope of the section. If it applies, the consequences are set out in section 172. The calculation is made at the “relevant time” (see section 169(2)).

Section 172: Company A’s proportion if shares etc have temporary rights

690.This section and section 171 require an alternative calculation if an equity holder’s rights (either to profits or to assets in a winding up) are capable of changing. Both sections are based on paragraph 5 of Schedule 18 to ICTA.

691.Subsection (1) takes up the story from the previous section, which determines whether or not this section applies. To arrive at the “alternative proportion” one must assume that the rights of the equity holders are now what they will be at a “future time” when the rights become different (see section 171(2) and (3)).

692.Subsection (2) explains “relevant future time”.

693.Subsection (3) is the rule that the alternative proportion is used if it is smaller than the proportion that would otherwise be used.

Section 173: Cases in which option arrangements are in place

694.This section defines “option arrangement” for the purpose of section 174. It is based on paragraph 5B of Schedule 18 to ICTA.

695.Subsection (1) is a cross-reference to section 174, which sets out the consequences of option arrangements.

696.Subsection (2) introduces the two conditions that have to be satisfied if an arrangement is to be an option arrangement.

697.Subsection (3) is the condition that the arrangement changes the equity holder’s entitlement. The subsection refers (twice) to beneficial entitlement but paragraph 5B(2) of Schedule 18 to ICTA refers only to entitlement. This is not a change in the law because the option arrangements are relevant only if they are used for a “determination” to be made under paragraph 5B(7) of the Schedule. The determination is made in accordance with paragraph 2(1) or 3(1) of the Schedule. Those sub-paragraphs make clear that the Schedule is concerned only with beneficial entitlements.

698.Subsection (4) is the condition that the option may lead to a person acquiring shares or securities. Shares must be ordinary shares (defined in section 160). The option may be a “call” option, which gives a person the right to acquire the shares or securities; or a “put” option, which gives a person the right to require another person to acquire shares or securities.

699.Subsection (5) excludes rights that arise from an SAYE option scheme or that are to acquire normal commercial loans.Rights to acquire restricted preference shares (see section 160) are excluded by the reference to “ordinary shares” in subsection (4).

700.Subsections (6) and (7)set out the excluded rights under an SAYE option scheme.

Section 174: Company A’s proportion if option arrangements in place

701.This section requires an alternative calculation if an equity holder’s rights (either to profits or to assets in a winding up) are affected by option arrangements. It is based on paragraph 5B of Schedule 18 to ICTA.

702.There is a distinction between:

  • an option which affects the rights carried by shares or securities; and

  • an option which leads to the acquisition of shares or securities.

703.In the first case, such an option would fall within section 171. This section deals with the second case, which was considered in J Sainsbury plc v O’Connor (1991), 64 TC 208 CA(2).

704.Subsection (1) provides a method statement. It requires a calculation for every permutation of rights that may exist if options are exercised so that shares or securities in the company are acquired. The permutation that gives the lowest proportion is the “alternative proportion”.

705.Subsection (2) is the rule that the alternative proportion is used if it is lower than the proportion that would otherwise be used.

Sections 175 to 178
Overview

706.The first step in a calculation of an equity holder’s proportion of profits available for distribution is based on the equity holder’s share holding (see section 165). The equivalent first step in the calculation of an equity holder’s proportion of assets available for distribution in a winding up is in section 166.

707.The next step is to check whether there is a (lower) alternative proportion in accordance with the three special rules in:

  • section 170 (limited rights);

  • section 172 (temporary rights); or

  • section 174 (options).

708.If only one of the special rules applies the lower alternative proportion is used. But sections 175 to 178 explain what happens if two or three of the special rules apply in the same case.

709.If two rules apply, there are four possible proportions:

  • calculated under the basic rule in section 165 or 166;

  • calculated under one of the special rules;

  • calculated under the other of the special rules; or

  • calculated under both rules together.

710.If all three rules apply, there are eight possible proportions.

711.In all cases, the lowest proportion is used.

Section 175: Cases in which both sections 170 and 172 apply

712.This section deals with the first and second special rules. It is based on paragraph 5A of Schedule 18 to ICTA.

Section 176: Cases in which both sections 170 and 174 apply

713.This section deals with the first and third special rules. It is based on paragraph 5C of Schedule 18 to ICTA.

Section 177: Cases in which both sections 172 and 174 apply

714.This section deals with the second and third special rules. It is based on paragraph 5D of Schedule 18 to ICTA.

Section 178: Cases in which sections 170, 172 and 174 all apply

715.This section deals with the first, second and third special rules. It is based on paragraph 5E of Schedule 18 to ICTA.

Section 179: Cases in which surrendering or claimant company is non-UK resident

716.This section introduces special rules about equity holders in non-UK resident companies. It is based on paragraph 5F of Schedule 18 to ICTA.

717.Subsection (1) sets the scope of the section.

718.Subsection (2) applies the special rules in section 180 if the equity holder’s rights are used to establish whether or not a non-UK resident company is owned by a consortium.

719.Subsection (3) applies the special rules in section 180 if the equity holder’s rights are used to establish whether or not a non-UK resident company is a subsidiary of another company.

720.Subsection (4) applies the special rules if (“Case 1”) the equity holder’s rights are referable to the profits or assets of the non-resident company’s “UK trade”. It also operates in this way if (“Case 2”) the equity holder has rights under an option arrangement which are referable to the profits or assets of the non-resident company’s UK trade. The extent to which profits or assets are referable to the company’s UK trade is determined in accordance with section 182.

Section 180: Company A’s proportion if non-UK resident involved

721.This section is the main special rule aboutequity holders in non-UK resident companies. It is based on paragraph 5F of Schedule 18 to ICTA.

722.Subsection (1) introduces the section: subsection (2) applies in cases where there are no limited rights, temporary rights or option arrangements; subsection (3) applies in other cases.

723.Subsection (2) deals with the straightforward case in which none of sections 170 (limited rights), 172 (temporary rights) or 174 (options) applies. The alternative proportion calculated on the assumptions in section 181 is used if it is lower than the proportion that would otherwise be used.

724.Subsection (3) is a method statement which deals with the more complicated cases involving sections 170 (limited rights), 172 (temporary rights) and 174 (options), either singly or in the various possible combinations (see sections 175 to 178). The rule is that any calculations under those sections is done again using the assumptions in section 181 and the result of that calculation is used if it is lower than the proportion would otherwise be.

Section 181: Assumptions to be applied if non-UK resident company involved

725.This section sets out how to calculate the “alternative proportion” for section 180. It is based on paragraph 5F of Schedule 18 to ICTA.

726.All the calculations under section 180 are done by reference to amounts that are “referable to company B’s UK trade” (defined in section 182).

727.Assumptions 2 and 3 do not include £100 as an alternative to the company’s United Kingdom profits or assets (see paragraph 5F(7)(b) of Schedule 18 to ICTA, which applies if the profits are between £1 and £99). This is because the alternative has little or no practical effect. See Change 26 in Annex 1. In a case where there are no profits, section 165(2) substitutes the amount of £100.

728.Assumption 4 refers (three times) to beneficial entitlement but paragraph 5F(7)(c) and (8) of Schedule 18 to ICTA refers only to entitlement. This is not a change in the law because the option arrangements are relevant only if they are used for a “determination” to be made under paragraph 5F(4) or (5) of the Schedule. The determination is made in accordance with paragraph 2(1) or 3(1) of the Schedule. Those sub-paragraphs make clear that the Schedule is concerned only with beneficial entitlements.

Section 182: Assets etc referable to UK trade

729.This section determines the extent to which amounts are referable to a company’s “UK trade”. It is based on paragraph 5F of Schedule 18 to ICTA.

730.Paragraph (b) of the section excludes amounts attributable to activities that are “double taxation exempt”. That expression is defined in section 186.

Chapter 7: Miscellaneous provisions and interpretation of Part
Overview

731.This Chapter contains definitions and two minor rules.

Section 183: Payments for group relief

732.This section takes outside the tax system any payments for group relief. It is based on section 402 of ICTA.

733.Originally (from 1953 to 1967) a form of group relief was available, based on “subvention” payments from one company to another. The payment was allowed as a deduction, reducing the profits of the paying company; and it was a taxable receipt of the company receiving the payment. Such payments are no longer required by United Kingdom tax law. But they may be made by agreement between group members. This section ensures that they are neither allowed as a deduction nor taxed.

Section 184: References to “allowance” in CAA 2001

734.This section clarifies the position if capital allowances are surrendered as group relief. It is based on section 411 of ICTA.

735.Capital allowances surrendered as group relief still count as having been made to the surrendering company. This means that a balancing charge on the surrendering company takes into account those surrendered allowances.

Section 185: “Trading company” and “holding company”

736.This section provides definitions. It is based on section 413(3) of ICTA.

Section 186: When activities of a company are double taxation exempt

737.This section explains what is meant by activities that are double taxation exempt. It is based on section 403D of, and paragraph 5F of Schedule 18 to, ICTA.

738.The definition is used in sections 107(4), 108(3), 140(8), and 182(b).

739.Subsection (1) makes the link between the activities that are described in the Part as exempt and the profits from those activities which are the subject of exemption under a DTA.

740.Subsection (2) makes clear that activities are to be treated as exempt whether or not any necessary claim for exemption is actually made.

741.Subsection (3) defines “double taxation arrangements” by reference tosection 2 of TIOPA. They are “… arrangements … made in relation to any territory outside the United Kingdom with a view to affording relief from double taxation in relation to …” the taxes within subsection (3) of that section.

Section 187: Meaning of “non-UK tax”

742.This section defines “non-UK tax” for this Part of the Act. It is based on sections 403D and 403E of, and paragraph 17 of Schedule 18A to, ICTA. The expression is used in sections 106 to 109, 115 to 121 and 949.

743.Subsection (1) is the basic rule that the non-UK tax must correspond to United Kingdom income tax or corporation tax.

744.Subsection (2) makes clear that the non-UK tax need not be a national tax: it may be a tax imposed by a province or state of a foreign country.

Section 188: Other definitions

745.This section sets out definitions of expressions used in the Part. It is based on sections 6(4) and 413 of ICTA.

746.Subsection (2) defines “trade” so that it includes an office but does not refer to a company having a vocation or employment.See Change 4 in Annex 1.

Part 6: Charitable donations relief

Overview

747.This Part deals with qualifying charitable donations, known as “charges on income” in the source legislation.

748.Chapter 1 gives relief for qualifying charitable donations and defines the term as qualifying payments and amounts treated as qualifying charitable donations. Chapter 2 deals with qualifying payments and Chapter 3 is about disposals treated as qualifying charitable donations.

749.For corporation tax purposes charges on income are now reduced to charitable donations only (see section 338A(2) of ICTA). A more accurate description has therefore been substituted for “charges on income”. The term “charges on income” was dispensed with for income tax purposes by ITA and this Act now follows that path.

750.It is not considered that by relabelling “charges on income” as “qualifying charitable donations” there is any danger of either depriving a company of a relief which is due or allowing relief that is not due for a payment.

Chapter 1: Nature of relief
Overview

751.This Chapter allows a deduction from a company’s total profits for qualifying charitable donations and explains what constitutes qualifying charitable donations. It is based on sections 338, 338A, and 339(1) of ICTA.

Section 189: Relief for qualifying charitable donations

752.This section allows qualifying charitable donations as deductions from a company’s total profits. It is based on section 338 of ICTA.

753.Allowable deductions are limited to an amount which reduces the taxable total profits for a period to nil.

Section 190: Qualifying charitable donations: meaning

754.This section gives the meaning of qualifying charitable donations. It is based on sections 338A(1) to (3) and 339(1) of ICTA.

755.Subsection (2) rewrites both section 338A(3) and section 339(1)(b) of ICTA. These two subsections cover the same ground.

756.A similar rule is found in section 337A(1)(b) of ICTA which provides that a company’s income from any source is to be computed without any deduction in respect of charges on income. This is rewritten and inserted into Chapter 1 of Part 20 of CTA 2009 (restriction of deductions) by Schedule 1 but expressed as a qualifying charitable donation rather than a charge on income.

Chapter 2: Certain payments to charity
Overview

757.This Chapter gives relief for certain payments of money by companies to charities. It is based on section 339 of ICTA.

Section 191: Qualifying payments

758.This section sets out the conditions which have to be met if a sum paid to a charity is to be a qualifying payment and hence a qualifying charitable donation. It is based on section 339(1), (3B), (3E), and (3G) of ICTA.

Section 192: Condition as to repayment

759.This section provides that under certain conditions a charitable payment is not subject to a “condition as to repayment” (see section 191(3)). It is based on sections 339(3BA) and (3BB) of ICTA.

760.Subsection (6), in referring to non-charitable expenditure, rewrites the cross-reference to “section 505(4)” of ICTA in section 339(3BB) of ICTA as section 493 and section 515. Section 515 rewrites section 505(4) of ICTA and section 493 section 505(5) of ICTA. Non-charitable expenditure referred to in section 505(5) is, by implication, the same non-charitable expenditure as is referred to in section 505(4). It was considered helpful however to clarify in the rewrite that non-charitable expenditure in both the accounting period (section 505(4)) and previous accounting period (section 505(5)) are referred to by subsection (6).

Section 193: Associated acquisition etc

761.This section specifies circumstances in which a payment to a charity is prevented from being a qualifying payment because of association with an acquisition of property by the charity from the donor or an associated company. It is based on section 339(3E) of ICTA.

Section 194: Distributions

762.This section prevents a distribution from being a qualifying payment other than in the case of a payment from a company which is whollyowned by a charity. It is based on section 339(1), (1A) and (1B) of ICTA.

Section 195: Associated benefits

763.This section prevents one or more payments which result in benefits from being qualifying payments, unless the benefits are within the limits set out in section 197 (restrictions on associated benefits). It is based on section 339(3B) of ICTA.

Section 196: Associated benefits: meaning

764.This section explains for the purposes of the Chapter when a benefit is associated with a payment to a charity. It is based on section 339(3B) of ICTA.

Section 197: Restrictions on associated benefits

765.This section sets out two conditions which, if either is met, mean that the restrictions on benefits associated with a payment to a charity are breached. It is based on section 339(3B), (3C), (3D) and (3DA) of ICTA.

766.The two conditions are:

  • a stepped scale, depending on the amount of each payment (Condition A) – the “benefit per payment” test; and

  • an overall monetary limit on benefits associated with the total of any payments to a single charity in the course of an accounting period – the “benefit per accounting period” test (Condition B). This is unrelated to the size of any particular payment.

767.Both these restrictions apply to any benefit “associated with” a payment.

Section 198: Payments and benefits linked to periods of less than 12 months

768.This section modifies the application of section 197 where payments or benefits are linked to periods of less than 12 months. It is based on section 339(3DB), (3DC) and (3DD) of ICTA.

769.The section provides, according to the case, for annualising:

  • the actual amount of the payment; or

  • both the amount of the payment and the value of the benefit(s) associated with the payment.

770.Only the annualised amount in each case is to be compared with the cash limits given in section 197. This prevents periods of less than 12 months being used to exploit the cash limits.

771.Subsection (8) states the formula for annualising in each case. In the source legislation some of the conditions could overlap, so that more than one condition could apply to the payment(s) and associated benefits concerned. This subsection removes doubt about which might take priority by providing a priority rule where payments are made at intervals of less than 12 months. See Change 27 in Annex 1.

Section 199: Payment attributed to earlier accounting period

772.This section allows an election to be made for a payment to be attributed to an earlier accounting period which falls within a period of nine months prior to the date of the payment instead of the accounting period in which the payment is made. It is based on section 339(7AA) of ICTA.

773.Subsection (3) sets out the time within which a claim must be made. The reference in the source legislation to claims being to the Board of Inland Revenue has been changed. Claims are simply to an officer of Revenue and Customs. See Change 5 in Annex 1.

Section 200: Company wholly owned by a charity

774.This section sets out what conditions are required to be met in order for a company to be wholly owned by a charity. It is based on section 339(7AB) and (7AC) of ICTA.

Section 201: Associated persons

775.This section defines an associated person as a person who is connected with the company or who is connected with such a person. It is based on section 339(7A) of ICTA.

Section 202: “Charity”

776.This section defines “charity” for the purposes of the Chapter and is based on section 339(9) of ICTA.

777.Section 339(9) of ICTA defines charity, in part, by reference to the bodies mentioned in section 507 of ICTA. That section includes the Trustees of the BritishMuseum and the Trustees of the Natural History Museum. The BritishMuseum and NaturalHistoryMuseum are established for charitable purposes and so there is no need to refer to them separately in this definition.

Chapter 3: Certain disposals to charity
Overview

778.This Chapter gives relief to companies making donations to charities not by payments of money but by way of certain disposals including disposals at an undervalue. It is based on sections 587B to 587C of ICTA.

Section 203: Certain disposals of investments

779.This section sets out the requirements for relief. It is based on section 587B(1) and (2) of ICTA.

780.Subsection (3) prevents relief under section 105(2) of CTA 2009 where relief is given under this section. Section 105 of CTA 2009 deals with gifts of “articles” manufactured, or of a class or description sold by, the donor in the course of the trade. It is considered that this may include certain shares or securities which fall within this section.

Section 204: Meaning of qualifying investment

781.This section lists the types of investment that can attract relief. It is based on section 587B(9) to (9ZB) of ICTA.

Section 205: Meaning of qualifying interest in land

782.This section defines “qualifying interest in land” (one of the qualifying investments listed in section 204). It is based on section 587B(9A) to (9E) of ICTA.

783.Subsections (2) and (3) clarify the position where a company with a beneficial interest in a freehold or leasehold interest in land in the United Kingdom gives that beneficial interest to a charity along with any easement, servitude or right that benefits the land. For example, company A’s land may only be accessible by way of an easement over B’s land. If company A gives the charity both the land and the right over B’s land, the disposal of the right is treated as a separate disposal.

784.Under subsection (4), if a company with a freehold or leasehold interest carves out of that interest a lease for the benefit of the charity, the retention of the freehold or leasehold reversion does not prevent the disposal from being “of the whole beneficial interest”.

785.Under subsection (5), an agreement to acquire a freehold, or an agreement for a lease, is not a qualifying interest in land. So disposing of such an agreement would not constitute a disposal of a qualifying investment.

Section 206: The relievable amount

786.This section sets out how to calculate the relievable amount, first in cases where the qualifying investment is transferred to the charity by way of gift (subsection (1)), and then where there is some, but not full, consideration for the transfer (subsection (2)). It is based on section 587B(4) to (7) of ICTA.

787.In each case, the computation starts with the value of the net benefit to the charity (V), either directly (as in subsection (1)) or in arriving at E (the excessof V over the consideration for the disposal) in subsection (2).

788.The detail of how V is calculated is in sections 209 to 212. But it is emphasised in the definition of V in subsection (1) that V must be considered both at, and immediately after, the time of disposal. If there is a difference between V at these two times, the lesser amount is taken.

789.Subsection (3) makes it explicit that if the amount given by either formula is negative the relievable amount is nil.

790.The treatment of incidental costs of disposal depends on whether the transfer is by way of gift or at an undervalue. If it is a gift, all the incidental costs areadded in arriving at the relievable amount. But if there is consideration for the disposal, there is an interplay between the capital gains tax treatment and the incidental costs.

791.Under section 257(2)(a) of TCGA a gift of a qualifying investment to a charity is treated as being for such a consideration as results in neither a loss nor a gain to the donor. Incidental costs are added only if that deemed consideration is greater than the actual consideration. But the amount added must not be greater than that excess. C is defined in subsection (4) to achieve this result.

Section 207: Incidental costs of making disposal

792.This section defines “the incidental costs of making the disposal to the company making it”. It is based on section 587B(9) of ICTA.

793.The section reproduces the relevant material in section 38(2) of TCGA to which section 587B(9) of ICTA cross-refers, with the exception of the reference to stamp duty and stamp duty land tax, which do not apply to transactions within this Chapter.

Section 208: Consideration

794.This section makes provision about the calculation of the relievable amount in the case of disposal at an undervalue. It is based on section 587B(7) of ICTA.

795.The section applies section 48 of TCGA (consideration due after time of disposal). The main thrust of section 48 of TCGA is that full value is to be introduced into the computation of the gain. Only on a subsequent claim is the consideration to be reduced, either because the right to receive any amount is contingent or because any part of the consideration proves to be irrecoverable.

Section 209: Value of net benefit to charity

796.This section is the first of four sections concerned with defining the value of the net benefit to the charity. It is based on section 587B(8A) and (8B) and (9) of ICTA.

797.In the simple case, where there are no disposal-related obligations, the value of the net benefit to the charity is the market value of the qualifying investment. As indicated in section 206, this has to be considered both at, and immediately after, the disposal.

798.If the charity is, or becomes, subject to an obligation that is related to the disposal of the qualifying investment to the charity, the market value of the investment is reduced by the amount of the disposal-related liabilities (see section 212) under the obligation. These obligations must also be considered both at, and immediately after, the disposal.

Section 210: Market value of qualifying investments

799.This section sets out how the market value of qualifying investments is to be determined. It is based on section 587B(9) to (11) of ICTA.

800.The methods are those laid down in sections 272 to 274 of TCGA. If an offshore fund publishes buy and sell prices, an interest in it is in effect subject to the same treatment as a unit trust scheme as laid down by section 272(5) of TCGA. The provisions of that subsection are reproduced here.

Section 211: Meaning of “disposal-related obligation”

801.This section defines “disposal-related obligation”. It is based on section 587B(8B) to (8D) and (9) of ICTA.

Section 212: Meaning and amount of “disposal-related liability”

802.This section defines “disposal–related liability”. It is based on section 587B(8E) to (8G) and (9) of ICTA.

803.Subsection (2) deals with contingent disposal-related obligations.

804.It is in the nature of a contingency that it may occur after the time of disposal; hence the words “at any time”. If a contingency occurs later than immediately after the disposal, but existed as a possibility at the time of disposal, the value of the net benefit to the charity at the time of, or immediately after, the disposal must be reduced. All necessary adjustments must be made to give effect to this. Conversely, if the contingency does not occur, to that extent there is no obligation and no liability.

Section 213: Certificate required from charity

805.This section, which is the first of four that deal specifically with qualifying interests in land, requires any claim for relief in relation to a qualifying interest in land to be supported by a certificate from the charity. It is based on section 587C(1), (4) and (5) of ICTA.

Section 214: Qualifying interests in land held jointly

806.This section deals with a disposal of land by all joint holders where at least one of the owners is a qualifying company. It is based on section 587BA(1) to (5) and (13) of ICTA.

Section 215: Calculation of relievable amount etc where joint disposal of interest in land

807.This section provides details for calculating the “relievable amount” in cases where there is a joint disposal of an interest in land. It is based on section 587BA(6) to (11) of ICTA.

808.If the joint owners include an individual subsection (3) directs the reader to Chapter 3 of Part 8 of ITA for the purposes of the relievable amount where that situation is catered for.

Section 216: Disqualifying events

809.This section provides for the recovery of relief if a “disqualifying event” occurs within the “provisional period”. It is based on section 587C(1) and (6) to (10) of ICTA.

810.In the simplest case, such an event occurs if any of the persons who made the disposal are entitled to buy the land back from the charity at an undervalue.

Section 217: “Charity”

811.This section defines “charity” for the purposes of the Chapter. It is based on section 587B(9) of ICTA.

Part 7: Community investment tax relief

Overview

812.This Part provides for community investment tax relief (CITR), that is corporation tax reductions for companies which invest in community development finance institutions (CDFIs). It is based on Schedule 16 to FA 2002.

813.Schedule 16 to FA 2002 as enacted also provided for CITR for individuals who invested in CDFIs, by way of reduction of income tax. Relief for individuals has been rewritten in Part 7 of ITA. This Part of this Act largely mirrors Part 7 of ITA.

814.Schedule 1 to ITA has inserted sections 151BA, 151BB and 151BC in TCGA, replacing paragraphs 40 and 41 of Schedule 16 to FA 2002 and, so far as they apply for the purposes of capital gains tax or corporation tax on chargeable gains, paragraphs 47 and 48(2) of that Schedule. Those sections of TCGA accordingly apply in relation to CITR for both individuals and companies.

Chapter 1: Introduction
Overview

815.This Chapter quantifies the tax reduction potentially available to a company, labels certain concepts and provides signposts to material contained elsewhere.

Section 218: Meaning of “CITR”

816.This section sets out a general description of the nature of the relief, an entitlement to tax reductions, and defines it as “CITR”. It is new.

Section 219: Eligibility for CITR

817.This section summarises the general conditions which need to be met for a company (“the investor”) to be eligible for CITR. It is based on paragraphs 1 and 4(1) of Schedule 16 to FA 2002.

818.Subsection (1)(a) requires that, for an investment in a CDFI to qualify for CITR, the CDFI must be accredited under Chapter 2 of Part 7 of ITA.

819.Chapter 2 of Part 7 of ITA provides that accreditation is to be made by the Secretary of State, sets out the criteria for accreditation, contains powers to determine the manner of making applications and the terms and conditions of accreditation, and authorises delegation of the Secretary of State’s functions. These functions have been assigned to the Secretary of State for Business, Innovation and Skills.

820.Sections 340 and 341 in Chapter 2 of Part 7 of ITA contain powers for the Treasury to make regulations. The regulations in force are the Community Investment Tax Relief (Accreditation of Community Development Finance Institutions) Regulations 2003 (SI 2003/96), made under the predecessor of those powers in paragraphs 4 and 5 of Schedule 16 to FA 2002, as amended by the Community Investment Tax Relief (Accreditation of Community Development Finance Institutions) (Amendment) Regulations 2008 (SI 2008/383).

821.Regulations may make different provision for bodies whose principal objective in providing finance is to invest in enterprises whose business does not consist of financing other enterprises or does so only to the extent permitted by the regulations. If such a body is accredited, it is designated as a retail community development finance institution (a “retail CDFI”). See the commentary on section 340 of ITA in the explanatory notes on that Act.

822.The distinction between a retail CDFI and an accredited CDFI which is not a retail CDFI (a “wholesale CDFI”) is relevant to the limits on the total value of investments which a CDFI can make for an accreditation period and which are set out in section 348(4) of ITA and section 229(4) of this Act. SI 2003/96 provides different limits on the value of investments which a retail CDFI and a wholesale CDFI may make in any enterprise.

823.As a consequence of the direct references to Chapter 2 of Part 7 of ITA in subsection (1)(a) of this section and elsewhere in this Part, it is unnecessary to rewrite paragraph 4(2)of Schedule 16 to FA 2002, as substituted by ITA, which contains signposts to the provisions of that Chapter.

Section 220: Form and amount of CITR

824.This section specifies the amount of the corporation tax reduction available and the accounting periods for which it may be claimed. It is based on paragraph 20 of Schedule 16 to FA 2002.

825.The combined effect of subsections (2) and (3) is that the maximum tax reduction is 25% of the amount invested and is available at the rate of not more than 5% of that amount in each of five accounting periods beginning with that in which the investment is made.

Section 221: Meaning of “making an investment”

826.This section provides that an investment in a CDFI may take the form of a loan or an issue of securities or shares. It is based on paragraph 2 of Schedule 16 to FA 2002. See also section 256 which extends the meaning of “loan” to include certain alternative finance arrangements.

Section 222: Determination of “the invested amount”

827.This section sets out rules for determining the amount invested for the purposes of section 220.It is based on paragraph 21 of Schedule 16 to FA 2002. In particular, it deals with the complications which arise where a loan may be drawn down in tranches, by requiring the average capital balance of the loan in relation to the accounting period to be calculated.

Section 223: Meaning of “the 5 year period” and “the investment date”

828.This section provides the definitions of two significant terms. It is based on paragraph 3 of Schedule 16 to FA 2002. “The 5 year period”, which begins with “the investment date”, is the period during which conditions as to the repayment or redemption of the investment are imposed.

Section 224: Overview of other Chapters of Part

829.This section indicates the subject matter of the Chapters of this Part not previously mentioned in Chapter 1. It is new.

Chapter 2: Qualifying investments
Overview

830.This Chapter sets out the conditions which must be met if an investment is to be a qualifying investment.

Section 225: Qualifying investments: introduction

831.This section introduces:

  • the respective conditions which apply to loans (section 226), to securities (section 227) and to shares (section 228), and

  • the provisions which apply to all kinds of investment (sections 229 and 230).

It is based on paragraph 8 of Schedule 16 to FA 2002.

Section 226: Conditions to be met in relation to loans

832.This section sets out the three conditions applicable to loans. It is based on paragraph 9 of Schedule 16 to FA 2002.

Section 227: Conditions to be met in relation to securities

833.This section sets out the two conditions applicable to securities. It is based on paragraph 10 of Schedule 16 to FA 2002.

834.Condition A (subsection (1)) requires that securities must be subscribed for wholly in cash and fully paid for on the investment date. It is in similar terms to section 228(1) which sets out identical requirements in relation to shares.

835.Section 228(3) (based on paragraph 11(1) of Schedule 16 to FA 2002) provides that shares are not fully paid up for the purposes of section 228(1) if there is any undertaking to pay cash to the CDFI at a future date in connection with the acquisition of the shares. The effect of this is to distinguish the meaning of “paid up” for that purpose from the meaning of those words for the purposes of the Companies Acts in section 583 of the Companies Act 2006 which provides that a share is deemed paid up in cash, or allotted for cash, if the consideration for the allotment or payment up is an undertaking to pay cash to the company at a future date.

836.There is no similar provision in the Companies Acts applicable to the issue of securities, but the position in relation to securities has been made explicit by the inclusion of subsection (3), equivalent to section 228(3). This clarification is not a change in either law or practice.

Section 228: Conditions to be met in relation to shares

837.This section sets out the two conditions applicable to shares. It is based on paragraph 11 of Schedule 16 to FA 2002.

Section 229: Tax relief certificates

838.This section sets limits on the value of investments in respect of which a CDFI may issue tax relief certificates in an accreditation period. It is based on paragraph 4(3) and 12 of Schedule 16 to FA 2002. Without a tax relief certificate, an investor may not claim CITR (see section 220(5)(b)).

839.Subsections (2) and (3) provide that the limit applies to the total value of investments in the CDFI made in the accreditation period by companies under this Part and by individuals under Part 7 of ITA.

840.Subsection (4) provides different amounts for the limits for retail and wholesale CDFIs. See the commentary on section 219.

841.Subsections (6) and (7) provide for the substitution of different amounts by Treasury order for the amounts in subsection (4). Subsection (7) is based on paragraph 12(5) of Schedule 16 to FA 2002 which provides that:

Any such substitution shall have effect in relation to such accreditation periods as may be specified in the order; and those periods may, if the substitution increases the amount for the time being specified in sub-paragraph (2), include periods beginning before the order takes effect.

842.Subsection (7) corrects two infelicities in the source legislation. For “the amount” it substitutes “an amount” to avoid any doubt that the power to apply an increase retrospectively can be exercised if one only of the amounts in subsection (4) is increased. For “the order takes effect” it substitutes “the order comes into force”. The wording in the source legislation could be misconstrued as referring to the time when the order is itself made. The substituted wording clarifies that the intended meaning is the time when the provisions of the order come into force.

843.In subsection (8), the words “wholly or partly”, which appear before “in contravention” in paragraph 12(6) of Schedule 16 to FA 2002, have been omitted as being unnecessary.

Section 230: No pre-arranged protection against risks

844.This section is an anti-avoidance provision concerned with ensuring that the investor is subject to all usual investment risks and is not protected from their effect by insurance, indemnity, guarantee or other means. It is based on paragraph 13 of Schedule 16 to FA 2002.

Chapter 3: General conditions
Overview

845.This Chapter contains various general conditions to be met by the investor. It is based on Part 4 of Schedule 16 to FA 2002.

Section 231: No control of CDFI by investor

846.This section provides that the investor does not qualify for CITR in relation to an investment if the investor or a person connected with the investor controls the CDFI at any time in the 5 year period. It is based on paragraph 14 of Schedule 16 to FA 2002.

847.The legal structure of a CDFI may take a number of forms. It may be a company or some other form of body corporate or it may be a partnership or some other form of unincorporated association. The different meanings of control needed to deal with the possible different forms of a CDFI’s constitution are set out in subsections (3) to (6).

Section 232: Investor must have beneficial ownership

848.This section provides that the investor must be the sole beneficial owner of the investment. It is based on paragraph 15 of Schedule 16 to FA 2002. Trustees and joint investors are thus precluded from obtaining CITR. But see section 262 which enables investments to be made by a nominee or a bare trustee for a company.

Section 233: Investor must not be accredited

849.This section prevents a CDFI claiming CITR in respect of an investment in another CDFI. It is based on paragraph 16 of Schedule 16 to FA 2002.

Section 234: No acquisition of share in partnership

850.This section provides that an investor cannot obtain CITR for capital contributed to a CDFI which is a partnership, including loan capital accounted for as partners’ capital. It is based on paragraph 17 of Schedule 16 to FA 2002.

Section 235: No tax avoidance purpose

851.This section denies CITR if the investment is part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax. It is based on paragraph 18 of Schedule 16 to FA 2002.

Chapter 4: Limitations on claims and attribution
Overview

852.This Chapter is based on Part 5 of Schedule 16 to FA 2002 other than paragraphs 20 and 21. Sections 220 and 222 in Chapter 1 are based on those two paragraphs.

Section 236: Loans: no claim after disposal or excessive repayments or receipts of value

853.This section prevents a claim being made for any accounting period in respect of an investment by way of loan in certain circumstances. It is based on paragraph 22 of Schedule 16 to FA 2002. This section links to the provisions in sections 243, 245 and 246 which provide for a tax reduction already given to be recaptured in similar circumstances.

Section 237: Securities or shares: no claim after disposal or excessive receipts of value

854.This section sets out two conditions to be met before a claim can be made for any accounting period in respect of a subscription for securities or shares. It is based on paragraph 23 of Schedule 16 to FA 2002.

855.The first condition (subsection (1)) is that the investor has not disposed of the securities or shares before the first anniversary of the investment date which occurs after the end of the accounting period.

856.The second condition (subsection(2)) is that the investor has not received or is not treated as having received value from the CDFI in excess of the limits allowed under section 247.

Section 238: No claim after loss of accreditation by the CDFI

857.This section provides that no claim may be made if the CDFI ceases to be accredited. It is based on paragraph 24 of Schedule 16 to FA 2002.

858.Depending on the investment date and the date upon which the CDFI ceased to be accredited, this section may prevent a claim being made for the accounting period before that in which the CDFI ceased to be accredited (see subsections (2) to (4)).

859.Subsections (2) to (4) unpack paragraph 24(2) of Schedule 16 to FA 2002 in order to make its various elements clearer.

Section 239: Accreditation of investor

860.This section provides that no claim may be made if the investor becomes accredited as a CDFI. It is based on paragraph 25 of Schedule 16 to FA 2002. This section has no equivalent in Part 7 of ITA as an individual cannot be a CDFI.

861.Depending on the investment date and the date upon which the investor becomes accredited, this section may prevent a claim being made for the accounting period before that in which it became accredited (see subsections (2) to (4)).

862.Subsections (3) to (5) unpack paragraph 25(2) of Schedule 16 to FA 2002 in the same way that section 238(2) to (4) unpack paragraph 24(2) of that Schedule.

Section 240: Attribution: general

863.This section sets out the general rules dealing with the attribution to the loan, securities or shares of the reduction in the investor’s corporation tax liability for any accounting period made as a result of the investor’s entitlement to CITR. It is based on paragraph 26(1) to (4), (7) and (8) of Schedule 16 to FA 2002.

864.Attribution is required for the purpose of determining the amount of the tax reduction which must be withdrawn or reduced in accordance with Chapter 5 of this Part.

Section 241: Attribution: bonus shares

865.This section sets out additional rules relating to attribution, to deal with the consequences of an issue of “corresponding bonus shares” (see subsection (4)) to the investor in respect of the original shares included in the investment. It is based on paragraph 26(5) and (6) of Schedule 16 to FA 2002.

Chapter 5: Withdrawal or reduction of CITR
Overview

866.This Chapter sets out the circumstances in which CITR attributable to an investment for any accounting period must be reduced to nil (withdrawn) or reduced proportionately. It is based on Part 6 of Schedule 16 to FA 2002.

Section 242: Introduction to Chapter

867.This section provides an overview of the Chapter and contains signposts to its principal provisions. Apart from subsection (3), it is new.

868.Subsection (3) is based on paragraph 33 of Schedule 16 to FA 2002,with the substitution of the term “the 6 year period” for the term “the period of restriction” in that paragraph but without any change in the definition of the term. The 6 year period is relevant to sections 246 and 247 which deal with receipts of value. As an anti-avoidance measure, receipts of value in the year before the investment dateare taken into account, as well as those in the 5 year period, which begins with the investment date. See the commentary on section 223 for the meaning of “the 5 year period” and “the investment date”.

Section 243: Disposal of loan during 5 year period

869.This section provides that the CITR attributable to a loan must be withdrawn if, within the 5 year period, the investor disposes (otherwise than by receiving repayment) of part of the loan or, unless it is by way of a permitted disposal, of the whole of the loan. It is based on paragraph 28 of Schedule 16 to FA 2002.

870.A permitted disposal is defined in subsection (2). If the disposal is a permitted disposal, any tax reduction already obtained is not withdrawn, but no further tax reduction may be claimed (see sections 220(6) and 236).

Section 244: Disposal of securities or shares during 5 year period

871.This section provides for the withdrawal or reduction of CITR attributable to securities or shares, if the investor disposes of the whole or part of the investment in the securities or shares (except upon repayment, redemption or repurchase by the CDFI) within the 5 year period and the CDFI is accredited at the time of the disposal. It is based on paragraph 29 of Schedule 16 to FA 2002.

872.Subsections (2) and (3) provide for different consequences depending upon whether the disposal is a qualifying disposal.

873.Subsection (4) defines what is a qualifying disposal. It is based on paragraph 29(4) of Schedule 16 to FA 2002 with the omission of the words “for full consideration” in paragraph(a). See Change 11in Annex 1.

874.There is inconsistency of language between paragraph 29(3) and (5) of Schedule 16 to FA 2002 which refer to CITR being attributable foran or any accounting period and paragraph 26(1)(b) of that Schedule (rewritten in section 240(1)) which defines references in that Schedule to “CITR attributable ... in respect of an accounting period”. This section removes this inconsistency by substituting “in respect of” in subsections (3) and (5).

875.Subsection (5)provides for circumstances where 5% of the invested amount is greater than the corporation tax liability of the investor for the accounting period.

Section 245: Repayment of loan capital during 5 year period

876.This section provides for the circumstances in which the CITR attributable to a loan must be withdrawn as a consequence of a repayment other than a “non–standard” repayment (see subsections (3) to (5)). It is based on paragraph 30 of Schedule 16 to FA 2002.

Section 246: Value received by investor during 6 year period: loans

877.This section applies if the investment consists of a loan and the investor or a person connected with the investor receives any value, other than an amount of insignificant value (as defined in subsection (5)), from the CDFI or a person connected with the CDFI in the 6 year period. It is based on paragraph 31 of Schedule 16 to FA 2002.

878.Subsection (2) provides that, if value is so received, the invested amount (see section 222) is adjusted by the amount treated as repaid and the investor is treated as having received a repayment other than a non-standard repayment for the purposes of section 245(see subsection (4)).

879.In subsection (5) the words “of value” have been added after “means an amount”. This conforms the language of this subsection with that of sections 247(4), 248(4) and 252(4).

Section 247: Value received by investor during 6 year period: securities or shares

880.This section applies if the investment consists of securities or shares and the investor or a person connected with the investor receives any value, other than an amount of insignificant value (as defined in subsection (4)), from the CDFI or a person connected with the CDFI in the 6 year period. It is based on paragraph 32 of Schedule 16 to FA 2002.

881.Subsection (2) provides that, if value is so received and its amount wholly or partly exceeds the permitted level (see subsection (3)) by more than an amount of insignificant value, the CITR attributable to the investment must be withdrawn.

Section 248: Receipts of insignificant value to be added together

882.This section applies at a time when the investor receives value, if the investor has also received value earlier in the 6 year period and the total amount of the value received earlier was of insignificant value. It is based on paragraph 34 of Schedule 16 to FA 2002.

883.The amount of the receipt in question is to be added to the amounts of value previously received. If the total value of the amounts received is not an amount of insignificant value, the total value is treated as received at that time for the purposes of this Part, including in particular sections 245, 246 and 247.

884.Subsection (8) is new. It provides that this section is subject to section 251 which modifies the effect of this section and of sections 246, 247 and 252.

885.Sections 246(7) and 247(5) already provide that those sections are subject to section 251. Subsection (8) of this section and new subsection (5) of section 252 (see the commentary on that section) have been added to ensure consistency.

Section 249: When value is received

886.This section explains when value is received. It is based on paragraph 35 of Schedule 16 to FA 2002.

887.In subsection (1)(d)(i), as in section 366(1)(d) of ITA, the singular “associate” is used in place of the plural “associates” in paragraph 35(1)(d)(i) of Schedule 16 to FA 2002. Similarly in subsection (1)(d)(ii) the singular “a director or employee” is used instead of the plural “directors or employees” in paragraph 35(1)(d)(ii) of that Schedule.

Section 250: The amount of value received

888.This section determines the respective values received in relation to the respective transactions listed in paragraphs (a) to (g) of section 249(1). It is based on paragraph 36 of Schedule 16 to FA 2002.

889.To give clarity, subsection (1) sets out the values against the paragraphs of section 249(1) in tabular form.

890.In a case falling within section 249(1)(d)(ii), the table permits the deduction of consideration which is given by a director or employee or an associate of a director or employee, in addition to consideration given by the investor or any associate of the investor. See subsection (2) and Change 28 in Annex 1.

Section 251: Value received if there is more than one investment

891.This section provides that, if there is more than one investment, any value received is to be apportioned among the investments according to the respective amounts invested and sets out how those amounts are to be calculated. It is based on paragraph 37 of Schedule 16 to FA 2002.

Section 252: Effect of receipt of value on future claims

892.This section applies if an investor holding securities or shares receives value (other than an amount of insignificant value) but, because that value is less than the permitted level, the CITR attributable to those securities or shares is not withdrawn under section 247. It is based on paragraph 38 of Schedule 16 to FA 2002.

893.Subsection (2) reduces the amount invested (see section 222) in respect of which CITR may be claimed for the accounting periods specified in subsection (3).

894.Subsection (5) is new. It provides that this section is subject to section 251 which modifies the effect of this section and of sections 246, 247 and 248.

895.Sections 246(7) and 247(5) already provide that those sections are subject to section 251. Subsection (5) of this section and new subsection (8) of section 248 (see the commentary on that section) have been added to ensure consistency.

Section 253: Receipts of value by or from connected persons

896.This section extends the meaning of “the investor” and “the CDFI” in sections 246 to 252. It is based on paragraph 39 of Schedule 16 to FA 2002.

897.The words “if the context permits” have been added in this section. These words, which do not appear in paragraph 39 of Schedule 16 to FA 2002, do not change the law. They make sections 246 to 252 clearer, by stating explicitly what is implicit in the source legislation.

Section 254: CITR subsequently found not to have been due

898.This section provides the basis for making an assessment under section 255 in cases where a claim for a tax reduction has been incorrectly allowed. It is based on paragraph 27 of Schedule 16 to FA 2002.

Section 255: Manner of withdrawal or reduction of CITR

899.This section authorises the making of assessments to recapture CITR attributable to an investment which has been withdrawn or reduced. It is based on paragraph 27 of Schedule 16 to FA 2002.

900.Subsections (3) and (4) are based on paragraph 27(5) and (6) of Schedule 16 to FA 2002 prospectively inserted by section 118 of, and paragraph 48 of Schedule 39 to, FA 2008 (time limits for assessments, claims etc) with effect from 1 April 2010 by virtue of the FA2008, Schedule 39 (Appointed Day, Transitional Provision and Savings) Order 2009 (SI 2009/403). The effect of thesesubsections is to preserve the right to make an assessment under this section not more than six years after the end of the accounting period for which the relief was obtained, when the normal time limit for the making of assessments under paragraph 46 of Schedule 18 to FA 1998 is reduced to four years by virtue of that Order bringing paragraph 42 of Schedule 39 to FA 2008 into force on 1 April 2010.

Chapter 6: Supplementary and general
Overview

901.This Chapter contains provisions relating to alternative finance arrangements, other miscellaneous provisions and definitions applicable to this Part.

902.Sections 256 to 259 modify this Part to enable the range of permitted investments in, and by, CDFIs to include various Sharia’a-compliant financial products that in substance, but not in form, are equivalent to interest-bearing loans. Such products are to be treated as loans for the purposes of this Part.

Section 256: Meaning of “loan” and “interest”

903.This section extends the meaning of the term “loan” to include purchase and resale arrangements, deposit arrangements and profit share agency arrangements and the meaning of the term “interest” to include profit share return under those alternative finance arrangements. It is based on section 54A(1) and (2) of FA 2005.

Section 257: Purchase and resale arrangements

904.This section sets out how this Part has effect in relation to purchase and resale arrangements. It is based on section 54A(3) and (4) of FA 2005.

Section 258: Deposit arrangements

905.This section sets out how this Part has effect in relation to deposit arrangements. It is based on section 54A(5) of FA 2005.

Section 259: Profit share agency arrangements

906.This section sets out how this Part has effect in relation to profit share agency arrangements. It is based on section 54A(6) of FA 2005.

Section 260: Information to be provided by the investor

907.This section imposes obligations on the investor to notify an officer of Revenue and Customs of events giving rise to the withdrawal or reduction of any CITR attributable to a loan or any securities or shares. It is based on paragraph 42 of Schedule 16 to FA 2002.

908.There is inconsistency of language between paragraph 42(1)(b) of Schedule 16 to FA 2002 which refers to CITR being attributable forany accounting period and paragraph 26(1)(b) of that Schedule (rewritten in section 240(1)) which defines references in that Schedule to “CITR attributable ... in respect of an accounting period”. This section removes this inconsistency by substituting “in respect of” in subsection (1)(b).

Section 261: Disclosure

909.This section authorises disclosure of information between HMRC and the Secretary of State for the purpose of discharging their respective functions under this Part. It is based on paragraph 43 of Schedule 16 to FA 2002.

Section 262: Nominees

910.This section allows for loans, securities or shares to be acquired, held and disposed of by nominees or bare trustees. It is based on paragraph 44 of Schedule 16 to FA 2002.

Section 263: Application for postponement of tax pending appeal

911.This section ensures that the investor cannot claim to postpone any payment of tax under section 55 of TMA on the grounds that the investor is eligible for CITR unless a claim has actually been made. It is based on paragraph 45 of Schedule 16 to FA 2002.

Section 264: Identification of securities or shares on a disposal

912.This section provides rules for the identification of the securities or shares disposed of for the purposes of this Part. It is based on paragraph 47 of Schedule 16 to FA 2002.

Section 265: Meaning of “issue of securities or shares”

913.This section provides definitions, in relation to a body, of an issue of securities or shares by that body and, in relation to a company, of an issue of securities or shares to that company. It is based on paragraph 46 of Schedule 16 to FA 2002.

Section 266: Meaning of “disposal”

914.This section defines “disposal”. It is based on paragraph 48 of Schedule 16 to FA 2002.

Section 267: Construction of references to being “held continuously”

915.This section explains what is meant by “held continuously”, for the purposes of those sections of this Part which require the investment to have been “held continuously” by the investor during a specified period (see for example sections 247 and 252). It is based on paragraph 49 of Schedule 16 to FA 2002.

Section 268: Meaning of “associate”

916.This section provides a definition of “associate”, which is relevant to sections 249 and 250. It is based on paragraph 50 of Schedule 16 to FA 2002.

Section 269: Minor definitions etc

917.This section explains various terms used in this Part. It is based on paragraph 51 of Schedule 16 to FA 2002.

918.With the exception of “body”, the terms defined in paragraph 51(1) of Schedule 16 to FA 2002 have been omitted, as they are either no longer required or are defined generally for the purposes of this Act.

919.A definition of “bonus shares” has been added in subsection (1).

920.In subsection (2), which determines when shares are to be treated as being of the same class, for the words “if dealt with on the Stock Exchange” in paragraph 51(2) of Schedule 16 to FA 2002 there are substituted the words:

if they were—

(a.included in the official UK list and

(b.admitted to trading on the London Stock Exchange.

See section 1005 of ITA as applied for corporation tax purposes by section 841 of ICTA for the meaning of “included in the official UK list”.

921.The words used in paragraph 51(2) of Schedule 16 to FA 2002 have been in wide use in tax legislation from a time when the London Stock Exchange only operated a single market. The reference to the Stock Exchange is accordingly to be taken as a reference to the requirements of the London Stock Exchange in relation to shares traded on the main market, rather than on AIM or any other platform. The substituted words are intended to preserve and clarify the meaning of the source legislation and do not change the law.

922.Paragraph 51(3) of Schedule 16 to FA 2002, which applies section 839 of ICTA (connected persons) for the purposes of that Schedule, has not been rewritten. Section 839 of ICTA is rewritten in section 1122 for the purposes of the Corporation Tax Acts and section 1176(1) applies that definition generally for the purposes of this Act.

Part 8: Oil activities

Overview

923.This Part contains rules relating to the corporation tax charge, including the supplementary charge, on profits from oil extraction and related activities. It rewrites Chapter 5 of Part 12 of, and Schedule 19C, to ICTA, sections 62 to 65 of FA 1991 and Schedule 44 to FA 2009. Section 496A of, and Schedule 19B to, ICTA (exploration expenditure supplement) are not rewritten. These particular rules apply only to expenditure incurred before 1 January 2006. They are therefore of limited future application.

924.Some of the source legislation relates to both income tax and corporation tax – the necessary rules for income tax are inserted into ITTOIA (after section 225) by TIOPA, which comes into effect at the same time as this Act.

925.A number of PRT definitions are used in the corporation tax and income tax rules, and some parts of the legislation depend on calculations made for PRT purposes. In particular the legislation uses the PRT term “participator” (see section 12(1) of OTA 1975). The legislation for PRT is not itself being rewritten.

926.The definitions of “exploration and exploitation activities”, “exploration and exploitation rights” and “designated area” are in section 1313 of CTA 2009. The equivalent income tax definitions are in section 874 of ITTOIA.

927.The extension of the United Kingdom to its territorial sea for the purposes of the scope of corporation tax, in section 830(1) of ICTA, is rewritten in section 1170 of this Act. The corresponding rule for income tax is section 1013 of ITA.

928.Oil is used as a shorthand throughout the commentary on these sections, but unless specifically mentioned the same rules and considerations apply to gas and other associated products.

929.The material is organised as follows:

  • Chapter 1: Introduction

  • Chapter 2: Basic definitions

  • Chapter 3: Deemed separate trade

  • Chapter 4: Calculation of profits

  • Chapter 5: Ring fence expenditure supplement

  • Chapter 6: Supplementary charge in respect of ring fence trades

  • Chapter 7: Reduction of supplementary charge for certain new oil fields

Chapter 1: IntroductionSection 270: Overview of Part

930.This section provides an overview of the legislation. It is new.

Chapter 2: Basic definitions
Section 271: “Associated companies”

931.This section sets out the definition of “associated companies” for the purposes of the Part. It is based on section 502(3), (3A) and (4) of ICTA.

932.Subsection (2) applies the consortium relief rules in Part 5 of this Act for the purposes of this Part with the following modification.

933.Section 153 provides the conditions by which a company is a member of a consortium. The additional circumstance in section 153(3) is not relevant for the purposes of the oil taxation provisions. Section 271 therefore operates by adopting a definition of “owned by a consortium” which encompasses the meaning of section 153(1) and (2) only.

Section 272: “Oil extraction activities”

934.This section sets out the definition of “oil extraction activities” for the purposes of this Part. It is based on section 502(1) and (2) of ICTA.

935.Certain definitions are taken from the PRT legislation in section 12 of OTA 1975.

936.The corresponding rule for income tax is section 225A of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 273: “Oil rights”

937.This section sets out the meaning of “oil rights” for the purposes of this Part. It is based on section 502(1) of ICTA.

938.The corresponding rule for income tax is section 225B of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 274: “Oil-related activities”

939.This section sets out a definition of “oil-related activities”. It is based on section 492(1) of ICTA.

940.This definition underpins the meaning of “ring fence trade” in section 277 and the deeming of a separate trade for corporation tax purposes in section 279. The corresponding rule for income tax is section 16 of ITTOIA.

Section 275: “Ring fence income”

941.This section sets out the meaning of “ring fence income” for the purposes of this Part. It is based on section 502(1) of ICTA and section 62 of FA 1991.

942.This term is then picked up in section 276 as part of the definition of a company’s “ring fence profits”.

943.The corresponding rule for income tax is section 225C of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 276: “Ring fence profits”

944.This section sets out the meaning of “ring fence profits” for the purposes of this Part. It is based on section 502(1) and (1A) of ICTA.

945.Although the definition is not explicitly limited to corporation tax in the source legislation, the term is only used in the legislation in relation to corporation tax. This term is therefore not included in the rewritten rules for income tax.

Section 277: “Ring fence trade”

946.This section sets out the meaning of “ring fence trade” for the purposes of this Part. It is based on section 502(1) of ICTA.

947.The corresponding rule for income tax is section 225D of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 278: Other definitions

948.This section sets out further definitions necessary for this Part. It is based on sections 493(1A), 500(10) and 502(1) and (2) of ICTA, and section 62(2) of FA 1991.

949.The corresponding rule for income tax is section 225E of ITTOIA (inserted by Schedule 1 to TIOPA).

Chapter 3: Deemed separate trade
Section 279: Oil–related activities treated as separate trade

950.This section deems a separate trade of oil-related activities to exist for corporation tax purposes where a company carries on those activities as part of its trade. It is based on section 492(1) of ICTA. The corresponding rule for income tax is section 16 of ITTOIA.

Chapter 4: Calculation of profits
Overview

951.This Chapter contains the rules that determine how income/profits from a ring fence trade are calculated, to the extent that they differ from the calculation for any other type of trade. The starting point is that all normal trading income rules apply unless they are modified by a provision of this Chapter. The calculation may also be affected by the ring fence expenditure supplement rules set out in Chapter 5.

952.The general rules for the calculation of trading income for corporation tax purposes are in Part 3 of CTA 2009.

Section 280: Disposal to be valued by reference to section 2(5A) of OTA 1975

953.This section modifies the calculation of profits for corporation tax purposes where certain expenses are incurred in connection with the transportation of oil. It is based on section 493(A1) to (A3) of ICTA. There is no equivalent for income tax.

954.The starting point is section 2(5A) of OTA 1975, which involves situations where the seller disposes of oil at arm’s length and is required to meet certain transportation costs – subsection (6).

955.Section 2(5A) OTA 1975 replaces:

  • actual sales proceeds from a sale at arm’s length under a contract which requires the seller to meet the transport costs,

with

  • deemed proceeds based on a hypothetical sale at arm’s length under which the seller does not have to meet the transport costs and has to transport the oil to the nearest landing point (or, in the case of onshore fields, to the place of extraction itself).

956.Subsection (9) adopts the price given by section 2(5A) of OTA 1975, for the seller only – it has no impact on the purchaser. Section 3(1)(f) of OTA 1975 allows transport costs for transportation to that point. If a company does not claim transportation costs for corporation tax then for practical purposes the price at that point is the actual sale price minus the transport costs to that point.

957.In order to prevent double counting, subsections (7)and (8) require that the company does not otherwise get a deduction for the transportation cost or “transportation allowance” against either its ring fence or non ring fence profits, as that allowance is in effect netted off to reach the price in subsection (9).

Section 281: Valuation where market value taken into account under section 2 of OTA 1975

958.This section specifies that where the market value of oil is included in the calculation of profits for PRT purposes by OTA 1975 in place of the actual sale price, the same price applies for corporation tax. It is based on section 493(1) of ICTA.

959.The market value applies to both the seller and the purchaser. The section therefore retains the term “person” rather than “company” as the other party may not necessarily be a company. The market value is derived by way of a comprehensive scheme put in place for PRT purposes – see in particular section 2 of and Schedule 3 to OTA 1975.

960.The corresponding rule for income tax is section 225F of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 282: Valuation where disposal not sale at arm’s length

961.This section applies a market value price where oil is disposed of otherwise than at arm’s length, but where the disposal is not covered by the PRT rules. It is based on section 493(3), (5) and (6) of ICTA.

962.A common application of this rule is where oil is extracted from an oil field that is not within the scope of PRT following the reforms in FA 1993, which took fields given development consent on or after 16 March 1993 out of the scope of PRT.

963.This section also retains the term “person” because the transactions may not necessarily involve only companies.

964.The corresponding rule for income tax is section 225G of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 283: Valuation where excess of nominated proceeds

965.This section ensures that where the “nomination scheme” adds an amount to the disposal value of oil for PRT purposes, that amount is also added for corporation tax purposes. It is based on section 493(1A) of ICTA.

966.The corresponding rule for income tax is section 225H of ITTOIA (inserted by Schedule 1 to TIOPA).

967.The “nomination scheme” is part of the mechanism to ensure that the full value of oil extracted from the UK sector is reflected in the profits calculated for PRT and for the ring fence trade. A full description of the scheme can be found in HMRC guidance at OTM 5199.

968.The addition to the price for corporation tax purposes is made even if the relevant oil field is not within the scope of PRT – see subsection (1)(b).

969.Subsection (3) provides for a deduction in computing the profits of a non-ring fence trade. The wording has been changed to clarify its meaning as the source legislation in section 493(1A)(b) of ICTA was unclear. See Change 29 in Annex 1.

Section 284: Valuation where relevant appropriation but no disposal

970.This section imposes a market value in a case where an oil producer does not sell the oil to another party but takes it into use in another of its businesses, such as refining. It is based on section 493(2) of ICTA.

971.The corresponding rule for income tax is section 225I of ITTOIA (inserted by Schedule 1 to TIOPA).

972.Where a market value is applied for PRT purposes by OTA 1975, that market value is used in the calculation of profits for corporation tax purposes – see subsections (4) and (5). The market value also applies to the non-ring fence trade.

Section 285: Valuation where appropriation to refining etc

973.This section imposes a market value in a case where an oil producer does not sell the oil to another party but takes it into use in another of its businesses, such as refining, and where the PRT rules do not apply. It is based on section 493(4), (5) and (6) of ICTA.

974.The corresponding rule for income tax is section 225J of ITTOIA (inserted by Schedule 1 to TIOPA).

975.In such a case the same calculation of market value is made using the PRT rules as if the PRT rules had applied to the appropriation.

Section 286: Restriction on debits to be brought into account

976.This section modifies the loan relationship rules in the case of a ring fence trade. It is based on section 494(2) and (2A) of ICTA.

977.The section ensures that non-trading debits from a company’s loan relationships cannot be set against the company’s ring fence profits, unless the loan relationship represents money borrowed to finance oil extraction activities or to acquire oil rights. The loan relationship rules are in Parts 5 and 6 of CTA 2009.

978.Subsection (5)provides that where a non-trading debit is restricted in this way the legislation allows the company to have relief for the debit against other profits.

Section 287: Restriction on credits to be brought into account

979.This section ensures that exchange gains in respect of loan relationships are not treated as part of the ring fence profits where the exchange gains do not arise from money borrowed to finance ring fence activities. It is based on section 494(2), (2ZA) and (2A) of ICTA.

980.The section operates in a similar way to section 286. Where a credit is excluded from the computation of ring fence profits it is brought into account by subsection (5).

Section 288: Sale and lease-back

981.This section ensures that where financing has been obtained by way of a sale and lease-back of assets, a deduction for the expenditure may not be made against ring fence profits unless certain conditions are met. It is based on section 494AA of ICTA.

982.Subsections (6) and (7)ensure thata deduction is only permitted against ring fence profits if the disposal proceeds are used in the ring fence trade.

983.Where the deduction is prevented from being given in full or in part against the ring fence profits, subsection (8) allows a deduction from other profits of the companyforany amount that has not been allowed because of this section.

984.This section has no income tax equivalent.

Section 289: Reduction of expenditure by reference to regional development grant

985.This section restricts a deduction for expenditure incurred to the extent that the expenditure has been met by a regional development grant. It is based on section 495(1), (2) and (7) of ICTA.

986.The corresponding rule for income tax is section 225K of ITTOIA (inserted by Schedule 1 to TIOPA).

987.The main restriction in respect of a grant is applied by section 534 of CAA. This section applies essentially the same restriction to the purchaser of an asset who buys the asset from a connected party, and where that connected party received a regional development grant on the original acquisition or construction of the asset.

988.The source legislation applies to expenditure taken into account under Parts 2, 3 or 6 of CAA. Section 84 of FA 2008 repeals Part 3 of CAA for corporation tax purposes with respect to expenditure incurred on or after 1 April 2011. The section therefore applies to Parts 2 and 6 of CAA and the reference to Part 3 of CAA has been retained for the interim period by way of a transitional provision in Schedule 2.

Section 290: Adjustment as a result of regional development grant

989.This section supplements section 289 and section 534 of CAA where the amount of expenditure involved is re-determined at a later date. It is based on section 495(3) to (7) of ICTA.

990.The corresponding rule for income tax is section 225L of ITTOIA (inserted by Schedule 1 to TIOPA).

991.The most likely application of regional development grants in the oil context is for onshore assets such as initial treatment plants to stabilise the crude oil arriving by pipeline. The eligibility of such assets for PRT relief, or the proportion that is eligible, can take some time to agree. As a result, the PRT position (which determines the amount eligible for capital allowances) may not be finalised for some time.

992.Accordingly, capital allowances could be given on the full amount in the “initial period”, disregarding the grant, as section 534(2) of CAA or its predecessors would not have applied at that stage. Subsection (5) ensures that the position can be adjusted in a later period if a change in circumstances occurs.

993.Section 137 of FA 1982, referred to in the source legislation, was rewritten in section 534 of CAA.

994.The source legislation applies to expenditure taken into account under Parts 2, 3 or 6 of CAA. Section 84 of FA 2008 repeals Part 3 of CAA for corporation tax purposes with respect to expenditure incurred on or after 1 April 2011. The section therefore applies to Parts 2 and 6 of CAA and the reference to Part 3 of CAA has been retained for the interim period by way of a transitional provision in Schedule 2.

Section 291: Tariff receipts etc

995.This section brings certain tariff receipts into the calculation of ring fence profits if those receipts would not otherwise be included. It is based on section 496 of ICTA.

996.The corresponding rule for income tax is section 225M of ITTOIA (inserted by Schedule 1 to TIOPA).

997.Tariff receipts arise where assets used in the ring fence trade are not used wholly for oil extraction by the owner but are used by other businesses in return for payment of a fee or “tariff”. Typical examples include the use of pipelines and treatment plants.

998.Tax-exempt tariffing receipts arise where the oil field to which the assets are attached for PRT purposes is not within the charge to PRT and therefore the tariffs are not chargeable to PRT.

999.Definitions of “tariff receipt” and “tax-exempt tariffing receipt” have been included to aid users of the legislation.

Section 292: Expenditure on and under abandonment guarantees

1000.This section provides relief against corporation tax where an oil field participator incurs expenditure in obtaining an abandonment guarantee. It is based on sections 62 and 63(8) of FA 1991.

1001.The corresponding rule for income tax is section 225N of ITTOIA (inserted by Schedule 1 to TIOPA).

1002.The cost of decommissioning oil fields is eligible for relief under the capital allowances code. But as the majority of oil fields are shared between two or more participators there is a risk that one or more of the participators may not meet their share of the cost when the time comes. As a result participators have taken out guarantees with financial institutions to cover their share. This section provides relief for the cost of obtaining the guarantee.

Section 293: Relief for reimbursement expenditure under abandonment guarantees

1003.This section provides relief for a participator against ring fence profits where some or all of a participator’s share of decommissioning costs is met by a guarantee and the participator subsequently reimburses the guarantor. It is based on section 63 of FA 1991.

1004.The corresponding rule for income tax is section 225O of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 294: Payment under abandonment guarantee not immediately applied

1005.This section applies where a guarantor makes payments into a fund and the assets of the fund are subsequently used to cover decommissioning costs. It is based on section 62(4) of FA 1991.

1006.The corresponding rule for income tax is section 225P of ITTOIA (inserted by Schedule 1 to TIOPA).

1007.In such a case the rules for relief under section 292 or 293 apply to the expenditure when it is eventually met out of the assets of the fund.

Section 295: Amounts excluded from section 293(1)

1008.This section restricts relief where amounts are repaid to a guarantor instead of being applied to meet decommissioning costs. It is based on section 63(2) of FA 1991.

1009.The corresponding rule for income tax is section 225Q of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 296: Introduction to sections 297 and 298

1010.This section sets out the circumstances in which sections 297 and 298 apply, and provides some related definitions. It is based on sections 64(1), (2) and (3) and 65(1) of FA 1991.

1011.The corresponding rule for income tax is section 225R of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 297: Relief for expenditure incurred by a participator in meeting defaulter’s abandonment expenditure

1012.This section provides for relief to a participator who meets the decommissioning expenditure that should have been met by another participator (the “defaulter”). It is based on section 64(4) and (5) of FA 1991.

1013.The corresponding rule for income tax is section 225S of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 298: Reimbursement by defaulter in respect of certain abandonment expenditure

1014.This section applies where a defaulting participator reimburses another participator who has met the defaulter’s liability for decommissioning expenditure. It is based on section 65 of FA 1991.

1015.The corresponding rule for income tax is section 225T of ITTOIA (inserted by Schedule 1 to TIOPA).

1016.Relief against ring fence profits is given to the defaulter, and the other participator is treated as receiving additional ring fence income.

1017.The time limit in subsection ( 5 ) was amended from six years to four years by paragraph 27 of Schedule 39 to FA 2008. This change takes effect by Order from 1 April 2010 (see article 2(2) of the Finance Act 2008, Schedule 39 (Appointed Day, Transitional Provisions and Savings) Order 2009 (SI 2009/403)).

Section 299: Deduction of PRT in calculating income for corporation tax purposes

1018.This section provides that a company may deduct PRT paid as an expense in calculating profits from the ring fence trade. It is based on section 500(1), (2), and (3) of ICTA.

1019.Sections 300 and 301 set out what happens when PRT is repaid and section 302 deals with interest on PRT repayments.

Section 300: Effect of repayment of PRT: general rule

1020.This section provides that when an amount of PRT is repaid the deduction under section 299 is reduced by the amount repaid. It is based on section 500(4) of ICTA.

1021.Subsection (2) provides thatthe repayment reduces or extinguishes the deduction for the original period for which the deduction was given, not the period when the repayment was received.

1022.The time limit in subsection (3) was amended from six years to four years by paragraph 23 of Schedule 39 to FA 2008. This change takes effect by Order from 1 April 2010 (see article 2(2) of the Finance Act 2008, Schedule 39 (Appointed Day, Transitional Provisions and Savings) Order 2009 (SI 2009/403)).

Section 301: Effect of repayment of PRT: special rule

1023.This section supplements section 300 in cases where the repayment derives from a carried back loss. It is based on section 500(5) to (10) of ICTA.

1024.In such a case the PRT repayment is treated as received, and hence the reduced deduction for corporation tax is applied, for the period in which the loss arose.

1025.The time limit in subsection (6) was amended from six years to four years by paragraph 23 of Schedule 39 to FA 2008. This change takes effect by Order from 1 April 2010 (see article 2(2) of SI 2009/403).

Section 302: Interest on repayment of PRT or APRT

1026.This section provides that interest paid to a participator on a repayment of PRT or advance PRT is disregarded in calculating profits for corporation tax purposes. It is based on section 501 of ICTA and paragraph 10 of Schedule 19 to FA 1982.

Section 303: Management expenses

1027.This section prohibits a deduction for expenses of management of an investment business against profits from a ring fence trade. It is based on section 492(3A) of ICTA.

Section 304: Losses

1028.This section prevents losses that arise in trades outside the ring fence from being set off against ring fence profits. It is based on section 492(3) and (4) of ICTA.

1029.Where a set-off is prevented in this way, subsection (5)allowsthe loss to be carried forward and set against future profits from “related activities”, that is activities which, taken together with the ring fence trade, would be regarded as a single trade but for the specific ring fence rule in section 279.

1030.The equivalent income tax rule, originally in section 492(2) of ICTA, is in section 80 of ITA.

1031.See section 40 for rules about the extension of the loss carry-back period in a ring fence trade where allowances for abandonment expenditure under section 164 of CAA are involved; and section 43, which extends the time limit for making a claim where allowances are made under section 165 (general decommissioning expenditure after ceasing ring fence trade) or 416 (site restoration expenditure) of CAA.

Section 305: Group relief

1032.This section prevents group relief arising from losses, allowances or expenditure outside the ring fence trade from being set against profits from the ring fence trade. It is based on sections 492(8) and 494A(1), (2) and (3) of ICTA.

1033.Subsections (2) and (3) provide that where a company cannot use certain amounts against its ring fence profits, those ring fence profits are disregarded in calculating how much the company can surrender as group relief.

Section 306: Capital allowances

1034.This section ensures that capital allowances arising from “special leasing” cannot be deducted from a company’s ring fence profits. It is based on section 492(6) and (7) of ICTA.

1035.The restriction does not apply to the extent that the leased asset is used in oil extraction activities by an associated company.

1036.Section 492(5) of ICTA is not rewritten as it is considered to be unnecessary. It prohibits the deduction of capital allowances given under section 258 of CAA against general profits. However, the deduction under section 258 of CAA can only be given against income from special leasing and not against other profits. Special leasing is defined in section 19 of CAA as leasing that is not part of any other qualifying activity. It is therefore not necessary to have a rule to protect ring fence income from this type of deduction.

Chapter 5: Ring fence expenditure supplement
Overview

1037.This Chapter rewrites the rules in Schedule 19C to ICTA, which provide a supplement for certain expenditure incurred on or after 1 January 2006. These rules superseded the exploration expenditure supplement in Schedule 19B to ICTA, which applies to expenditure incurred before 1 January 2006. Schedule 19B is therefore of limited future application and is not rewritten. This also means that certain terms used in this Chapter such as “the carried forward qualifying Schedule 19B amount” do not need to be altered.

Section 307: Overview of Chapter

1038.This section sets out an overview of the Chapter. It is based on paragraph 1 of Schedule 19C to ICTA.

Section 308: Qualifying companies

1039.This section sets out the definition of a qualifying company for the purposes of this Chapter. It is based on paragraph 2 of Schedule 19C to ICTA.

Section 309: Accounting periods

1040.This section sets out defined terms for accounting periods that lie either side of, or straddle, 1 January 2006. It is based on paragraph 3 of Schedule 19C to ICTA.

Section 310: The relevant percentage

1041.This section sets out the relevant percentage for the supplement and provides a power for the Treasury to vary the percentage by order. It is based on paragraph 4 of Schedule 19C to ICTA.

Section 311: Limit on number of accounting periods for which supplement may be claimed

1042.This section limits to six the number of accounting periods for which supplement may be claimed. It is based on paragraph 5 of Schedule 19C to ICTA.

1043.Subsection (3) directs that a claim for an accounting period under Schedule 19B to ICTA counts as part of the overall total of six accounting periods.

Section 312: Qualifying pre-commencement expenditure

1044.This section defines “qualifying pre-commencement expenditure” for the purposes of the Chapter. It is based on paragraph 6 of Schedule 19C to ICTA.

Section 313: Unrelieved group ring fence profits for accounting periods

1045.This section defines the term “unrelieved group ring fence profits” for an accounting period. It is based on paragraph 7 of Schedule 19C to ICTA.

1046.The broad scheme of the supplement is to increase the amount of certain expenditure and losses that cannot be relieved immediately to reflect the time value of the delay in obtaining effective tax relief. But where there are unrelieved profits from a ring fence trade elsewhere in the same group, some or all of the losses could have been used against those other ring fence profits in the same accounting period. Where this is the case supplement is restricted by section 318 or 328 as appropriate. The pool of expenditure eligible for supplement in a given period is reduced by the amount of any unrelieved group ring fence profits.

1047.This term applies for both pre-commencement and post-commencement supplement.

Section 314: Taxable ring fence profits for an accounting period

1048.This section defines the term “taxable ring fence profits” for the purposes of the Chapter. It is based on paragraph 8 of Schedule 19C to ICTA.

1049.This term is used in section 313 to determine the amount of unrelieved group ring fence profits.

Section 315: Supplement in respect of a pre-commencement accounting period

1050.This section sets out when a company may qualify for pre-commencement supplement, and how the supplement is given effect. It is based on paragraph 9 of Schedule 19C to ICTA.

1051.Supplement is given as a percentage of the “reference amount”, which is defined in section 319. “Pre-commencement period” is defined in section 309.

Section 316: The mixed pool of qualifying pre-commencement expenditure and supplement previously allowed

1052.This section sets out how the pool of expenditure that qualifies for pre-commencement supplement is determined. It is based on paragraph 10 of Schedule 19C to ICTA.

1053.The pool can include amounts carried forward from the exploration expenditure supplement in Schedule 19B to ICTA.

Section 317: Reduction in respect of disposal receipts under CAA 2001

1054.This section restricts the amount of expenditure eligible for supplement where there is a relevant disposal receipt taken into account under CAA. It is based on paragraph 11 of Schedule 19C to ICTA.

Section 318: Reduction in respect of unrelieved group ring fence profits

1055.This section restricts the amount eligible for supplement where some or all of the expenditure could have been surrendered as group relief. It is based on paragraph 12 of Schedule 19C to ICTA.

1056.The term “unrelieved group ring fence profits” is defined in section 313.

Section 319: The reference amount for a pre-commencement period

1057.This section defines the “reference amount” for the purposes of section 315. It is based on paragraph 13 of Schedule 19C to ICTA.

1058.The reference amount is the amount on which supplement can be claimed, that is the eligible expenditure reduced under either or both of sections 317 and 318 as appropriate.

Section 320: Claims for pre-commencement supplement

1059.This section sets out how a claim for pre-commencement supplement must be made and applies the time limit in paragraph 74 of Schedule 18 to FA 1998 to the claim. It is based on paragraph 14 of Schedule 19C to ICTA.

Section 321: Supplement in respect of a post-commencement period

1060.This section sets out when a company may qualify for post-commencement supplement, and how the claim is given effect. It is based on paragraph 15, 17 and 18 of Schedule 19C to ICTA.

1061.The calculation of post-commencement supplement is set out in sections 322 to 329. Under subsection (2 ) the supplement is treated as a loss carried forward to be set against future profits from the ring fence trade.

Section 322: Amount of post-commencement supplement for a post-commencement period.

1062.This section sets out how to calculate the amount of the post-commencement supplement. It is based on paragraph 16 of Schedule 19C to ICTA.

1063.The supplement is a percentage of the “reference amount”. The percentage is specified in section 310 and “reference amount” for post-commencement supplement is defined in section 329.

Section 323: Ring fence losses

1064.This section sets out how much of a trading loss from the ring fence trade is eligible for inclusion in the calculation of post-commencement supplement. It is based on paragraph 17 of Schedule 19C to ICTA.

1065.Subsection (3) provides thatlosses are not eligible for supplement if they could have been claimed against profits from an earlier accounting period.

Section 324: Special rule for straddling periods

1066.This section sets out the rules that apply where a company’s accounting period straddles 1 January 2006. It is based on paragraph 18 of Schedule 19C to ICTA.

Section 325: The pool of ring fence losses and the pool of non-qualifying Schedule 19B losses

1067.This section sets out how to determine the company’s pool of expenditure (the “ring fence pool”) for the purposes of post-commencement supplement. It is based on paragraph 19 of Schedule 19C to ICTA.

1068.The ring fence pool includes qualifying amounts carried forward from the pool determined under Schedule 19B to ICTA. The section also defines a non-qualifying pool which contains non-qualifying amounts carried forward under Schedule 19B to ICTA.

Section 326: The ring fence pool

1069.This section sets out how and when additions to and reductions of the ring fence pool are made. It is based on paragraph 20 of Schedule 19C to ICTA.

Section 327: Reductions in respect of utilised ring fence losses

1070.This section sets out how reductions in the two pools are to be made when a ring fence loss is utilised against profits. It is based on paragraph 21 of Schedule 19C to ICTA.

1071.The general rule is that when losses carried forward are set against profits in a later period, the non-qualifying pool is reduced first and the ring fence pool is then reduced by any balance of the loss after the non-qualifying pool has been reduced to nil.

Section 328: Reductions in respect of unrelieved group ring fence profits

1072.This section sets out how the expenditure eligible for supplement is to be reduced where there is an amount of unrelieved group ring fence profits. It is based on paragraph 22 of Schedule 19C to ICTA.

1073.The term “unrelieved group ring fence profits” is defined in section 313.

Section 329: The reference amount for a post-commencement period

1074.This section sets out how to determine the reference amount, the amount on which supplement is calculated, for the purposes of post-commencement supplement. It is based on paragraph 23 of Schedule 19C to ICTA.

Chapter 6: Supplementary charge in respect of ring fence trades
Section 330: Supplementary charge in respect of ring fence trades

1075.This section imposes an additional charge to tax on an adjusted measure of profits from the ring fence trade. It is based on section 501A(1), (2), (3) and (12) of ICTA.

1076.The adjustment to profits for this purpose is that financing costs, defined in section 331, are left out of account.

1077.Subsection (5) makes Chapter 6 subject to Chapter 7, which contains provisions that reduce the supplementary charge for certain new oil fields.

Section 331: Meaning of “financing costs” etc

1078.This section defines the term “financing costs” for the purposes of the supplementary charge. It is based on section 501A(4) to (11) of ICTA.

Section 332: Assessment, recovery and postponement of supplementary charge

1079.This section sets out the arrangements for the administration of the supplementary charge. It is based on section 501B of ICTA.

1080.The general rule is that the supplementary charge is treated for all administrative purposes as corporation tax, unless specific rules apply. In particular, this ensures that the relevant rules in TMA and in Schedule 18 to FA 1998 can apply.

Chapter 7: Reduction of supplementary charge for certain new oil fields
Overview

1081.This Chapter provides an allowance, a “field allowance”, which can reduce a company’s adjusted ring fence profits from oil and gas production in the UK and UKcontinental shelf (UKCS).

1082.The allowance is available to certain categories of new oil and gas fields in the UK/UKCS – small fields, ultra heavy oil fields and ultra high pressure/high temperature fields. Allowances from a company’s interests in all qualifying fields in an accounting period are then pooled and offset against adjusted ring fence profits. Any unused amounts in the pool are carried forward to the next accounting period.

Section 333: Reduction of adjusted ring fence profits

1083.This section provides that a company’s ring fence profits are to be reduced by the company’s pool of field allowances. It is based on paragraph 1 of Schedule 44 to FA 2009.

Section 334: Company’s pool of field allowances

1084.This section provides that a company’s pool of field allowances for an accounting period is the amount of the company’s pool of field allowances that is carried forward from the previous accounting period plus the aggregate of field allowances activated in the accounting period. It is based on paragraph 2 of Schedule 44 to FA 2009.

Section 335: Carrying part of pool of field allowances into following period

1085.This section provides the rules for determining the amount of field allowances that are carried forward into a future accounting period. It is based on paragraph 3 of Schedule 44 to FA 2009.

Section 336: Carrying whole of pool of field allowances into following period

1086.This section provides the rules for determining when the whole of the company’s pool of field allowances is carried forward into a future accounting period. It is based on paragraph 4 of Schedule 44 to FA 2009.

Section 337: Initial licensee to hold a field allowance

1087.This section provides that from the day a new oil field is licensed, a company that is an initial licensee holds a field allowance determined by the company’s equity share in the field. It is based on paragraph 5 of Schedule 44 to FA 2009.

Section 338: Holding a field allowance on acquisition of equity share

1088.This section provides a signpost to section 347(2) (acquisition of field allowance). It is based on paragraph 6 of Schedule 44 to FA 2009.

Section 339: Unactivated amount of field allowance

1089.This section provides the rules for determining the unactivated amount of field allowance when a company acquires a field allowance by virtue of section 337 (initial licensee) or section 347(2) (acquisition of field allowance). It is based on paragraph 7 of Schedule 44 to FA 2009.

Section 340: Introduction to section 341

1090.This section provides that four conditions need to be met in respect of a new oil field for the activation of field allowance where there is no change in equity share during the accounting period. It is based on paragraph 8 of Schedule 44 to FA 2009.

Section 341: Activation of field allowance

1091.This section provides the rules for determining the amount of field allowance to be activated in an accounting period when all conditions in section 340 are met. It is based on paragraph 9 of Schedule 44 to FA 2009.

Section 342: Introduction to sections 343 and 344

1092.This section deals with the situation where a company’s equity share in a new oil field changes during the accounting period and provides four conditions which need to be met for sections 343 and 344 to apply. It is based on paragraph 10 of Schedule 44 to FA 2009.

Section 343: Reference periods

1093.This section provides a definition of reference period for the purposes of section 344 where a company is not a licensee for a whole accounting period or where the equity share changes. It is based on paragraph 11 of Schedule 44 to FA 2009.

Section 344: Activation of field allowance

1094.This section provides the calculation of field allowance for each reference period. It is based on paragraph 12 of Schedule 44 to FA 2009.

Section 345: Introduction to sections 346 and 347

1095.This section deals with the treatment of transfers of field allowance and provides the conditions which need to be met for sections 346 and 347 to apply. It is based on paragraph 13 of Schedule 44 to FA 2009.

Section 346: Reduction of field allowance if equity disposed of

1096.This sectionprovides the calculation for the remaining field allowance which a company (“the transferor”) has, after it has disposed of some of the equity interest in a new oil field. It is based on paragraph 14 of Schedule 44 to FA 2009.

Section 347: Acquisition of field allowance if equity acquired

1097.This section provides the calculation of field allowance where a company (“the transferee”) acquires an equity interest in a new oil field. It is based on paragraph 15 of Schedule 44 to FA 2009.

Section 348: Adjustments

1098.This section provides that if there is any alteration in a company’s adjusted ring fence profits, necessary adjustments are made for the purposes of this Chapter. It is based on paragraph 16 of Schedule 44 to FA 2009.

Section 349: Orders

1099.This section provides that the Commissioners for HMRC can make provision about qualifying oil fields (section 352) and the amount of the total field allowance for a new oil field (section 356). It is based on paragraph 17 of Schedule 44 to FA 2009.

Section 350: “New oil field”

1100.This section provides the definition of “new oil field” for the purposes of this Chapter. It is based on paragraph 18 of Schedule 44 to FA 2009.

Section 351: “Authorisation of development of an oil field”

1101.This section provides the definition of “authorisation of development of an oil field” for the purposes of this Chapter. It is based on paragraph 19 of Schedule 44 to FA 2009.

Section 352: “Qualifying oil field”

1102.This section provides the definition of “qualifying oil field” for the purposes of this Chapter. It is based on paragraph 20 of Schedule 44 to FA 2009.

Section 353: “Small oil field”

1103.This section provides the definition of “small oil field” for the purposes of this Chapter. It is based on paragraph 21 of Schedule 44 to FA 2009.

Section 354: “Ultra heavy oil field”

1104.This section provides the definition of “ultra heavy oil field” for the purposes of this Chapter. It is based on paragraph 22 of Schedule 44 to FA 2009.

Section 355: “Ultra high pressure/high temperature oil field”

1105.This section provides the definition of “ultra high pressure/high temperature oil field” for the purposes of this Chapter. It is based on paragraph 23 of Schedule 44 to FA 2009.

Section 356: “Total field allowance for a new oil field”

1106.This section provides the definition of “total field allowance for a new oil field” for the purposes of this Chapter. It is based on paragraph 24 of Schedule 44 to FA 2009.

Section 357: Other definitions

1107.This section provides various other definitions for the purposes of this Chapter. It is based on paragraph 25 of Schedule 44 to FA 2009.

Part 9: Leasing plant or machinery

Overview

1108.This Part rewrites two sets of provisions relating to the leasing of plant or machinery:

  • Chapter 5A of Part 12 of ICTA (special rules for long funding leases of plant or machinery); and

  • Schedule 10 to FA 2006 (sale etc of lessor companies etc).

Chapter 1: Introduction
Section 358: Introduction to Part

1109.This section provides an overview of the Chapters of the Part and their subject matter. It is based on paragraph 1 of Schedule 10 to FA 2006.

1110.Subsection (4) defines the term “the sales of lessors Chapters” to mean Chapters 3 to 6 of this Part.

1111.Subsections (5) to (7) introduce, and provide signposts to the definitions of, a “qualifying change of ownership” and a “qualifying change in a company’s interest in a business”. These are the events which give rise to charges and reliefs under the sales of lessors Chapters.

Chapter 2: Long funding leases of plant or machinery
Overview

1112.This Chapter rewrites Chapter 5A (special rules for long funding leases of plant or machinery) inserted into Part 12 of ICTA by Part 2 of Schedule 8 to FA 2006.

1113.Schedule 8 to FA 2006 reformed the way in which certain finance leases of plant or machinery, and operating leases of plant or machinery akin to such finance leases, are taxed. In broad terms it does so by amending ICTA, CAA and ITTOIA:

  • to move entitlement to capital allowances in relation to the plant or machinery under such a lease – a “long funding lease” – from lessor to lessee; and

  • to tax the lessor and lessee in relation to the financing of the plant or machinery through such a lease in much the same way as lender and borrower would be taxed in relation to financing the plant or machinery through a loan.

Section 359: Overview of Chapter

1114.This section sets out the structure of the Chapter and contains a signpost to section 381 for the meaning of terms used in the Chapter. It is new.

1115.The Chapter is arranged so that it deals first with the calculation of the taxable profits of the lessor and then with the calculation of the taxable profits of the lessee. In each case it deals with the lessor or lessee first as party to a long funding finance lease and then as party to a long funding operating lease.

1116.The terms “long funding lease” and “long funding finance lease” take their meaning from Chapter 6A of Part 2 of CAA and “long funding operating lease” is defined by reference to those terms. See section 381(2).

1117.It is an integral part of the definition of “long funding lease” in CAA that the subject matter of the lease is plant or machinery (see sections 70G, 70J and 70K of CAA).

Section 360: Lessor under long funding finance lease: rental earnings

1118.This section determines the taxable income of the lessor from a long funding finance lease. It is based on section 502B of ICTA.

1119.The taxable income is the amount of rental earnings. The calculation of rental earnings follows GAAP. The rental earnings is the amount that in accordance with that practice is to be treated as gross return on investment or, in a case where in accordance with that practice the lease is to be treated as a loan, as interest.

1120.Section 502B(3) of ICTA includes in relation to the lease the words “where it meets the finance lease test”. Those words are otiose and have been omitted from subsection (3).

1121.Section 502B(4) of ICTA refers to the lease being “treated as a loan in the accounts in question”. There is no other reference to “accounts” in section 502B and those words have been changed in subsection (4) to read “treated as a loan for the period of account” linking back to the “period of account” mentioned in subsection (1).

Section 361: Lessor under long funding finance lease: exceptional items

1122.This section treats as taxable income or a revenue expense certain profits or losses in connection with a long funding finance lease which would not apart from this section be brought into account for corporation tax purposes. It is based on section 502C of ICTA.

1123.The profits and losses to be brought into account are those (whether of an income or capital nature) which in accordance with GAAP fall to be recognised for accounting purposes.

Section 362: Lessor under long funding finance lease making termination payment

1124.This section prohibits a deduction by a lessor for a payment made in respect of the termination of a long funding finance lease if the amount of the payment is calculated by reference to “termination value”. It is based on section 502D of ICTA.

1125.On termination of a finance lease of an asset, the lessor often makes a payment to the lessee, commonly referred to as a rebate of rentals. This payment principally represents partial reimbursement of payments made by the lessee in respect of the capital value of the asset, unencumbered possession of which has reverted to the lessor as a result of the termination. This section prevents such a payment from being deducted by the lessor for corporation tax purposes. But the section does not prevent the deduction of a payment to the extent it is in respect of a sum included in computing rental earnings (see subsection (3)).

1126.Subsection (4) is new and provides a signpost to the definition of “termination value”.

Section 363: Lessor under long funding operating lease: periodic deduction

1127.This section compensates a lessor under a long funding operating lease for the fact that capital allowances in relation to the leased plant or machinery are not available to it. It is based on section 502E(1) to (3) and (6) to (9) of ICTA.

1128.In the case of an operating lease, the gross rentals are to be brought into account for corporation tax purposes. This achieved the correct result prior to FA2006, as the lessor was entitled to capital allowances which over the term of the lease balanced the amount brought into charge that represented payment of the capital value of the leased plant or machinery.

1129.This section replaces the role of capital allowances. It allows deductions in calculating the profits of the lessor for corporation tax purposes, which over the term of the lease equate in total to the expected reduction in value of the plant or machinery over the term.

1130.The words “had that value been estimated at that time” have been added in subsection (4)(b) to explain the reasoning behind the use of the words “would have been expected” in section 502E(6)(b) of ICTA.

1131.This section, together with sections 364 and 365, presents the calculation required by section 502E of ICTA in a substantially different way. The provision has been restructured to improve the accessibility of the legislation for lessor companies and their advisers, in particular by splitting out the different basis of calculation required where the lessor incurred expenditure on the provision of the plant or machinery otherwise than for a qualifying purpose.

Section 364: “Starting value”: general

1132.This section determines the “starting value” of the plant or machinery for the purposes of the calculation required by section 363 except in the circumstances where section 365 applies. It is based on section 502E(4) and (5) of ICTA.

Section 365: “Starting value” where plantor machinery originally unqualifying

1133.This section determines the “starting value” of the plant or machinery for the purposes of the calculation required by section 363 in a case where, before the long funding operating lease commenced, the lessor incurred expenditure on the plant or machinery otherwise than for the purposes of a qualifying activity within the meaning of Part 2 of CAA. It is based on section 502E(4) and (5) of ICTA.

Section 366: Long funding operating lease: lessor’s additional expenditure

1134.This section provides for an additional deduction by a lessor under a long funding operating lease if the lessor incurs additional expenditure in relation to the leased plant or machinery. It is based on section 502F(1) to (4) and (7) to (11) of ICTA.

1135.This section, together with sections 367 and 368, presents the calculation required by section 502F of ICTA in a substantially different way. The provision has been restructured to improve the accessibility of the legislation for lessor companies and their advisers, in particular by splitting out the different basis of calculation required where the lessor has previously incurred additional expenditure.

Section 367: Determination of remaining residual value resulting from lessor’s first additional expenditure

1136.This section determines the amount of the remaining residual value of the plant or machinery for the purposes of section 366 as a result of the first occasion on which the lessor incurs additional expenditure. It is based on section 502F(5) and (6) of ICTA.

1137.The words “(or, if section 365 applies, would have been expected to be that value had that value been estimated at that time)” in subsection (2)(b) reflect the wording of section 363(4)(b). See the commentary on section 363.

Section 368: Determination of remaining residual value resulting from lessor’s further additional expenditure

1138.This section determines the amount of the remaining residual value of the plant or machinery for the purposes of section 366 as a result of the second and subsequent occasions on which the lessor incurs additional expenditure. It is based on section 502F(5) and (6) of ICTA.

1139.The words “(or, if section 365 applies, would have been expected to be that value had that value been estimated at that time)” in subsection (3)(a) reflect the wording of section 363(4)(b). See the commentary on section 363.

Section 369: Lessor under long funding operating lease: termination of lease

1140.This section provides for the lessor to be treated as receiving income or, depending on the circumstances, incurring a revenue expense for corporation tax purposes on the termination of a long funding operating lease. It is based on section 502G of ICTA.

1141.Whether or not income is treated as being received or a revenue expense as being incurred is determined by reference to “the termination amount” and the amounts mentioned in subsection (3)(a) to (c), but the amounts mentioned in subsection (3)(a) (amounts paid to the lessee by reference to the termination value) may not themselves be deducted (see subsection (5)).

1142.The presentation of the calculation required by section 502G of ICTA has been substantially restructured to improve the accessibility of the legislation for lessor companies and their advisers.

Section 370: Plant or machinery held as trading stock

1143.This section disapplies sections 360 to 369 if, apart from those sections, any part of the lessor’s expenditure on the acquisition of the plant or machinery is allowable as a deduction for corporation tax purposes as a result of the plant or machinery forming part of the lessor’s trading stock. It is based on section 502GA(1) to (3) of ICTA.

Section 371: Adjustments where sections 360 to 369 subsequently disapplied by section 370

1144.This section applies if sections 360 to 369 previously applied, but the condition in section 370(2) is subsequently met. It is based on section 502GA(4) and (5) of ICTA.

1145.The section provides for just and reasonable assessments and adjustments to assessments to be made in relation both to the amounts taken into account in accordance with sections 360 to 369 and to those to be taken into account in accordance with section 370.

Section 372: Lessor also lessee under non–long funding lease

1146.This section disapplies sections 360 to 369 in the case of a company which as lessor grants a long funding lease (lease B) of plant or machinery in which its interest is that of a lessee under a lease (lease A) which is not a long funding lease. It is based on section 502GB of ICTA.

1147.Section 70H of CAA provides that a lease otherwise capable of being a long funding lease is not a long funding lease as regards the lessee unless the lessee has made a tax return treating the lessee as taxable in relation to the lease in accordance with Chapter 5A of Part 12 of ICTA. Subsection (3)(a) ensures that, if a tax return is made validly treating lease A as being a long funding lease after lease B has been entered into, this section is treated as never having applied to lease B. Subsection (3)(b) ensures that this section does apply to lease B, if a tax return which treated lease A as being a long funding lease is subsequently amended so as not to treat it as such a lease.

Section 373: Other avoidance

1148.This section disapplies sections 360 to 369 where three conditions are met. It is based on section 502GC(1) to (3) and (5) of ICTA.

1149.The three conditions counter arrangements involving a long funding lease which are intended to create tax profits which are substantially less than, or tax losses which are substantially greater than, the profits or losses arising from the arrangements as shown in the lessor company’s accounts. The section may also apply where there is a tax loss and an accounting profit.

Section 374: Provision supplementing section 373

1150.This section provides definitions and interpretation for the purposes of section 373. It is based on section 502GC(2), (4) and (6) to (8) of ICTA.

Section 375: Adjustments where sections 360 to 369 subsequently disapplied by section 373

1151.This section applies if sections 360 to 369 have previously applied, but the conditions in section 373 are subsequently met. It is based on section 502GC(9) and(10) of ICTA.

1152.The section provides for just and reasonable assessments and adjustments to assessments to be made in relation both to the amounts taken into account in accordance with sections 360 to 369 and to those to be taken into account in accordance with section 373.

Section 376: Films

1153.This section disapplies sections 360 to 369 in the case of a long funding lease of a film. It is based on section 502GD of ICTA.

Section 377: Lessee under long funding finance lease: limit on deductions

1154.This section, the first of those relating to lessees, limits the amount which a lessee of plant or machinery under a long funding finance lease may deduct in calculating its profits for corporation tax purposes. It is based on section 502I of ICTA.

1155.The amount which may be deducted is limited to the amounts which in accordance with GAAP fall to be shown in the lessee’s accounts as finance charges in respect of the lease (see subsections (2) and(3)).

1156.In certain circumstances in accordance with GAAP a long funding finance lease is treated as a loan for accounting purposes. This section applies as if such a lease were treated as a finance lease (see subsection (4)).

Section 378: Lessee under long funding finance lease: termination

1157.This section avoids double taxation by excluding from the lessee’s calculation of its profits for corporation tax purposes any sum received by the lessee in relation to a long funding finance lease which is calculated by reference to “termination value”. It is based on section 502J of ICTA.

1158.Such sums must, however, be brought into account as part of the disposal value for the purpose of capital allowances (see subsection (3) and section 70E of CAA).

1159.Subsection (4) is new and provides a signpost to the definition of “termination value”.

Section 379: Lessee under long funding operating lease

1160.This section reduces the deductions which a lessee under a long funding operating lease of plant or machinery may make in calculating its profits for corporation tax purposes. It is based on section 502K(1) to (3) and (6) to (9) of ICTA.

1161.The amount of the deduction is reduced by reference to the expected reduction in value of the plant or machinery over the term of the lease. As the lessee is entitled to capital allowances, it effectively obtains relief through the allowances for the amount of the lease payments which it cannot deduct in calculating its profits.

1162.The words “had that value been estimated at the commencement of the term” have been added in subsection (6)(b) to explain the reasoning behind the use of the words “would have been expected” in section 502K(6)(b) of ICTA.

Section 380: “Starting value” in section 379

1163.This section determines the “starting value” of the plant or machinery for the purposes of the calculation required by section 379. It is based on section 502K(4) and(5) of ICTA.

Section 381: Interpretation of Chapter

1164.This section defines or provides signposts to the provisions defining terms used in the Chapter. It is based on section 502L of ICTA.

1165.To assist the user, this section expands on section 502L(4) of ICTA, rewritten in subsection (1), by including numerous signposts to specific sections of Part 6A of CAA in subsections (2) and (3).

Chapters 3 to 6: The sales of lessors Chapters
Overview

1166.The sales of lessors Chapters, based on Schedule 10 to FA 2006, are designed to deter arrangements which have the effect of converting the corporation tax deferral arising from the availability of capital allowances to companies which carry on a business of leasing plant or machinery into a permanent deferral of tax.

1167.The sales of lessors Chapters counter these arrangements by imposing a charge to corporation tax on the leasing company on any day:

  • if there is a qualifying change of ownership of the company on that day; or

  • in a case where the leasing business is carried on by the company in partnership, if there is a qualifying change on that day in the company’s interest in the business.

1168.The tax charge is broadly equivalent to the tax benefit enjoyed down to that day and the rules are designed to ensure that it is borne by the selling group.

1169.In the case of a qualifying change in the ownership of the leasing company, a relief equivalent to the charge is given to the company on the day after the qualifying change and the rules ensure that the relief can only be accessed by the buying group. In the case of a qualifying change in the company’s interest in a business carried on in partnership, relief is given to the other partner companies whose interest in the business carried on in partnership has increased.

1170.The effect of this is that a tax-driven sale to a loss making group is unattractive as the charge recovers the tax benefits taken by the selling group and a loss making buying group has no interest in an additional relief which merely increases its tax losses.

1171.The intended tax effect on a commercially driven sale to another (profitable) group is that it should be broadly neutral, as the charge and the relief cancel each other out. The relief is valuable to the profit making buying group and so it can be expected that the price paid reflects this and compensates the selling group for the tax charge.

Chapter 3: Sales of lessors: leasing business carried on by a company alone
Overview

1172.This Chapter deals with cases where a leasing business is carried on by a company alone. Chapter 4 deals with cases where the business is carried on by one or more companies in partnership with others.

Section 382: Introduction to Chapter

1173.This section introduces Chapter 3. It is based on paragraph 1(1) and (2) of Schedule 10 to FA 2006.

Section 383: Income and matching expense in different accounting periods

1174.This section provides for an accounting period to end if there is a “qualifying change of ownership” in relation to a company within the charge to corporation tax carrying on a business of leasing plant or machinery otherwise than in partnership. It is based on paragraph 3 of Schedule 10 to FA 2006.

1175.On the day the accounting period ends the company is treated as receiving an amount of income which is brought into account for that accounting period for corporation tax purposes. See subsections (2) and (3).

1176.On the following day the company is treated as incurring an expense which is brought into account for a new accounting period for corporation tax purposes. See subsections (4) and (5).

Section 384: Amount of income and expense

1177.This section contains a signpost to the sections which contain the provisions for calculating the amount of the income to be brought into account in accordance with section 383(2) and (3) and provides that the amount of the expense to be brought into account in accordance with section 383(4) and (5) is the same as the amount of the income. It is based on paragraph 4 of Schedule 10 to FA 2006.

Section 385: No carry back of the expense

1178.This section prevents any loss which arises in the later accounting period which derives from the expense from being carried back against profits of any earlier accounting period under section 37(3)(b). It is based on paragraph 5 of Schedule 10 to FA 2006.

Section 386: Relief for expense otherwise giving rise to carried forward loss

1179.This section provides for the carrying forward of the expense to later accounting periods. It is based on paragraph 39 of Schedule 10 to FA 2006.

1180.If the company makes a loss in the accounting period which, in accordance with section 383(4)(b), begins on the day after the qualifying change of ownership, the loss derived from the expense treated as incurred under section 383(4)(a), which could otherwise only be carried forward and applied against the profits of the company’s leasing trade, is instead to be treated as an expense of the next accounting period and so available for group relief in that period.

1181.If the company continues to make losses, so much of the loss as derives from the expense can similarly be treated as an expense of subsequent accounting periods which start within five years of the qualifying change of ownership, unless there is a subsequent qualifying change of ownership.

1182.The amount of the loss derived from the expense is indexed to up-rate its value and preserve the symmetry between the value of the charge and the value of the relief. See subsection (2).

1183.Paragraph 39 of Schedule 10 to FA 2006 applies for the purposes of:

  • paragraph 3 of that Schedule, in a case where the company carries on the leasing business alone; and

  • paragraphs 23(4A) and 33 of that Schedule, in a case where the company carries on the business in partnership.

1184.It has been rewritten here for the purposes only of section 383. It has also been rewritten in two places in Chapter 4: in section 419 for the purposes of section 417(5) and in section 428 for the purposes of section 425. It is considered that it is helpful to paint the complete picture in each Chapter.

Section 387: “Business of leasing plant or machinery”

1185.This section, read with sections 388 to 391, sets out the conditions for determining whether on any day a companycarries on a “business of leasing plant or machinery” for the purposes of Chapter 3. It is based on paragraph 6 of Schedule 10 to FA 2006.

1186.Condition A in subsection (3) is that at least one half of “the relevant plant or machinery value” (see section 388) relates to “qualifying leased plant or machinery” (see subsection (7)).

Section 388: “Relevant plant or machinery value” for condition A in section 387

1187.This section sets out the method of calculating the relevant plant or machinery value on any day for the purposes of condition A in section 387(3). It is based on paragraph 7(1) to (3A) of Schedule 10 to FA 2006.

Section 389: Provision supplementing section 388

1188.This section contains further details of the basis of the calculation to be made in accordance with section 388. It is based on paragraph 7(4) to (9) of Schedule 10 to FA2006.

Section 390: Relevant plant or machinery value where relevant company lessee under long funding lease etc

1189.This section provides for adjustments to be made to the calculation in section 388 in certain circumstances. It is based on paragraph 7A of Schedule 10 to FA 2006.

1190.The circumstances are if the relevant company (see section 387(1)) is the lessee of the plant or machinery under a long funding finance lease or a long funding operating lease or is treated under section 67 of CAA as the owner of the plant or machinery under a hire purchase or similar contract.

Section 391: Relevant company’s income for condition B in section 387

1191.This section provides for the way in which income is to be calculated for the purposes of condition B in section 387(5). It is based on paragraph 8 of Schedule 10 to FA 2006.

Section 392: “Qualifying change of ownership”

1192.This section, read with sections 393 to 398, determines what constitutes a “qualifying change of ownership” for the purposes of the sales of lessors Chapters. It is based on paragraph 10 of Schedule 10 to FA 2006.

1193.A qualifying change of ownership is a “relevant change” in the relationship between the company carrying on a business of leasing plant or machinery (“A”) and its principal company. Section 393 determines what constitutes a “relevant change” where the relationship between A and its principal company is that of subsidiary and parent and section 394 deals with the case where the relationship is that of A and a member (or the parent company of a member) of a consortium, directly or indirectly, owning A.

1194.A qualifying change of ownership triggers A being treated as receiving income and incurring a matching expense not only for the purposes of section 383 in Chapter 3 where it carries on the business alone but also for the purposes of section 425 in Chapter 4 where it carries on the business in partnership.

Section 393: Qualifying 75% subsidiaries

1195.This section defines the relationship between a principal company and its subsidiary and determines what constitutes a “relevant change” in that relationship for the purposes of section 392. It is based on paragraph 11 of Schedule 10 to FA 2006.

1196.A company is only capable of being a principal company if it is not itself a75% subsidiary of another company (see subsections (1)(b), (3)(c) and (5)).

1197.A company carrying on a business of leasing plant or machinery (“A”) has another company (“B”) as its principal company if A is a qualifying 75% subsidiary, as defined in section 398, of B unless B is a qualifying 75% subsidiary of another company (see subsection (1)).

1198.If B is a 75% subsidiary of another company (“C”), then C is the principal company of A. But if C is a 75% subsidiary of another company (“D”), then D is the principal company of A. And so on.

1199.There is a “relevant change” in the relationship of A and the principal company if the relationship of A to the principal company ceases to be that of a qualifying 75% subsidiary or the chain of 75% qualifying subsidiaries is broken (see subsections (2), (4) and (6)).

Section 394: Consortium relationships

1200.This section defines the relationship between a company carrying on a business of leasing plant or machinery (“A”) and a principal company of A where A is owned, directly or indirectly, by a consortium and determines what constitutes a “relevant change” in that relationship for the purposes of section 392. It is based on paragraph 12 of Schedule 10 to FA 2006.

1201.This section applies if A is either owned by a consortium or is a qualifying 90% subsidiary of a company owned by the consortium (see subsections (1)(b) and (5)(b)).

1202.A company is only capable of being a principal company if it is not itself a75% subsidiary of another company (see subsections (1), (5) and (7)).

1203.Each company which is a member of the consortium (“E”) is a principal company of A unless it is a qualifying 75% subsidiary of another company (see subsection (1)).

1204.If E is a 75% subsidiary of another company (“F”), then F is the principal company of A. But if F is a 75% subsidiary of another company (“G”), then G is the principal company of A. And so on.

1205.There is a “relevant change” in the relationship of A and a principal company on any day if E’s “ownership proportion” is less at the end of the day than it was at the start of the day (see subsections (2), (6)(a) and (8)).

1206.E’s ownership proportion is measured by reference to the lowest of E’s interest in the share capital of A, A’s profits available for distribution and A’s assets available on a winding up (see subsection (3)), except where A is a qualifying 90% subsidiary of a company owned by the consortium. In that case it is E’s interest in the company of which A is a qualifying 90% subsidiary which is measured (see subsection (4)).

1207.The term “ownership proportion” has been substituted for the term “relevant fraction” in paragraph 12 of Schedule 10 to FA 2006. Similarly “proportion” has been used in place of “percentage”. This change in language follows the change in language used in rewriting section 403C of ICTA (amount of relief in consortium cases) in this Act (see sections 143 and 144).

1208.If a company other than E is the principal company of A in relation to E’s membership of the consortium, there is also a “relevant change” in the relationship of A and the principal company if E ceases to be a qualifying 75% subsidiary of the other company or the chain of 75% qualifying subsidiaries between the other company and E is broken (see subsections (6)(b) and (8)(b)).

Section 395: No qualifying change of ownership in the case of certain intra–group reorganisations

1209.This section ensures that there is no qualifying change of ownership of A in the case of certain group reorganisations. It is based on paragraph 13 of Schedule 10 to FA 2006.

1210.The group reorganisations in question are ones following which A and all other companies involved remain qualifying 75% subsidiaries of the same principal company as before the reorganisation.

Section 396: No qualifying change of ownership where principal company’s interest in consortium company unchanged

1211.This section ensures that there is no qualifying change in ownership in the case of a change in the composition of a consortium but there is no change in the interest of the principal company in the consortium company. It is based on paragraph 13A of Schedule 10 to FA 2006.

Section 397: Companies owned by consortiums and members of consortiums

1212.This section defines, for the purposes of the sales of lessors Chapters, what a company owned by a consortium means and who are the members of the consortium in relation to that company. It is based on paragraph 14 of Schedule 10 to FA 2006.

Section 398: “Qualifying 75% or 90% subsidiary” etc

1213.This section sets out the tests for determining whether, for the purposes of the sales of lessors Chapters, a company is a “qualifying 75% subsidiary” or a “qualifying90% subsidiary” of another company. It is based on paragraph 15 of Schedule 10 to FA 2006.

1214.It uses the same approach as is used for determining whether companies are in the same group for group relief purposes but with a modification. This is that companies without share capital, such as companies limited by guarantee, can be treated as subsidiaries if they fall to be treated as controlled by another company. Such companies are also accommodated by applying Chapter 6 of Part 5 of this Act to treat their members as if they were equity holders.

1215.The reference in paragraph 15(1)(b) of Schedule 10 to FA 2006 to the definition of control in section 840 of ICTA has not been rewritten.. The definition of control is rewritten in section 1124 and section 1176(2) applies that definition for the purposes of this Act unless otherwise indicated.

Section 399: The amount of the income: the basic amount

1216.This section gives the formula for determining the basic amount of income which is then to be adjusted in accordance with sections 404 to 406 to determine the amount of income for the purposes of section 383 on any day (“the relevant day”). It is based on paragraph 16 of Schedule 10 to FA 2006.

Section 400: “PM” in section 399

1217.This section, read together with sections 401 and 402, determines the amount which is “PM” in the formula in section 399 on the relevant day. It is based on paragraph 17(1) to (2B) of Schedule 10 to FA2006.

1218.Subsection (2)(d) is new. It provides a link to section 407 which requires plant or machinery to be ignored in certain circumstances.

Section 401: Provisions supplementing section 400

1219.This section contains further details of the basis of the calculation to be made in accordance with section 400 and gives the meaning of “the amounts shown in the appropriate balance sheet” in relation to the leasing company or an associated company. It is based on paragraph 17(3) to (8) of Schedule 10 to FA 2006.

Section 402: “PM” where relevant company lessee under long funding lease etc

1220.This section provides for adjustments to be made to the calculation in section 400 in certain circumstances. It is based on paragraph 17A of Schedule 10 to FA 2006.

1221.The circumstances are if the relevant company (see section 399(5)) is the lessee of the plant or machinery under a long funding finance lease or a long funding operating lease or is treated under section 67 of CAA as the owner of the plant or machinery under a hire purchase or similar contract.

Section 403: “TWDV” in section 399

1222.This section determines the amount which is “TWDV” in the formula in section 399 on the relevant day. It is based on paragraph 18 of Schedule 10 to FA2006.

1223.The TWDV amount is made up of the unrelieved qualifying expenditure in all single asset pools, class pools and the main pool. This is the amount at the start of the new accounting period following the relevant day but excludes any expenditure on the acquisition of plant or machinery on the relevant day except for plant or machinery acquired from associated companies. This adjustment ensures that amounts in respect of plant or machinery acquired from associated companies on the relevant day are included in both the PM and the TWDV amounts.

Section 404: Amount to be nil if basic amount negative

1224.This section ensures that, if the formula in section 399(3) produces a negative basic amount, the amount of the company’s income for the purposes of section 383 is nil. It is based on paragraph 19 of Schedule 10 to FA 2006.

Section 405: Adjustment to the basic amount: qualifying 75% subsidiaries

1225.This sectionprovides for an adjustment to the basic amount if the company ceases to be a 75% subsidiary and becomes instead a consortium company or a qualifying 90% subsidiary of a consortium company. It is based on paragraph 20 of Schedule 10 to FA 2006.

1226.In these circumstances the basic amount is reduced to reflect the change in the economic control of the lessor company. The amount of the income is limited to the “appropriate percentage” of the basic amount, that is the difference between 100 per cent and the “ownership percentage” after the qualifying change of ownership (see subsections (4) and (5)).

1227.The term “ownership percentage” has been substituted for the term “relevant fraction” in paragraph 20 of Schedule 10 to FA 2006 and corresponds to the use of the term “ownership proportion” in sections 394 and 406.

Section 406: Adjustment to the basic amount: consortium relationships

1228.This sectionprovides for an adjustment to the basic amount if the trigger event is a change in a consortium relationship. It is based on paragraph 21 of Schedule 10 to FA 2006.

1229.Subsections (2) and (3) apply if the qualifying change of ownership arises only because the ownership proportion (as defined in section 394(3) and (4)) at the end of the day is less than the ownership proportion at the start of the day (see section 394(2)). They provide that the amount of the income is limited to the “appropriate proportion” of the basic amount. The “appropriate proportion” is found by deducting the ownership proportion at the end of the day from the ownership proportion at the start of the day.

1230.Subsection (4) applies if the qualifying change of ownership does not arise solely because the ownership proportion at the end of the day is less than the ownership proportion at the start of the day (see for example section 394(6)(b) and(8)). It provides that the amount of the income is limited to the ownership proportion of the basic amount at the start of the day.

Section 407: Migration

1231.This section deals with situations where a company comes within the charge to corporation tax as a result of migration to the United Kingdom. It is based on paragraph 22 of Schedule 10 to FA 2006.

1232.The section prevents the migration of a company to the United Kingdom which is coupled with a qualifying change of ownership on the same day giving rise to an expense in its first accounting period in relation to plant or machinery which would be shown in a balance sheet of the company drawn up in accordance with GAAP immediately before the day of its migration.

Section 408: “Associated company”

1233.This section gives the meaning of “associated company” for the purposes of Chapter 3 only. It is based on paragraphs 7(10) and 9 of Schedule 10 to FA 2006.

Chapter 4: Sales of lessors: leasing business carried on by a company in partnership
Overview

1234.This Chapter deals with cases where the company is carrying on a leasing business in partnership with others. It is necessary to provide not only for changes in the ownership of the company itself but also for changes in the partners’ interests in the partnership business, including the introduction and retirement of partners and changes in profit sharing ratios.

1235.This Chapter is based on Part 3 of Schedule 10 to FA 2006. The opportunity has been taken to set out in full certain provisions which in the source legislation operate by applying provisions of Part 2 of that Schedule with modifications. See sections 410 to 414 which restate in full the provisions of paragraphs 6 to 8 of Schedule 10 to FA 2006 as modified by paragraph 25 of that Schedule.

1236.Sections 417 to 424 deal with changes in the partnership and sections 425 to 429 deal with changes in the ownership of a company carrying on business in partnership.

Section 409: Introduction to Chapter

1237.This section introduces the Chapter and contains signposts to its principal provisions. It is based on paragraphs 23(1), 25(1) and (2) and 33(1) of Schedule 10 to FA 2006.

1238.In particular, it highlights the two events which may give rise to a charge and relief where a company carries on a leasing business in partnership.

Section 410: “Business of leasing plant or machinery”

1239.This section, read with sections 411 to 414, sets out the conditions for determining whether on any day a partnership carries on a “business of leasing plant or machinery” for the purposes of this Chapter. It is based on paragraph 25 of Schedule 10 to FA 2006.

1240.This section restates in full the provisions of paragraph 6 of Schedule 10 to FA2006 as applied by paragraph 25(1) and modified by paragraph 25(2) of that Schedule.

1241.Condition A in subsection (2) is that at least half of “the relevant plant or machinery value” (see section 411) relates to “qualifying leased plant or machinery”.

1242.Paragraph 25(2) of Schedule 10 to FA 2006 provides that:

Any reference in [paragraphs 6 to 8] to the relevant company is to be read as a reference to the partnership.

1243.Paragraph 6(5) of Schedule 10 to FA 2006 refers to “any company” and “the company”. Although paragraph 25(2) of Schedule 10 to FA 2006 does not explicitly modify those references, it is implicit that for the purposes of Part 3 of that Schedule those references must also be read as references to the partnership. This has been made explicit in subsection (6).

Section 411: “Relevant plant or machinery value” for condition A in section 410

1244.This section sets out the method of calculating the relevant plant or machinery value on any day for the purposes of condition A in section 410(2). It is based on paragraph 25 of Schedule 10 to FA 2006.

1245.This section restates in full the provisions of paragraph 7(1) to (3A) of Schedule 10 to FA 2006 as applied by paragraph 25(1) and modified by paragraph 25(2) and (3) of that Schedule.

Section 412: Provision supplementing section 411

1246.This section contains further details of the basis of the calculation to be made in accordance with section 411. It is based on paragraph 25 of Schedule 10 to FA 2006.

1247.This section restates in full the provisions of paragraph 7(4) to (9) of Schedule 10 to FA 2006 as applied by paragraph 25(1) and modified by paragraph 25(2) of that Schedule.

1248.In giving effect to the implicit modifications made by paragraph 25(2) of Schedule 10 to FA 2006 to paragraph 7(4) and (7) of that Schedule, references have been included in subsections (1) and (4)both to the partnership and to any company, a company or the company. This is necessary as the question whether any plant or machinery is “relevant transferred plant or machinery” as regards any company mentioned in section 411(5) is determined by reference to the amounts which would be shown in the appropriate balance sheet of that company (seesection 411(4)).

Section 413: Relevant plant or machinery value where partnership lessee under long funding lease etc

1249.This section provides for adjustments to be made to the calculation in section 411 in certain circumstances. It is based on paragraph 25 of Schedule 10 to FA2006.

1250.This section restates in full the provisions of paragraph 7A of Schedule 10 to FA 2006 as applied by paragraph 25(1) and modified by paragraph 25(2) and (3) of that Schedule.

1251.The circumstances are if the partnership is the lessee of the plant or machinery under a long funding finance lease or a long funding operating lease or is treated under section 67 of CAA as the owner of the plant or machinery under a hire purchase or similar contract.

Section 414: Partnership’s income for condition B in section 410

1252.This section provides for the way in which the partnership’s income is to be calculated for the purposes of condition B in section 410(4). It is based on paragraph 25 of Schedule 10 to FA 2006.

1253.This section restates in full the provisions of paragraph 8 of Schedule 10 to FA2006 as applied by paragraph 25(1) and modified by paragraph 25(2) of that Schedule.

Section 415: “Qualifying change” in company’s interest in a business

1254.This section defines a “qualifying change” in a company’s interest in a business by reference to a reduction in its “percentage share” in the profits or loss of the business. It is based on paragraph 27 of Schedule 10 to FA 2006.

Section 416: Determining the percentage share in the profits or loss of business

1255.This section provides that a company’s “percentage share” in the profits or loss of the business is to be determined on a just and reasonable basis. It is based on paragraph 28 of Schedule 10 to FA 2006.

Section 417: Partner company’s income and other companies’ matching expense

1256.This section provides for the consequences of a “qualifying change” on any day in a company’s interest in a leasing business carried on by it in partnership. It is based on paragraph 23 of Schedule 10 to FA 2006.

1257.A “qualifying change” is defined in section 415 and occurs if there is a reduction in the company’s interest in the business.

1258.On the day of the qualifying change, the company is treated as receiving an amount of income and the other companies carrying on the business are treated as incurring an expense. In this case, there is no ending of an accounting period such as in section 383. The income and expense are recognised in the accounting period of the company which relates to the day of the qualifying change.

1259.If a single company is carrying on the business alone after the qualifying change, subsection (5) provides that the expense is treated as incurred by it at a time when it is carrying the business alone and is allowed as a deduction in calculating the profits of the business for the accounting period in which it is treated as incurred.

Section 418: Amount of income and expense

1260.This section contains a signpost to the sections which contain the provisions for calculating the amount of the income to be brought into account in accordance with section 417(2)(a) and (3) and to the section determining the amount of the expense to be brought into account in accordance with section 417(2)(b) and (4) or (5). It is based on paragraph 24 of Schedule 10 to FA 2006.

Section 419: Relief for expense otherwise giving rise to carried forward loss

1261.This section applies if, as the result of a qualifying change in a partner company’s interest in the partnership business, a single company succeeds to the partnership business and provides for the carrying forward of the expense incurred by the successor company to later accounting periods. It is based on paragraph 39 of Schedule 10 to FA 2006.

1262.If the successor company makes a loss in the accounting period in which it begins to carry on the business alone, the loss derived from the expense treated as incurred under section 417(5)(a), which could otherwise only be carried forward and applied against the profits of the company’s leasing trade, is instead to be treated as an expense of the next accounting period and so available for group relief in that period.

1263.If the company continues to make losses, so much of the loss as derives from the expense can similarly be treated as an expense of subsequent accounting periods which start within the period of five years beginning with the day on which the qualifying change in the partner company’s interest in the business occurs, unless there is a subsequent qualifying change of ownership.

1264.The amount of the loss derived from the expense is indexed to up-rate its value and preserve the symmetry between the value of the charge and the value of the relief. See subsection (2).

1265.Paragraph 39 of Schedule 10 to FA 2006 applies for the purposes of:

  • paragraph 3 of that Schedule, in a case where the company carries on the leasing business alone; and

  • paragraphs 23(4A) and 33 of that Schedule, in a case where the company carries on the business in partnership.

1266.It has been rewritten here for the purposes only of section 417(5). It has also been rewritten in section 386 for the purposes of section 383 and in section 428 for the purposes of section 425. It is considered that it is helpful to paint the complete picture in each Chapter.

Section 420: Exception: companies carrying on business ceasing to share in its profits

1267.This section disapplies section 417 subject to certain conditions where all the companies carrying on the business in partnership cease to be interested in the business on the same day. It is based on paragraph 23A of Schedule 10 to FA 2006.

Section 421: The amount of the income: the basic amount

1268.This section gives the formula (PM – TWDV) for determining the basic amount of income of the partnership which is then to be adjusted in accordance with section 422 or 423 to determine the amount of income of the company for the purposes of section 417 on any day (“the relevant day”). It is based on paragraph 29 of Schedule 10 to FA 2006.

1269.Subsection (4) applies the definition of PM in section 400 with modifications.

1270.Subsection (5) determines the amount which is TWDV.

1271.The TWDV amount is made up of the unrelieved qualifying expenditure in all single asset pools, class pools and the main pool. This is the amount that would be carried forward assuming that a chargeable period ends on the relevant day and a new one begins on the following day (see subsection (6)(a)).

1272.But any expenditure on the acquisition of plant or machinery on the relevant day is excluded, except for plant or machinery acquired from qualifying companies (see subsection (6)(b)). This adjustment ensures that amounts in respect of plant or machinery acquired from qualifying companies (as defined in subsection (7)) on the relevant day are included in both the PM and the TWDV amounts.

Section 422: Amount to be nil if basic amount negative

1273.This section ensures that, if the formula in section 421(3) produces a negative basic amount, the amount of the company’s income for the purposes of section 417 is nil. It is based on paragraph 30 of Schedule 10 to FA 2006.

Section 423: Adjustment to the basic amount

1274.This section limits the amount of the company’s income for the purposes of section 417 to a percentage of the basic amount. It is based on paragraph 31 of Schedule 10 to FA 2006.

1275.The percentage of the basic amount is found by deducting the company’s percentage share in the profits or loss of the partnership at the end of the day from its percentage share at the beginning of the day.

Section 424: The amount of expense

1276.This section determines the amount of expense treated as incurred by a company in accordance with section 417(2)(b) as the result of a qualifying change in the partner company’s interest in the business on any day. It is based on paragraph 32 of Schedule 10 to FA 2006.

1277.Except where a single company is carrying on the business at the end of the day, the amount of the expense is determined by reference to any increase of the company’s percentage interest in the profits or loss of the partnership which is attributable to the qualifying change in the interest in the business of the partner company (see subsections (2) and (3)).

1278.Where a single company is carrying on the business at the end of the day, the amount of the expense is equal to the amount of the income (see subsection (4)).

Section 425: Partner company’s income and matching expense in different accounting periods

1279.This section provides for an accounting period to end if there is a “qualifying change of ownership” in relation to a company within the charge to corporation tax carrying on a business of leasing plant or machinery in partnership. It is based on paragraph 33 of Schedule 10 to FA 2006.

1280.This section is the equivalent of section 383 which applies where the company is carrying on the business alone. “Qualifying change of ownership” has the same meaning in this section as it does in section 383 (see sections 392 to 398).

1281.On the day the accounting period ends the company is treated as receiving an amount of income which is brought into account in calculating the profits of the company’s “notional business” for that accounting period for corporation tax purposes. See subsections (2) and (3).

1282.On the following day the company is treated as incurring an expense which is brought into account in calculating the profits of the company’s “notional business” for a new accounting period for corporation tax purposes. See subsections (4) and (5).

Section 426: Amount of income and expense

1283.This section contains a signpost to the section which contains the provisions for calculating the amount of the income to be brought into account in accordance with section 425(2) and (3) and provides that the amount of the expense to be brought into account in accordance with section 425(4) and (5) is the same as the amount of the income. It is based on paragraph 34 of Schedule 10 to FA 2006.

Section 427: No carry back of the expense

1284.This section prevents any loss which arises in the later accounting period which derives from the expense from being carried back against profits of any earlier accounting period under section 37(3)(b). It is based on paragraph 35 of Schedule 10 to FA 2006.

Section 428: Relief for expense otherwise giving rise to carried forward loss

1285.This section provides for the carrying forward of the expense to later accounting periods. It is based on paragraph 39 of Schedule 10 to FA 2006.

1286.If the company makes a loss in the accounting period which, in accordance with section 425(4)(b), begins on the day after the qualifying change of ownership, the loss derived from the expense treated as incurred under section 425(4)(a), which could otherwise only be carried forward and applied against the profits of the company’s leasing trade, is instead to be treated as an expense of the next accounting period and so available for group relief in that period.

1287.If the company continues to make losses, so much of the loss as derives from the expense can similarly be treated as an expense of subsequent accounting periods which start within five years of the qualifying change of ownership, unless there is a subsequent qualifying change of ownership.

1288.The amount of the loss derived from the expense is indexed to up-rate its value and preserve the symmetry between the value of the charge and the value of the relief. See subsection (2).

1289.Paragraph 39 of Schedule 10 to FA 2006 applies for the purposes of:

  • paragraph 3 of that Schedule, in a case where the company carries on the leasing business alone; and

  • paragraphs 23(4A) and 33 of that Schedule, in a case where the company carries on the business in partnership.

1290.It has been rewritten here for the purposes only of section 425. It has also been rewritten in section 386 for the purposes of section 383 and in section 419 for the purposes of section 417(5). It is considered that it is helpful to paint the complete picture in each Chapter.

Section 429: The amount of the income

1291.This section sets out the rules for determining the amount of the company’s income for the purposes of section 425 on any day. It is based on paragraph 36 of Schedule 10 to FA 2006.

1292.The rules adopt concepts from Chapters 3 and 4 for this purpose. The basic amount is found in accordance with section 421 in Chapter 4 and is then adjusted in accordance with sections 404 to 406 in Chapter 3. The “appropriate percentage” of the adjusted amount is then taken.

1293.Subsection (5) ensures that, if on the same day there is also a qualifying change in the company’s interest in the business carried on by the partnership, the percentage share in relation to which the amount of income under section 417 is calculated is not also taken into account in calculating the income under section 425.

Section 430: “Associated company”

1294.This section gives the meaning of “associated company” for the purposes of Chapter 4 only. It is based on paragraph 26 of Schedule 10 to FA 2006.

1295.This section is substantially similar to section 408 which gives the meaning of “associated company” for the purposes of Chapter 3 but includes additional provisions in subsection (5) for the case where the company is a consortium company and there is a qualifying change in its interest in the business carried on by it in partnership.

Section 431: “Profits” and “loss”

1296.This section provides that in calculating the amount of income and expense for the purposes of this Chapter a company’s percentage share does not include its share in any chargeable gains or losses. It is based on paragraph 37 of Schedule 10 to FA2006.

1297.In the case of some partnerships, different profit sharing ratios are agreed for income profits and losses and capital profits and losses. This provision ensures certainty in such cases by looking only at the profit sharing ratios for income profits and losses.

Chapter 5: Sales of lessors: anti–avoidance provisions
Overview

1298.This Chapter contains two sets of anti–avoidance provisions.

Section 432: Restrictions on relief for Chapter 3 or 4 expenses: introduction

1299.This section provides for the circumstances in which section 433 applies. It is based on paragraph 38(1), (2), (6) and (7) of Schedule 10 to FA 2006.

1300.Section 433 applies if a company incurs an expense under Chapter 3 or 4 which arises in consequence of or in connection with arrangements the main purpose, or one of the main purposes, of which is to secure that the company is treated as incurring the expense (see subsection (1)).

Section 433: Restrictions applying to the restricted loss amount

1301.This section is an anti–avoidance provision. It is based on paragraph 38(2) to(5), (8) and (9) of Schedule 10 to FA 2006.

1302.The section restricts the manner in which the loss derived from the expense referred to in section 432 may be utilised. It ensures that the loss can only be set against income from certain leases of plant or machinery entered into before the day on which the company is treated as incurring the expense.

Section 434: Introduction to sections 435 and 436

1303.This section explains when sections 435 and 436 apply and what is meant by a question as to the application of Chapter 3 or 4. It is based on paragraphs 38A(1) and (4) and 38B(1) of Schedule 10 to FA 2006.

1304.A question as to the application of Chapter 3 or 4 is one which concerns:

  • whether a company carries on a business of leasing plant or machinery (whether alone or in partnership); or

  • the amount (if any) of any income or expense treated as received or incurred.

Section 435: Disregard of increases and decreases in balance sheet amounts

1305.This section is an anti–avoidance provision. It is based on paragraph 38A(1) to(3) and (5) of Schedule 10 to FA 2006.

1306.The section targets arrangements that increase or reduce the amounts shown in a company’s balance sheet in respect of plant or machinery.

1307.Subsection (1) provides that this section applies if:

  • there is a question as to the application of Chapter 3 or 4 and the answer to the question relies on amounts in respect of plant or machinery shown in any balance sheet of any company;

  • there has been an arrangement that results in an increase or reduction of the amount that would otherwise have been shown on the balance sheet; and

  • that arrangement had as its main purpose, or one of its main purposes, securing a relevant tax advantage (see subsection (2)).

1308.If this section applies the increase or decrease in the amount in respect of plant or machinery is to be ignored (see subsection (3)).

Section 436: Balance sheet amounts determined on assumption company has no liabilities

1309.This section is an anti–avoidance provision. It is based on paragraph 38B of Schedule 10 to FA 2006.

1310.The section targets situations where the amount shown in a company’s balance sheet in respect of plant or machinery is affected by the liabilities of the company.

1311.It applies if, apart from this section, on any day:

  • no amount would fall to be shown in the company’s balance sheet in respect of plant or machinery (see subsection (2)); or

  • the amount which would fall to be shown in the balance sheet of the company in respect of plant or machinery is less than the amount which would fall to be shown on the assumption that the company had no liabilities of any kind on that day (see subsections (3) and (4)).

1312.In either of those cases, a question as to the application of Chapter 3 or 4 is to be answered applying the assumption that the company had no liabilities of any kind on that day (see subsection (5)).

Chapter 6: Sales of lessors: general interpretation
Section 437: Interpretation of the sales of lessors Chapters

1313.This section defines terms and provides interpretation for the purposes of the sales of lessors Chapters. It is based on paragraph 41 of Schedule 10 to FA 2006.

1314.The definition of connected persons by reference to section 839 of ICTA in paragraph 41(9) of Schedule 10 to FA 2006 has not been rewritten. Section 839 of ICTA is rewritten in section 1122 and section 1176(1) applies the defined term for the purposes of this Act unless otherwise indicated.

1315.Paragraph 42 of Schedule 10 to FA 2006 (index of definitions) has not been rewritten in this Part, but Schedule 4 (Index of defined expressions) contains the principal defined terms used in the sales of lessors Chapters.

Part 10: Close companies

Overview

1316.This Part rewrites sections 414 to 417 and 419 to 422 of ICTA and Schedule 12 to FA 1989, which are concerned with close companies.

1317.A company controlled by a small group of persons may arrange its affairs to enable those persons to avoid income tax. The close company provisions in Part 11 of ICTA counter this.

1318.The close company legislation, as such, has two main effects. First, section 418 of ICTA extends the meaning of “distribution” to encompass certain benefits which may be disguised distributions of profit to the shareholders or their families. Section 418 is rewritten in this Act as part of the legislation on distributions. See section 1064. Second, section 419 of ICTA imposes tax in respect of certain loans made to shareholders or their families which could in practice represent the extraction of profits without the payment of tax by those persons. Section 419 is rewritten in Chapter 3 of this Part.

1319.Other legislation imposes further restrictions on close companies. For example, close companies which are “close investment-holding companies” (as defined in section 13A of ICTA) are not entitled to claim to pay the rate of corporation tax for companies with small profits. Section 13A is rewritten in this Act as part of the legislation on relief for companies with small profits. See section 34.

1320.The term “control” is defined for close company purposes in section 416 of ICTA. This definition is also widely used in other contexts. Section 416 is rewritten in Chapter 2 of this Part.

Chapter 1: Overview of Part
Section 438: Overview of Part

1321.This section introduces the Part. It is new.

1322.In its present form, the close company legislation in Part 11 of ICTA largely dates back to 1965. The opportunity has been taken to disentangle its structure.

1323.The definitions of the key technical terms are located near the beginning of the Part, in Chapter 2.

1324.Chapter 3 imposes the charge to tax in connection with loans or advances by close companies to participators.

1325.Chapter 4 contains a power to obtain information in connection with close companies.

1326.“Participator” is used for the first time in this Part in subsection (2). Its definition is signposted in subsection (4).

Chapter 2: Basic definitions
Overview

1327.This Chapter defines which companies are and are not to be close companies. It has the following structure.

  • Sections 439 to 441 define “close company”.

  • Sections 442 to 447 make exceptions to the rules in sections 439 to 441.

  • Sections 448 to 454 define some expressions used in this Part and, in particular, in defining “close company”. These definitions are arranged in alphabetical order.

Section 439: “Close company”

1328.This section is the first of a group of three sections defining “close company”. It is based on section 414(1), (2) and (2D) of ICTA.

1329.Subsection (1) provides that there are two alternative tests to determine whether a company is a close company.

1330.The first test, condition A in subsection (2), focuses on control over the company.

1331.The second test, condition B in subsection (3), focuses on rights to assets in the event that the company is wound up.

1332.Subsection (4) gives a signpost to the exceptions to this section in sections 442 to 447.

1333.Subsections (5) and (6) relate to condition B in subsection (3). Subsection (5) provides for subsection (3) to be supplemented by section 451. Subsection (6) gives a signpost to section 441, which supplements subsection (3).

1334.“Control” and “director” are used for the first time in this Part in subsection (2), and “loan creditor” is used for the first time in subsection (3). Signposts to their definitions are given in subsection (7).

Section 440: Basis of winding up under section 439(3)

1335.This section quantifies the part of the assets available for distribution among the participators which a person is entitled to receive in the notional winding up under section 439(3). It is based on section 414(2A) and (2B) of ICTA.

Section 441: Treatment of some persons as participators or directors for the purposes of section 439(3)

1336.This section supplements section 439(3). It is based on section 414(2C) of ICTA.

Section 442: Particular types of company

1337.This section is the first of a series of sections stipulating that certain companies are not to be treated as close companies. It is based on section 414(1) and (2) of ICTA.

Section 443: Companies controlled by or on behalf of Crown

1338.This section provides that certain companies controlled by or on behalf of the Crown are not to be treated as close companies. It is based on section 414(1) and (4) of ICTA.

1339.Subsection (1) provides that “a company is not to be treated as a close company as a result of section 439(2) if it is controlled by or on behalf of the Crown.” The italicised words are based on “and not otherwise a close company” in section 414(1)(c) of ICTA.

1340.The italicised words leave it open for a company controlled by or on behalf of the Crown to be a close company if condition B in section 439(3) is met. Section 439(3) is based on section 414(2) of ICTA.

1341.The italicised words also leave it open for a company controlled by or on behalf of the Crown to be a close company if condition A in section 439(2) is satisfied by reference to persons acting independently of the Crown. See subsection (3).

1342.In short, section 414(1)(c) of ICTA is a qualified exception to section 414(1) of that Act but not an exception to section 414(2) of that Act.

Section 444: Companies involved with non-close companies

1343.This section provides that certain companies involved with non-close companies are not to be treated as close companies. It is based on section 414(5) and (6) of ICTA.

1344.Subsections (2) and (3) rewrite section 414(5)(a) and (b) of ICTA respectively.

Section 445: Section 444: registered pension schemes

1345.This section supplements section 444; it is concerned with shares held on trust for registered pension schemes. It is based on section 414(7) of ICTA.

1346.Subsection (1) is based on the full-out words at the beginning and end of section 414(7) of ICTA. In summary, a registered pension scheme within subsection (1) is treated as a non-close company.

1347.Subsection (2) is based on the “unless”-clause in the full-out words at the beginning of section 414(7) of ICTA. It is the first part of an exception to subsection (1). It focuses on the individuals for whose benefit the scheme is established.

1348.Subsection (3) is based on section 414(7)(a) to (c) of ICTA. It is the second part of the exception to subsection (1). It focuses on the companies of which the individuals in subsection (2)(a) are or were directors or employees.

1349.“Associate” and “associated company” appear for the first time in subsection (3). Their definitions are signposted in subsection (4).

Section 446: Particular types of quoted company

1350.This section provides that certain quoted companies are not to be treated as close companies. It is based on section 415(1), (2) and (6) to (8) of ICTA.

1351.Subsection (1) lays down the general rule.

1352.Subsection (2) makes an exception to the general rule in subsection (1).

1353.Subsection (2) uses the concept of a “principal member” of a company. This term is defined in subsection (3).

1354.Subsection (4) qualifies subsection (3).

1355.Subsections (1) to (4) focus on voting power. Subsection (5) supplements the references to voting power in those provisions.

Section 447: Section 446: meaning of “shares beneficially held by the public” etc

1356.This interpretative section is based on section 415(3) to (8) of ICTA.

1357.Subsection (1) lays down the general rule.

1358.Subsection (2) makes an exception to that rule.

1359.Subsection (3) specifies the individuals in subsection (2)(e).

1360.Subsection (4) rewrites the tail words of section 415(3) of ICTA. It supplements the references to unconditional allotment and unconditional acquisition in section 446(1).

1361.Subsections (5) to (8) supplement this section or provisions of this section.

Sections 448 and 449: “Associate”; “associated company”

1362.These interpretative sections are based on sections 416(1) and 417(3) and (4) of ICTA.

Section 450: “Control”

1363.This interpretative section is based on section 416(2) and (3) of ICTA.

1364.Subsection (1) specifies that this definition of “control” applies for the purposes of this Part. The definition of “control” in section 840 of ICTA is rewritten in section 1124.

1365.Subsection (2) rewrites the general proposition in the opening words of section 416(2) of ICTA.

1366.Subsection (3) rewrites the specific propositions in section 416(2)(a) to (c) of ICTA.

1367.Subsection (4) rewrites as a separate stipulation the words in brackets in section 416(2)(b) of ICTA.

1368.Subsection (5) rewrites section 416(3) of ICTA.

Section 451: Section 450: rights to be attributed etc

1369.This section supplements section 450. It is based on section 416(4) to (6) of ICTA.

1370.Subsections (2) and (3) rewrite, respectively, section 416(4) and (5) of ICTA.

1371.Subsections (4) to (6) rewrite section 416(6) of ICTA, paragraphing it and breaking it up into sense-units.

1372.Sections 439(5), 446(5) and 447(6) provide for the application of provisions of this section.

Section 452: “Director”

1373.This interpretative section is based on section 417(5) and (6) of ICTA.

1374.Section 417(5) of ICTA refers to “the company’s trade or business”. Section 6(4)(b) of ICTA provides that, in Part 11 of that Act, “trade” includes “vocation” and also includes an office or employment. A company cannot carry on an employment. In relation to a company, “business” is apt to include an office. Subsection (2) therefore does not provide that “trade” includes an office or employment. In addition, subsection (2)includes a minor change in the law, in that it does not provide that “trade” includes “vocation”. See Change 4 in Annex 1.

1375.Section 417(5)(b) of ICTA has the phrase “directly or through the medium of other companies or by any other indirect means”. It follows from the meaning of “other” that “through the medium of other companies or by any other indirect means” can be compressed to “by any indirect means”. Compare Viscount Radcliffe’s remarks on “interest, annuities, or other annual payments” in CIR v Frere (1964) 42 TC 125 HL on page 152. And, as a matter of normal English usage, “by any indirect means” is synonymous with “indirectly”. Subsection (2)(b)(ii) therefore compresses the phrase under review to “directly or indirectly”.

1376.In section 417(6) of ICTA, if a person (P) is deemed to own whatever P’s associates own or control, then “either on his own or with one or more associates” is otiose. Subsection (3) therefore omits it. And subsection (3) goes on to omit as otiose “even if he does not own or control share capital on his own”.

Sections 453 and 454 “Loan creditor”; “participator”

1377.These interpretative sections are based on section 417(1), (2) and (7) to (9) of ICTA.

Chapter 3: Charge to tax in case of loan to participator
Section 455: Charge to tax in case of loan to participator

1378.This section imposes a charge to tax if a close company makes a loan, or advances money, to a participator or an associate of a participator. It is based on section 419(1) to (3), (6) and (7) of ICTA.

1379.Subsection (1) states when this section applies. It uses the expression “relevant person”, which is defined in subsection (6).

1380.Subsection (2) imposes the charge.

1381.Subsection (3) states when the tax is due and payable.

1382.Subsection (4) extends the scope of the charge. It is based on section 419(2) of ICTA, which is expressed to apply for the purposes of that section. Subsection (4) is expressed to apply for the purposes of, among other things, section 456 – that is, including the provisions of that section which are based on section 420 of ICTA. Since section 420 of ICTA makes exceptions to section 419 of that Act, defining the scope of subsection (4) in this way does not change the law.

1383.Subsection (5) extends the circumstances in which a person is treated as being a participator in a company.

Section 456: Exceptions to the charge under section 455

1384.This section makes certain exceptions to the charge under section 455. It is based on sections 419(1) and 420 of ICTA.

1385.Subsection (1) is an exception for money-lending companies.

1386.Subsection (2) is an exception for ordinary supplies of goods and services.

1387.Subsection (2) refers to a company’s “trade or business”. It does not refer to a company’s “vocation”. This is a minor change in the law. See the commentary on section 452 and Change 4in Annex 1.

1388.Subsections (3) to (8) are an exception for small amounts.

1389.Subsections (3), (4) and (7) apply not only to loans but also to advances. This is a minor change in the law to bring it into line with practice. See Change 30 in Annex 1.

Section 457: Section 456: meaning of “material interest in a company”

1390.This interpretative section is based on section 420(2) of ICTA.

1391.The closing sentence of section 420(2) of ICTA attracts, with modifications, section 168(11) of ICTA. Section 168(11) of ICTA has been rewritten in section 68 of ITEPA and repealed. This section largely replicates section 68 of ITEPA.

1392.Section 168(11) of ICTA is reproduced below for the reader’s convenience, as it stood before ITEPA and as modified by section 420(2) of ICTA.

A person shall be treated as having a material interest in a company if he, either on his own or with one or more associates, or if any associate of his with or without such other associates –

(a)

is the beneficial owner of, or able, directly or through the medium of other companies, or by any other indirect means, to control more than 5 per cent of the ordinary share capital of the company, or

(b)

in the case of a close company, possesses, or is entitled to acquire, such rights as would in the event of the winding up of the company or in any other circumstances, give an entitlement to receive more than 5 per cent of the assets which would then be available for distribution among the participators.

In this subsection “associate” has the same meaning as in section 417(3), except that for this purpose “relative” in that subsection has the meaning given by section 160(6),and “participator” has the meaning given by section 417(1).

1393.The closing sentence of section 420(2) of ICTA provides for the words following “417(3)” to be omitted, and the words in strikethrough reflect this. But this omission merely disapplies the definition of “relative” in section 160(6) of ICTA. It does not extend to the underlined words, because omitting the underlined words would leave “participator” undefined. FA 1989 inserted the underlined words into section 168(11) of ICTA by way of consequential amendment, and it appears that the need to make a further consequential amendment to section 420(2) of that Act was overlooked.

1394.Subsection (2)(b) has been compressed for the sake of brevity and consistency with section 452(2)(b)(ii). See the commentary on that provision.

Section 458: Relief in case of repayment or release of loan

1395.This section gives relief from tax in cases in which:

  • a loan or advance from a close company has given rise to a charge under section 455, and

  • the loan or advance is repaid or the debt in respect of it is released or written off.

1396.It is based on section 419(4) to (4B) of ICTA.

1397.Subsection (1) states when the section applies.

1398.Subsection (2) specifies the relief and the circumstances in which it is given.

1399.Subsection (3) is about claiming the relief. It reflects paragraph 21 of Schedule 39 to FA 2008, which substitutes “4 years” for “six years” in section 419(4) of ICTA with effect from 1 April 2010.

1400.If the company becomes eligible for relief after the tax due under section 455 becomes due and payable, subsections (4) and (5) defer the relief.

1401.Subsection (6) sets the link with TMA.

Section 459: Loan treated as made to participator

1402.This section blocks arrangements to circumvent the charge under section 455. It treats certain loans or advances, which would otherwise be outside the scope of that section, as having been made to a relevant person. It is based on section 419(5) and (7) of ICTA.

1403.Subsection (1) states when the section applies.

1404.Subsection (2) is the main operative provision.

1405.Section 419(5) of ICTA provides for that section to apply as if the loan or advance had been made to the individual in question. Subsection (2), which is based on section 419(5), provides for sections 455 to 458 to apply. These sections include provisions which are based on section 420 of ICTA. Since section 420 of ICTA makes exceptions to section 419 of that Act, defining the scope of subsection (2) in this way does not change the law.

1406.Subsection (3) makes two exceptions to this section.

1407.Subsection (4) extends the circumstances in which a person is treated as a participator in a company.

Section 460: Loan treated as made by close company

1408.This section extends the scope of sections 455 to 459 to catch loans or advances made by certain companies which are controlled by other companies. It is based on section 422(1) to (3) and (6) of ICTA.

1409.Subsection (1) states when the section applies.

1410.Subsection (2) prescribes the consequences if the company (C) making the loan or advance is controlled by a close company.

1411.Subsection (3) prescribes the consequences if C is not controlled by a close company but a close company subsequently acquires control of it.

1412.Subsections (2) and (3) operate in relation to section 459, because the references in section 422(1) and (2) of ICTA to section 419 of that Act pick up section 419(5) of that Act.

1413.Subsection (4) deals with the case in which two or more close companies control C.

1414.Subsections (5) and (6) are signposts.

1415.Subsection (7) extends the circumstances in which a company is deemed to make a loan.

Section 461: Exception to section 460

1416.This section makes an exception to section 460. It is based on section 422(4) and (6) of ICTA.

Section 462: Determination of particular questions as a result of section 460

1417.This section supplements sections 455 to 459. It is based on section 422(5) and (6) of ICTA.

1418.Subsection (1) states when the section applies. It operates in relation to section 459 for the reason given in the commentary on section 460(2) and (3).

1419.Subsection (2) lists the questions which come within this section, and requires them to be determined by reference to the company labelled C in section 460(1).

Section 463: Taxation of debtor on release of loan to trustees of settlement which has ended

1420.This section deems income to arise to a company for corporation tax purposes in certain circumstances when a loan or advance from a close company is released or written off. It is based on section 421 of ICTA.

1421.This section deals with the following case, as specified in subsections (2) to (5).

  • A close company (X) makes a loan or advance to the trustees of a settlement.

  • Another company (Y) becomes the debtor in respect of this loan or advance.

  • After the settlement has ended, X releases or writes off the whole or part of the loan or advance.

1422.Subsection (6) is the main operative provision.

1423.Subsection (7) quantifies the income. Section 421(1)(a) of ICTAuses the word “gross” in a manner analogous to “grossing up” as defined in section 1128(3) of this Act. Subsection (7) therefore uses a formula to rewrite section 421(1)(a) and (b) of ICTA on the lines of the formula in section 1128(3).

Section 464: Section 463: other person treated as releasing or writing off debt

1424.This section supplements section 463. It is based on section 422(5) of ICTA.

1425.Subsection (1) states when the section applies. It operates in relation to section 459 for the reason given in the commentary on section 460(2) and (3).

1426.Subsection (2) is the operative provision.

Chapter 4: Power to obtain information
Section 465: Power to obtain information

1427.This section gives HMRC power to obtain information about close companies. It is based on Schedule 12 to FA 1989.

Part 11: Charitable companies etc

Overview

1428.This Part contains rules specific to charitable companies. It follows to a large extent the structure of Part 10 of ITA, and, like those provisions, is based on sections 505 to 506C of, and Schedule 20 to, ICTA, section 25 of FA 1990 and section 46 of FA 2000. It also rewrites certain provisions which have only ever applied for corporation tax purposes such as sections 507 and 508 of ICTA.

Chapter 1: Introduction
Overview

1429.This Chapter gives an overview of the Part and provides certain important definitions.

Section 466: Overview of Part

1430.This section sets out the scope of the Part.

Section 467: Meaning of “charitable company”

1431.This section defines “charitable company” for the purposes of this Part and is based on section 506(1) of ICTA, section 25(12) of FA 1990, section 46(6) of FA 2000 and section 83(5) of FA 2004.

1432.The effect of splitting the source legislation between income tax and corporation tax is that the income tax rules apply to charities constituted in the form of charitable trusts while the corporation tax rules apply to charitable companies.

1433.The definition of charitable company therefore includes charities constituted as unincorporated associations and charities incorporated by Royal Charter.

1434.A definition of a “charity” is included in section 1119 of this Act. The definition for income tax is in section 989 of ITA.

Section 468: Meaning of “eligible body”

1435.This section lists the institutions which are referred to in this Part as “eligible bodies”. It is based on section 507(1) of ICTA.

Section 469: Conditions for qualifying as a scientific research association

1436.This section sets out the conditions necessary for a company to qualify as a scientific research association (SRA) for the purposes of this Part. It is based on section 508(1) to (3) of ICTA.

Section 470: Meaning of “research and development” in section 469.

1437.This section applies the definition of “research and development” in section 1138. It is based on section 508(3) and (4).

1438.Subsection (2) follows the approach taken in section 1138 which draws on the regulatory power in section 1006 of ITA.

Chapter 2: Gifts and other payments
Overview

1439.This Chapter provides the rules on grossing up and exemptions for gifts and other payments paid by individuals and companies to charities and other bodies within this Part.

Section 471: Gifts qualifying for gift aid relief: income tax treated as paid

1440.This section deals with the income tax treated as paid when a charitable company receives gift aid donations from individuals. It is based on section 25(10) and (12) of FA 1990. The corresponding rule for income tax is in sections 520 of ITA.

1441.The company is treated as receiving a grossed up amount, and the tax treated as deducted from the gift is treated as paid by the charitable company.

Section 472: Gifts qualifying for gift aid relief: corporation tax liability and exemption

1442.This section sets out the charge to tax and exemption that can arise on gift aid payments received by a charitable company. It is based on section 505(1) of ICTA, section 25(10) and (12) of FA 1990 and section 83(4) of FA 2004. The corresponding rule for income tax is in section 521 of ITA save that this section incorporates the requirement to make a claim.

1443.The section imposes a freestanding charge to corporation tax on gift aid payments, unlike the source legislation which operates by treating the gifts as annual payments. The charge is on the grossed up amount. The section also sets out the exemption which normally applies if the charitable company uses the gifts for charitable purposes.

1444.Subsection (4) provides that a claim is necessary for an exemption.

1445.Claims are made either as required during the accounting period, for example to secure repayments of income tax treated as paid in relation to gift aid payments, or in a corporation tax self-assessment return. The need to make a claim ensures that there is a mechanism for appeals in the event of any dispute about the availability or amount of any exemption.

1446.The corporation tax self-assessment procedure means that a charitable company only need complete a tax return, and make the associated claims, if the charitable company is chargeable to tax or is required to do so by HMRC.

1447.The reference in section 505(1) of ICTA to claims being to the Board of Inland Revenue has been changed. Claims are simply to an officer of Revenue and Customs. See Change 5 in Annex 1.

1448.Subsection (5) provides that if an individual makes a direction in a self-assessment return for a tax repayment to be paid as a gift to a charitable company, the company is treated as having made a claim.

Section 473: Gifts of money from companies: corporation tax liability and exemption

1449.This section sets out the charge to tax that can arise on gifts received by a charitable company from other companies which are not charities. It is based on section 339(4) and 505(1) of ICTA. The corresponding rule for income tax is in section 522 of ITAsave that the requirement to make a claim has been incorporated into the section.

1450.As with section 472, this section imposes a freestanding charge to corporation tax on gifts.

Section 474: Payments from other charities: corporation tax liability and exemption

1451.This section prevents avoidance by charities of the restrictions on exemptions by routing non-charitable expenditure through other charities. It is based on section 505(1) and (2) of ICTA. The corresponding rule for income tax is in section 523 of ITA save that the requirement to make a claim has been incorporated into the section.

1452.The section operates by imposing a charge to tax on certain payments made by a charity to a charitable company. It also sets out the exemption which normally applies if the charitable company uses the payments for charitable purposes.

1453.Earlier drafts of subsection (1) added to the conditions (now paragraphs (a) to (c)) a further condition (paragraph (d)) that payment should not arise from a source outside the United Kingdom. This requirement has now been removed. It was unnecessary and subsection (1) now rewrites the law accurately as it stands. CTA 2009 replaced the reference to Schedule D Case III in section 505(2) of ICTA with a reference to the charge to corporation tax on income. The amendment made it clearer that the charge under section 505(2) is not limited to payments from a source in the United Kingdom.

1454.Subsection (4) makes it clear that section 494 of ITA, which deals with the grossing up of discretionary payments from trusts, takes precedence over this section where applicable.

Section 475: Gifts qualifying for gift aid relief: income tax treated as paid and exemption

1455.This section gives the treatment that applies when an eligible body receives gift aid donations from individuals. It is based on section 25(10) and (12) of FA 1990 and sections 505(1) and 507(1) of ICTA. The corresponding rule for income tax is in section 520 of ITA save that the exemption and the requirement to make a claim has been incorporated into the section.

1456.The company is treated as receiving a grossed up amount, and the tax treated as deducted from the gift is treated as paid by the charitable company.

1457.Subsection (7) treats eligible bodies as having made a claim for exemption in respect of gifts made under section 429(2) of ITA which are treated as qualifying donations under that Act. See Change 31 in Annex 1.

Section 476: Gifts of money from companies: exemption

1458.This section gives the exemption that applies where an eligible body receives a gift of money from a company. It is based on sections 339(4), 505(1) and 507(1) of ICTA.

Section 477: Gifts of money from companies: exemption

1459.This section gives the exemption that applies where a scientific research association receives a gift of money from a company. It is based on sections 339(4), 505(1) and 508(1) of ICTA.

Chapter 3: Other exemptions
Overview

1460.This Chapter deals with exemptions other than gifts and payments dealt with in Chapter 2.

Section 478: Exemption for profits etc of charitable trades

1461.This section sets out the exemption for trading profits of charitable companies. It is based on section 505(1) of ICTA. The corresponding rule for income tax is in section 524 of ITA.

1462.The exemption applies only if the trade is a charitable trade. This is defined in section 479.

1463.There is a difference between this section and the corresponding provision in ITA. Adjustment income (arising, for example, on a change of accounting basis) is an integral part of the trading profits of a company – see section 181 of CTA 2009. Charitable companies are entitled to the exemption on adjustment income on the same basis as their trading profits. The consequence is that, in contrast to ITA, there is no need for a change in the law to establish an exemption for adjustment income.

1464.This section does make it clear that, in the same way as the income tax legislation, post-cessation receipts (arising from what was a charitable trade) are exempt, in line with practice. Post-cessation receipt is defined by reference to Chapter 15 of Part 3 of CTA 2009. See Change 32 in Annex 1.

1465.Exemptions for small-scale trades are dealt with separately in section 480.

Section 479: Meaning of “charitable trade”

1466.This section defines “charitable trade” for the purposes of the Part. It is based on section 505(1) and (1B) of ICTA. The corresponding rule for income tax is in section 525 of ITA.

1467.The source legislation in section 505(1)(e) of ICTA refers to the trade being carried on “in the United Kingdom or elsewhere”, and section 505(1)(e)(i) refers to it being exercised in the “actual” carrying out of a primary purpose. The words in inverted commas are omitted as they add nothing.

1468.The section differs slightly from its income tax counterpart in section 525 of ITA. For income tax the conditions must be met throughout the basis period for the relevant tax year to reflect the fact that the two time periods are not usually the same, and it clearly makes sense to test the condition by reference to the period in which the activity was being carried on. This is not necessary for corporation tax as the accounting period is both the basis period and the chargeable period.

1469.Subsection (4), about making apportionments where different parts of a trade are treated as separate trades, makes specific mention of post-cessation receipts, but unlike the equivalent income tax provision there is no need for a specific apportionment for adjustment income. See Change 32in Annex 1 and the commentary on section 478.

1470.Any apportionments must be “just” as well as “reasonable”. Only the latter term appeared in the source legislation. See Change 33 in Annex 1.

Section 480: Exemption for profits of small-scale trades

1471.This section provides an exemption for trading income, related adjustment income and post-cessation receipts in circumstances where the amount of income to be exempted under this section and the next is small, and provided the income is applied to the purposes of the charitable company. It is based on section 46 of FA 2000. The corresponding rule for income tax is in section 526 of ITA.

1472.The exemption provided by this section applies only if the income is not otherwise exempt. So profits from primary purpose trading (including related adjustment income and post-cessation receipts) are exempt under section 478, whereas profits from a non-primary purpose trading activity (including related adjustment income and post-cessation receipts) may be exempt under this section.

1473.Change 32 is not necessary here as post-cessation receipts from a “small trade” are already exempt because of the exemption in section 46 FA 2000 for income chargeable under Schedule D Case VI.

1474.The condition about the limit on the level of income for this exemption to apply is in section 482. For Change 34 see commentary on section 482.

Section 481: Exemption from charges under provisions to which section 1173 applies

1475.This section provides an exemption for certain miscellaneous income and gains arising to a charitable company and applied to the purposes of the charitable company. It is based on section 46 of FA 2000. The corresponding rule for income tax is in section 527 of ITA.

1476.Section 834A of ICTA, which lists sources of income previously charged to tax under Schedule D Case VI, was inserted by paragraph 273 of Schedule 1 to CTA 2009. It is rewritten in this Act as section 1173. Now that the relief is by reference to the list in section 1173, some of the exclusions from the relief listed in the source legislation no longer need to be mentioned explicitly as they are not within the scope of section 1173. These are sections 703, 788 and 790 of ICTA, and paragraph 52(4) of Schedule 18 to FA 1998.

1477.Subsection (2) specifies the particular types of income and gains which cannot benefit from the exemption but which are within section 1173.

1478.The exemption provided by this section applies only if the income or gains are not otherwise exempt. So, for example, post-cessation primary purpose trading receipts are exempt under section 478 and post-cessation trading receipts from a non-primary purpose trading activity are exempt under section 480.

1479.The scope of this provision is therefore narrowed slightly in that post-cessation receipts from a primary purpose trade can now be exempt under section 478 whereas previously they could only be statutorily exempt under section 46 of FA 2000. (See Change 32 in Annex 1 and the commentary on section 478.)

1480.The condition about the level of the income and gains is in section 482. For Change 34 see commentary on section 482.

Section 482: Condition as to trading and miscellaneous incoming resources

1481.This section sets out the condition about the limit on the level of trading and miscellaneous incoming resources that has to be met if the exemptions in sections 480 and 481 are to apply. It is based on section 46 of FA 2000. The corresponding rule for income tax is in section 528 of ITA.

1482.The condition operates by reference to the incoming resources associated with the trading activity and miscellaneous transactions whose profits are not exempt under the other exemptions in this Part. The expression “incoming resources” is used instead of “gross income” because this accounting term is a more direct and accessible way of capturing the meaning of the income labelled “gross income” in the source legislation. There are also related points of clarification. See Change 34 in Annex 1. This change also affects sections 480 and 481 (see following paragraph).

1483.Trading incoming resources and miscellaneous incoming resources are defined in subsections (2) and (4) respectively. The “requisite limit” is defined in subsection (6). The total incoming resources must not exceed the limit set out in subsection (6)(a), but subsection (6)(b) ensures that the limit is never less than £5000 or greater than £50,000. Accordingly if a charitable company’s trading and miscellaneous incoming resources relating to its non-exempt activities for an accounting period are, say, £4500 it would qualify for the exemption (provided that all other conditions are met) under section 480 or 481, even if that amount exceeds 25% of its total incoming resources for the accounting period.

1484.Similarly if the incoming resources related to its non-exempt activities exceed £50,000 in an accounting period, the charitable company cannot benefit from the exemptions in section 480 or 481, even if this figure does not breach the 25% limit in subsection (6)(a).

Section 483: Exemption for profits from fund-raising events

1485.This section gives statutory effect to ESC C4 as it applies to charitable companies and voluntary organisations provided the profits in question are applied to charitable purposes or transferred to a charity. It is new. The corresponding rule for income tax is in section 529 of ITA.

1486.The fund-raising event has to fall within the exemption from VAT under Group 12 of Schedule 9 to the Value Added Tax Act 1994. That 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.

1487.See Change 35 in Annex 1. This change also affects sections 490, 491 and 492.

Section 484: Exemption for profits from lotteries

1488.This section provides an exemption for lottery income provided the income is applied to the purposes of the charitable company. It is based on section 505(1) of ICTA. The corresponding rule for income tax is in section 530 of ITA.

Section 485: Exemption for property income etc

1489.This section sets out the exemption from corporation tax for property income and certain trading income arising from land, provided the income is applied to charitable purposes. It is based on section 505(1) of ICTA. The corresponding rule for income tax is in section 531 of ITA.

1490.The exemption applies if the income is chargeable to tax under either Part 3 or Part 4 of CTA 2009. Subsection (1) deals with income chargeable under Part 3 of CTA 2009 and subsection (2) with income chargeable under Part 4 of CTA 2009.

1491.There is no requirement for the trade to be exercised in the course of carrying on a primary purpose of the charitable company. Instead, the exemption applies if the income derives from land vested for charitable purposes. But if some of the land is vested for charitable purposes and some vested or held for other purposes (for example, as an investment to generate income for non-charitable purposes) it is necessary to allocate the profits of the single property business between the two parts. This reflects the approach of the exemption in the source legislation that looks to particular interests in land, rather than to one overall property business.

1492.This makes the effect of the source legislation in section 505(1)(a) of ICTA explicit. There is no other income arising from land and chargeable to tax under Part 3 of CTA 2009 which is exempt under that provision.

1493.Subsection (3) provides an exemption from corporation tax for distributions from a United Kingdom REIT. The corresponding income tax exemption for this subsection is in section 531(2A) of ITA.

1494.The source legislation in section 505(1)(aa) of ICTA refers to exemption under Part 3 of CTA in respect of distributions to which section 121 of FA 2006 (rewritten in section 548) applies. Distributions to which section 121 of FA 2006 applies cannot be taxed as trading income and the reference to Part 3 of CTA has not therefore been rewritten.

1495.Section 505(1)(aa) of ICTA also refers to charging provisions in ITTOIA. These are not necessary for corporation tax and are not included in the rewritten legislation.

1496.The United Kingdom REIT rules are rewritten in Part 12 of this Act.

Section 486: Exemption for investment income and non-trading profits from loan relationships

1497.This section sets out the various categories of savings and investment income that qualify for exemption from corporation tax, provided the income is applied to charitable purposes. It is based on section 505(1) of ICTA. The corresponding rule for income tax is in section 532 of ITA.

1498.Interest and related amounts are exempted by reference to the loan relationships regime, and the reference to a non-trading profit on a loan relationship also encompasses income from derivative contracts.

1499.The reference to an “Act” in subsection (1) is extended to include references to Northern Ireland legislation by section 1119, and to Acts of the Scottish Parliament. See Change 6 in Annex 1.

1500.Section 56(3)(c) of ICTA disapplies the charge to corporation tax on the disposal of rights to receive amounts under a certificate of deposit where profits or gains (other than trading profits) on the disposal arise to a charitable company and are applied for charitable purposes. But section 56(4A) provides that section 56 does not apply for corporation tax purposes except in relation to rights in existence before 1 April 1996. This is necessary because rights arising in or after April 1996 fall within the loan relationships legislation, now rewritten in Part 5 of CTA 2009. Section 56(3)(c) has been retained as a saving in Schedule 2 so that the disposal of pre-1996 rights are still exempt so far as they are applied to charitable purposes although subsequent rights fall within subsection (2)(a) of this section.

Section 487: Exemption for public revenue dividends

1501.This section provides an exemption for public revenue dividends used for the repair of certain places of worship. It is based on section 505(1) and (1A) of ICTA. The corresponding rule for income tax is in section 533 of ITA.

Section 488: Exemption for certain miscellaneous income

1502.This section provides an exemption from corporation tax for certain categories of miscellaneous income, provided the income is applied to charitable purposes. It is based on section 505(1) of ICTA. The corresponding rule for income tax is in section 536 of ITA.

1503.The reference to an “Act” in subsection (1) (b) is extended to include references to Northern Ireland legislation by section 1119, and to Acts of the Scottish Parliament. See Change 6 in Annex 1.

1504.Subsection (3)(c) deals with income from intangible fixed assets that does not fall within Part 8 of CTA 2009 because the assets involved are “pre-FA 2002 assets”. Previously the only exemption that covered this type of income was the exemption for annual payments. This section broadens the exemption to encompass income that is not covered by another exemption (for example, as a trading receipt) and is not exempted by this section as an annual payment, in the same way as for income tax in section 536 ITA. See Change 36 in Annex 1. This change also affects sections 490 and 491.

1505.Note that this extension to pre-FA 2002 assets only applies to what would be regarded as non-trading gains under Part 8 of CTA 2009. If the gains arise in respect of a pre-FA 2002 asset in the course of a non-charitable trade the exemption does not apply.

Section 489: Exemption for income from estates in administration

1506.This section provides an exemption for estate income received by a charitable company provided the income is applied to the purposes of the charitable company. It is new. The corresponding rule for income tax is in section 537.

1507.Estate income is income from property held by the personal representatives of the estate of a deceased person on behalf of the beneficiaries of the estate. The personal representatives are liable to income tax on the income. The exemption provided by this section allows a charitable company to recover any income tax suffered by the personal representatives. See Change 37in Annex 1.

Section 490: Eligible bodies

1508.This section extends certain of the exemptions to the five specified bodies defined as “eligible bodies” in section 468. It is based on section 507 of ICTA.

1509.Section 507 of ICTA grants to these bodies the exemptions under section 505 that would fall to be allowed to a charitable company if the whole of the charitable company’s income is applied to charitable purposes.

1510.The exemptions are listed in subsection (3). The list includes exemption under section 483 and section 489. These are not part of the source legislation, which refers only to the exemptions under section 505 of ICTA, but they are brought into the purview of the exemptions for these bodies – see Changes 35and37 in Annex 1. The broadening of the exemptions under section 478 in respect of post-cessation receipts, and under section 488 in respect of intangible fixed assets also has an effect – see Changes 32and 36 in Annex 1.

1511.The list does not include the exemption under section 487 as the conditions for this exemption are structured in a different way.

Section 491: Scientific research associations

1512.This section brings scientific research associations (SRAs) within most of the exemptions in this Part. It is based on section 508(1) of ICTA.

1513.Like the bodies named in section 490, SRAs are assumed to have met the test regarding the purpose of their expenditure. The relevant exemptions are listed in subsection (3). An SRA may itself be charitable and able to qualify under its own charitable status by meeting the necessary tests. Exemption under this section does not preclude that possibility, and equally a charitable SRA may still benefit from section 491.

1514.The broadening of the exemptions under section 478 in respect of post-cessation receipts, and under section 488 in respect of intangible fixed assets also has an effect – see Change 32and Change 36 in Annex 1. See also Changes 36 and 37 in Annex 1 in respect of the exemptions in subsection (3).

Chapter 4: Restrictions on exemptions
Overview

1515.This Chapter sets out the restrictions that may apply to the exemptions under Chapters 2 and 3. Restrictions arise where a charitable company incurs non-charitable expenditure. Non-charitable expenditure may also arise where a company makes payments to “substantial donors” (defined in section 502).

Section 492: Restrictions on exemptions

1516.This section restricts exemptions if income of a charitable company is attributed to non-charitable expenditure. It is based on section 505(3) and (4) of ICTA. The corresponding rule for income tax is in section 539 of ITA.

1517.Certain exemptions have been extended or put onto a statutory footing:

  • post-cessation receipts. See Change 32in Annex 1 and the commentary on section 478;

  • profits of fund-raising events. See Change 35in Annex 1 and the commentary on section 483; and

  • income from estates in administration. See Change 37in Annex 1 and the commentary on section 489.

The restrictions apply to these extended exemptions.

Section 493: The non-exempt amount

1518.This section specifies how the non-exempt amount is calculated. It is based on section 505(3) and (4) of ICTA. The corresponding rule for income tax is in section 540 of ITA.

1519.The term “attributable income and gains” is defined in subsection (3). This label replaces “relievable income and gains” as defined in section 505(3) of ICTA.

1520.Subsection (5) specifies that section 256(4) of TCGA is to be ignored in applying subsection (3)(b). Section 256 of TCGA provides the exemption from capital gains tax for certain gains accruing to a charity. Schedule 1 to this Act amends section 256 of TCGA, adding subsections (3A), (7) and (8), and amending subsection (4) so that it applies to charitable companies as well as to charitable trusts. Schedule 1 also inserts sections 256C and 256D of TCGA, to deal with the interaction of this Act and the chargeable gains legislation as regards attributing income and gains to the non-exempt amount. It complements section 494. The headings to sections 256A and 256B of TCGA are amended to make it clear that they apply to charitable trusts only.

Section 494: Attributing income to the non-exempt amount

1521.This section sets out how income is attributed to the non-exempt amount. It is based on section 505(4) of ICTA. The corresponding rule for income tax is in section 541 of ITA.

1522.It specifies that the non-exempt amount is to have attributed to it amounts of attributable income or amounts of attributable gains or a combination of both, until it is used up. The commentary on section 493 contains further detail about the amendments to TCGA 1992.

Section 495: How income is attributed to the non-exempt amount

1523.This section specifies that the charitable company can decide which items of what would otherwise be exempt income or chargeable gains should be treated as taxable. It is based on section 505(7) of ICTA. The corresponding rule for income tax is in section 542 of ITA.

1524.If the restrictions apply, an amount of income (or chargeable gains) equal to the non-exempt amount (of expenditure) must be identified (as calculated in accordance with section 493) in order to enable the charitable company to complete its tax return and self-assess its tax liability. This section provides the mechanism for the charitable company to specify the items or elements of income (such as trading income or investment income) which lose the benefit of exemption.

1525.If the charitable company has not specified the details within a period of 30 days from the date of a request, an officer of Revenue and Customs can decide. References to “the Board” have been replaced with “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Section 496: Meaning of “non-charitable expenditure”

1526.This section defines “non-charitable expenditure”. It is based on sections 506(1) and (4) and 506A(3) to (5) of ICTA. The corresponding rule for income tax is in section 543 of ITA.

1527.Section 506(1) of ICTA contains a definition of “charitable expenditure”, but neither expenditure itself nor “non-charitable expenditure” is defined explicitly. This section sets out the definition in some detail, to reflect practice and HMRC guidance. See Change 38in Annex 1, which also affects sections 497 and 498.

1528.Schedule 2 to this Act contains a transitional provision to ensure that the pre-22 March 2006 rules continue to operate where appropriate.

Section 497: Section 496: supplementary

1529.This section applies relevant material located elsewhere to the definition of “non-charitable expenditure” (eg rules for computing trading losses) and provides interpretative material. It is new. The corresponding rule for income tax is in section 544 of ITA.

1530.Change 38 in Annex 1 affects this section.

Section 498: Section 496(1)(d): meaning of expenditure

1531.This section provides interpretative material about the meaning of “expenditure”. It is new. The corresponding rule for income tax is in section 545 of ITA.

1532.Change 38 in Annex 1 affects this section.

1533.Subsection (1) makes it clear that “expenditure” includes expenditure on the acquisition of capital assets. But expenditure on assets qualifying for capital allowances is taken account of in determining, for example, a trading loss and so is not included in expenditure within section 496(1)(d).

Section 499: Section 496(1)(d): accounting period in which certain expenditure treated as incurred

1534.This section specifies the accounting period to which expenditure relating to commitments (whether or not contractual in nature) that have been entered into is to be allocated for the purpose of operating the restrictions. It is based on section 506(2) of ICTA. The corresponding rule for income tax is in section 546 of ITA.

1535.This rule is rewritten in terms which make explicit reference to UK GAAP. See Change 39 in Annex 1.

Section 500: Section 496(1)(d): payment to body outside the UK

1536.This section provides interpretative material about payments to a body outside the United Kingdom. It is based on section 506(3) of ICTA. The corresponding rule for income tax is in section 547 of ITA.

1537.The section makes it clear that the onus is on the charitable company to ensure that any payments to a body outside the United Kingdom are applied for charitable purposes. Otherwise the charitable company must classify the payments as “non-charitable expenditure”.

Section 501: Section 496(1)(g) and (h): investments and loans

1538.This section provides interpretation about the making of investments or loans. It is based on section 506(5) of ICTA. The corresponding rule for income tax is in section 548 of ITA.

1539.The section makes it clear that it is only the expenditure in the accounting period on making new investments and loans, or expenditure to fund net increases in such investments or loans, that is included in the calculation of non-charitable expenditure.

Section 502: Transactions with substantial donors

1540.This section defines “substantial donor transaction” and explains when a person is a substantial donor to a charitable company. It is based on sections 506A(1) and (2) and 506C(3) of ICTA. The corresponding rule for income tax is in section 549 of ITA.

1541.References to a charitable company include connected charities (see section 509) and references to a substantial donor include persons connected with the donor (see section 510(1)(a)).

Section 503: Meaning of “relievable gift”

1542.This section includes details of the sources of gifts that are “relievable gifts” for the purposes of the preceding section. It is based on section 506C(1) of ICTA. The corresponding rule for income tax is in section 550 of ITA.

Section 504: Non-charitable expenditure in substantial donor transactions

1543.This section specifies that certain amounts relating to substantial donor transactions are to be treated as non-charitable expenditure. It is based on sections 506A(3) to (5) and 506C(2) and (6) of ICTA. The corresponding rule for income tax is in section 551 of ITA.

1544.The source legislation specifies that certain matters are to be determined by the Commissioners for HMRC. References to “the Commissioners for Her Majesty’s Revenue and Customs” are replaced with references to “an officer of Revenue and Customs”. See Change 5 in Annex 1, which also affects sections 507 and 510. The source legislation specifies that, on an appeal against an assessment, the tribunal may review a decision of the Commissioners, so section 510 specifies that the tribunal may affirm or replace a decision of an officer.

Section 505: Adjustment if section 504(1) and (2) applied to single transaction

1545.This section makes it clear that if both subsections (1) and (2) of section 504 apply to an amount, the effect is not duplicated to create more “non-charitable expenditure” than the total amount in question. It is based on section 506C(4) of ICTA. The corresponding rule for income tax is in section 552 of ITA.

Section 506: Section 504: certain payments and benefits to be ignored

1546.This section provides that, in determining the amount of non-charitable expenditure, payments or benefits arising from transactions relating to gift aid donations made by individuals or qualifying donations by companies are to be ignored in certain circumstances. It is based on section 506B(7) of ICTA. The corresponding rule for income tax is in section 553 of ITA.

1547.The payments or benefits are ignored if they would not prevent the donation being a “qualifying donation” by virtue of the rules concerning associated benefits provided to donors in section 416(7)(b) of ITA and section 191(7) of this Act.

Section 507: Transactions: exceptions

1548.This section specifies exceptions to the transactions caught by section 502. It is based on section 506B of ICTA. The corresponding rule for income tax is in section 554 of ITA.

1549.In particular, the section carves out of the substantial donor provisions transactions of an ordinary commercial nature between the parties.

1550.References to “the Commissioners for Her Majesty’s Revenue and Customs” and “the Commissioners” are replaced with references to “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Section 508: Donors: exceptions

1551.This section specifies exceptions to the donors caught by section 502. It is based on section 506B(8) and (9) of ICTA. The corresponding rule for income tax is in section 555 of ITA.

1552.Subsection (1) concerns companies set up by charitable companies, for example to carry on trading activities as a means of generating funds.

1553.Subsection (2) concerns registered social landlords and housing associations, which often share services and accommodation with charities as a means of meeting charitable and non-charitable objectives. Section 506B(9) of ICTA is prospectively amended by paragraph 15 of Schedule 9 to the Housing and Regeneration Act 2008 from a day to be appointed by Order (section 325(1) of that Act). This subsection incorporates that amendment with a saving in Schedule 2 to this Act to apply until the amendment made by paragraph 15 has effect.

Section 509: Connected charities

1554.This section extends, for the purposes of sections 502 to 508, the meaning of “charitable company” to include charities connected with the charitable company. It is based on section 506C(5) of ICTA. The corresponding rule for income tax is in section 556 of ITA.

1555.It covers, for example, situations where a charity decides to hold all its properties in one company and organise other charitable activities in another, or where two charities with different objects are managed by the same board of directors.

1556.Note that the term “connected” in this section applies to charities and charitable companies and is different from the use of the term in section 510 where it refers to substantial donors and other persons.

1557.Subsection (2) gives the definition of “connected” for subsection (1). The definition of “connected persons” in section 1122 does not apply for this purpose.

Section 510: Substantial donor transactions: supplementary

1558.This section provides interpretation for sections 502 to 508. It is based on section 506C(7) to (9) of ICTA. The corresponding rule for income tax is in section 557 of ITA.

1559.The use of the term “connected” relates to substantial donors and other persons and is different from the use of the term in section 509, where it refers to charities and charitable companies that are connected.

1560.The definition of “connected person” for the purposes of this section is in section 1122 (applied by section 1176).

1561.References to “the Commissioners” are replaced with references to “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Section 511: Approved charitable investments

1562.This section sets out which investments, including loans made by way of investment, count as approved charitable investments for the purposes of the rules restricting exemptions. It is based on Schedule 20 to ICTA. The corresponding rule for income tax is in section 558 of ITA.

1563.The label “approved charitable investment” replaces the label “qualifying investment” in section 506(4) of ICTA.

1564.Paragraph 2 of Schedule 20 to ICTA specifies investments falling within Schedule 1 to the Trustee Investments Act 1961 (TIA 1961) as approved, with a small exception. For trust law purposes TIA 1961 has been largely superseded by the Trustee Act 2000 (TA 2000). So the detail of investments covered by Schedule 1 to TIA 1961 is incorporated into the sections in an updated form, removing the need to refer to a Schedule to an Act (TIA 1961) that trustees no longer need to refer to for investment purposes. See Change 40 in Annex 1, which also affects section 512 and section 513.

1565.The reference to securities traded on the Unlisted Securities Market has not been reproduced as the Unlisted Securities Market ceased trading in December 1996.

1566.Investments can qualify as approved charitable investments if, despite not falling into any of the specified types not requiring a claim, a claim is made and it is accepted by HMRC. In order to be accepted, the claimant must show that the investment is made for the benefit of the charitable company and is not made for the avoidance of tax.

1567.The source legislation includes a reference in paragraph 7(2) of Schedule 20 to ICTA to an “authorised institution” – which in the context of that paragraph clearly means a “bank”. “Authorised institution” was amended to read “bank” in paragraph 7(1) by Schedule 37 to FA 1996, but was not amended in paragraph 7(2) of Schedule 20 to ICTA. This was an oversight and is corrected here.

1568.Type 2 refers to common investment funds established under section 25 of the Charities Act (Northern Ireland) 1964. This section has been prospectively repealed by Schedule 29 of the Charities Act (Northern Ireland) 2008.

1569.The reference to an “Act” in Type 4 is extended to include references to Northern Ireland legislation by section 1119, and to Acts of the Scottish Parliament. See Change6 in Annex 1.

1570.Paragraph 9(2) of Schedule 20 to ICTA, which explains that a loan in sub-paragraph (1) (rewritten as Type 12 in this section) includes a loan which is secured by a mortgage or charge of any kind over land, has not been rewritten as unnecessary. It adds nothing to the meaning of “loan”.

1571.References to “the Board” have been replaced with “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Section 512: Securities which are approved charitable investments

1572.This section sets out details of which investments in securities count as approved charitable investments for the purposes of the rules restricting exemptions. It is based on Schedule 20 to ICTA and Schedule 1 to TIA 1961. The corresponding rule for income tax is in section 559 of ITA.

1573.The details of investments covered by Schedule 1 to TIA 1961 are incorporated into these sections in an updated form. See Change 40 in Annex 1 and the commentary on section 511.

Section 513: Conditions to be met for some securities

1574.This section sets out details of certain conditions which some of the securities specified in the previous section have to meet to count as approved charitable investments for the purposes of the rules restricting exemptions. It is based on Schedule 1 to TIA 1961. The corresponding rule for income tax is in section 560 of ITA.

1575.The detail of the investments covered by Schedule 1 to TIA 1961 is incorporated into these sections in an updated form. See Change 40 in Annex 1 and the commentary on section 511.

1576.Subsection (8) specifies (among other things) that a company acquiring control of another company or other companies is treated as having paid a dividend or dividends paid by the other company or companies. See Change 40 in Annex 1.

Section 514: Approved charitable loans

1577.This section sets out which loans (not being made by way of investment) count as approved charitable loans for the purposes of the rules restricting exemptions. It is based on Schedule 20 to ICTA. The corresponding rule for income tax is in section 561 of ITA.

1578.The label “approved charitable loan” replaces the label “qualifying loan” in section 506(4) of ICTA.

1579.References to “the Board” are replaced with references to “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Section 515: Excess expenditure treated as non-charitable expenditure of earlier periods

1580.This section treats “excess expenditure” in an accounting period as non-charitable expenditure for earlier accounting periods. It is based on section 505(3) and (5) of ICTA. The corresponding rule for income tax is in section 562 of ITA.

1581.The “excess expenditure” is the amount of the non-charitable expenditure of the year in excess of the available income and gains of the accounting period.

1582.The term “available income and gains” is defined in subsection (4). This label replaces “total income and gains” as defined in section 505(3) of ICTA.

Section 516: Rules for attributing excess expenditure to earlier periods

1583.This section specifies the earlier accounting periods to which the excess expenditure is to be attributed, later periods taking priority over earlier ones. It is based on section 505(5) and (6) of ICTA. The corresponding rule for income tax is in section 563 of ITA.

1584.The amount of excess expenditure that can be attributed to an accounting period commencing before 22 March 2006 or earlier periods cannot exceed the amount that would have been attributed if the change in the method of calculating excess expenditure resulting from section 55 of FA 2006 had not been introduced. See the transitional provision in Part 12 of Schedule 2.

Section 517: Adjustments in consequence of section 515

1585.This section specifies that any necessary adjustments (eg to tax, interest etc) for earlier years may be made. It is based on section 505(5) of ICTA. The corresponding rule for income tax is in section 564 of ITA.

Part 12: Real Estate Investment Trusts

Overview

1586.This Part sets out the rules applicable to UK REITs.

1587.A UK REIT is:

  • a group of companies (a “group UK REIT”) the principal company of which gives a notice under section 523; or

  • a single company (a “company UK REIT”) which gives a notice under section 524.

1588.In either case, the company must not have ceased to be a UK REIT in accordance with section 571, 572 or 578.

1589.Provided that a UK REIT meets certain conditions (see Chapter 2 of this Part and sections 538 (entry charge), and 548 (distributions)), there is no charge to corporation tax (or income tax in the case of certain non-UK companies) on profits or gains of “property rental business” (or “UK property rental business” in the case of non-UK companies). “Property rental business” is defined in section 519(1), “UK property rental business” is defined in section 520 and “non-UK company” is defined in section 521(2).

1590.Distributions made by the principal company of a group UK REIT or company UK REIT of profits and gains of property rental business are subject to deduction of tax at source under regulations made under section 973 of ITA (SI 2009/2036). In the hands of a shareholder, the distribution is treated as if it is UK property business income and is taxed accordingly with a credit for tax which has already been deducted at source.

1591.This Act enacts certain regulations which modify the primary legislation through layers of cross-references. In particular the Act enacts the regulations dealing with joint venture companies (SI 2006/2866)and breach of conditions (SI 2006/2864 and SI 2007/3540), except for regulation 11 of SI 2006/2864.

1592.The Act also enacts the regulations on joint venture groups (SI 2007/3425).

Chapter 1: Introduction
Section 518: Introduction to Part

1593.This section is an overview of the Part. It is based on section 103 of FA 2006.

1594.Subsection (1) sets out the “bargain” which is entered into by a group of companies on becoming a UK REIT. If the group meets certain conditions it benefits from an exemption from corporation tax (and, through the operation of section 520(3), an exemption from income tax for non-UK companies) for profits and gains of property rental business. This benefit comes with the following liabilities:

  • an entry charge (section 538),

  • a requirement that the principal company of a group deducts sums representing income tax in respect of distributions made to shareholders (section 973 of ITA and SI 2009/2036), and

  • the treatment of such distributions as profits of a UK property business rather than dividend incomein the hands of shareholders (section 548).

1595.Subsection (2) makes similar provision for companies which enter the UK REIT regime other than as part of a group.

1596.Subsection (3) contains signposts to the remaining Chapters of the Part.

1597.Subsection (4) defines “UK REIT”.

Section 519: “Property rental business”

1598.This section defines “property rental business” for the purposes of the Part. It is based on section 104 of, and paragraph 32(2) of Schedule 17 to, FA 2006.

1599.Subsection (1) defines “property rental business”.

1600.Subsection (4) provides that, for non-UK companies, business is “property rental business” if it would be property rental business if carried on by a UK company. See section 521 for the definitions of UK company and non-UK company. This provision ensures that the worldwide property rental business of a non-UK company is treated as property rental business for the purposes of the Part.

1601.The definition of “tax-exempt business” in section 107(2) of FA 2006 is not rewritten. Instead reference is made to “property rental business” throughout the Act. This is because “tax-exempt business” suggests that the company must carry on such a business to be within the regime. But sections 563 and 564 allow a company to breach the conditions in section 529 or 530 and remain within the regime.

Section 520: “UK property rental business” of non-UK companies

1602.This section defines “UK property rental business” of non-UK companies and treats profits of such business, which would ordinarily be charged to income tax, as chargeable to corporation tax. It is based on paragraph 32(1), (3) and (5) of Schedule 17 to FA 2006.

1603.Subsection s (2) and (3) provide that profits of UK property rental business of non-UK companies (including non-UK joint venture companies) which are subject to income tax under Chapter 3 of Part 3 of ITTOIA are to be treated as being subject to corporation tax (and not income tax).

1604.Subsections (2) and (3)(a) are needed to bring UK property rental business of non-UK companies within the charge to corporation tax so that provisions such as sections 534 (tax treatment of profits) and 541 (ring-fencing) apply to all non-UK companies.

1605.Paragraph 32(3) of Schedule 17 to FA 2006 does not specify whether it is profits and/or gains of UK property rental business which are made subject to corporation tax. The Act provides that only profits of UK property rental business, which are not already subject to corporation tax, are caught by this section. This approach ensures that gains of non-UK companies with no permanent establishment in the United Kingdom are not brought within the charge to tax in the United Kingdom. SeeChange 41 in Annex 1.

1606.In the case of a non-UK company carrying on a UK property rental business, subsections (2) and (3)(b) (based on paragraph 32(5) of Schedule 17 to FA 2006) remove the charge to income tax and replace it with a charge to corporation tax for the purposes of this Part. If the rules in this Part apply, that charge to corporation tax is removed. To the extent that the rules in this Part do not apply, any charge to income tax is undisturbed.

Section 521: “UK company” and “non-UK company”

1607.This section defines “UK company” and “non-UK company” for the purposes of the Part. It is based on section 106(3) of, and paragraph 3(1) of Schedule 17 to, FA 2006.

1608.Subsection (1) defines “UK company” for the purposes of the Part as a company which is UK resident and is not resident in any other place for the purpose of taxation. AUK company is not the same as a “UK resident” company (which is defined in section 1119).

Section 522: “Residual business”

1609.This section defines “residual business” for the purposes of the Part. It is based on section 105(3)(c) of, and paragraph 2(c) of Schedule 17 to, FA 2006.

1610.The reason for the definition of residual business is two-fold. First, it is needed to identify the profits and gains which are charged to corporation tax at the main rate under sections 534(3) and 535(6). Second, it is needed to identify items to be included in the financial statements in accordance with section 532(2)(c).

1611.For non-UK companies the definition of residual business is aligned with the definition used for other members of a group. It is based on paragraph 2(c) of Schedule 17 to FA 2006 which provides that residual business is all business other than property rental business.

Chapter 2: Requirements for being a UK REIT
Section 523: Notice for a group of companies to become a UK REIT

1612.This section provides that, in order to be a “group UK REIT”, the principal company of the group must give notice of entering the UK REIT regime. It is based on sections 106, 109 and 134 of, and paragraphs 5(1) and 8(1) of Schedule 17 to, FA 2006.

1613.Subsections (1) and (2) provide that a group of companies may give notice for the UK REIT regime to apply from a specified date. If a group notice is given, all 75% subsidiaries of the group (as defined in section 606) are included in the UK REIT regime. A new accounting period of each company in the group starts on the specified date (see section 536(5)). That new accounting period is called “accounting period 1” – see section 609.

1614.Subsection (3) provides that the principal company of a group may give notice only if it is a “UK company” as defined in section 521 and it is not an OEIC.

1615.It is unclear from the source legislation (in particular sections 106(2), 107(1) and 108(1) of FA 2006) whether a group becomes a UK REIT from the date specified in a section 109 of FA 2006 notice or when the various conditions set out in sections 106(2), 107(1) and 108(1) of FA 2006 are satisfied. Subsection (4) addresses this by making it clear that a group becomes a UK REIT from the date specified in the notice given under this section.

1616.Subsection (5) defines“group UK REIT” as being a group which has given notice under this section.

1617.Section 103(3) of FA 2006, which provides that “a company or group to which this Part applies may be referred to as a Real Estate Investment Trust”, is not rewritten as this expression is not used elsewhere in the legislation.

1618.Subsection (6) makes clear that merely giving a notice is not enough: the group must also meet the conditions in section 527.

Section 524: Notice for a company to become a UK REIT

1619.This section provides that, in order to be a “company UK REIT”, the company must give notice of entering the UK REIT regime. It is based on sections 106 and 109 of FA 2006.

1620.Subsections (1) and (2) provide that a company may give notice for the UK REIT regime to apply from a specified date. A new accounting period of the company starts on the specified date (see section 536(5)). That new accounting period is called “accounting period 1” – see section 609.

1621.It is possible for a company with a 75% subsidiary to give notice under subsection (3) on its own, in which case none of its 75% subsidiaries is included in the UK REIT regime.

1622.If a company UK REIT gives notice under this section and subsequently wants an existing 75% subsidiary to be brought within the regime, a group notice under section 523 needs to be given. The new notice must comply with all the requirements of section 525.

1623.If a company UK REIT gives notice under section 586(2) for a joint venture company to be treated as forming a group UK REIT with the company UK REIT, the notice does not cause any 75% subsidiaries of the company UK REIT to be brought within the regime.

1624.Subsection (3) provides that a company may give notice only if it is a “UK company” as defined in section 521 and it is not an OEIC.

1625.It is unclear from the source legislation (in particular sections 106(2), 107(1) and 108(1) of FA 2006) whether a company becomes a UK REIT from the date specified in a section 109 of FA 2006 notice or when the various conditions set out in sections 106(2), 107(1) and 108(1) of FA 2006 are satisfied. Subsection (4) addresses this by making it clear that a group becomes a UK REIT from the date specified in the notice given under this section.

1626.Subsection (5) defines“company UK REIT” as being a company which has given notice under this section.

1627.Section 103(3) of FA 2006, which provides that “a company or group to which this Part applies may be referred to as a Real Estate Investment Trust”, is not rewritten as this expression is not used elsewhere in the legislation.

1628.Subsection (6) makes clear that merely giving a notice is not enough: the company must also meet the conditions in section 527.

Section 525: Notice under section 523 or 524: supplementary

1629.This section makes supplemental provision about a notice given under section 523 or 524. It is based on sections 109(2) to (5) and 134(1) of, and paragraph 8(2) of Schedule 17 to, FA 2006.

1630.Subsection (1) lists what the principal company of a group or a single company must provide in order to give a valid notice under section 523 or 524.

1631.Subsection (1)(a) requires the notice to be given in writing to “an officer of Revenue and Customs” rather than to “the Commissionersfor Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

Section 526: Duration of status as UK REIT

1632.This section provides that once a group or single company becomes a UK REIT, it continues to be a UK REIT until the regime ceases in accordance with section 571, 572 or 578. It is based on sections 110 and 134(1) of, and paragraph 4 of Schedule 17 to, FA 2006.

Section 527: Being a UK REIT in relation to an accounting period

1633.This section makes it clear that once a notice under section 523 or 524 has been given, the principal company of a group, or the company, must meet the conditions set out in the remainder of this Chapter in relation to all accounting periods. It is based on sections 106 to 108 and 134 of, and Schedule 17 to, FA 2006.

1634.Subsection (2)(e) provides that the principal company must prepare and submit financial statements to “an officer of Revenue and Customs” rather than to “the Commissionersfor Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

Section 528: Conditions for company

1635.This section sets out the conditions which the principal company of a group or, in the non-group case, the company, must meet throughout each accounting period. It is based on section 106(3) to (9) of, and paragraph 3(1) of Schedule 17 to, FA 2006.

Section 529: Conditions as to property rental business

1636.This section sets out the conditions which need to be satisfied by a group or company in respect of its property rental business. It is based on sections 107(1), (3), (4) and (6), of, and paragraph 6(1) of Schedule 17 to, FA 2006.

1637.Subsections (1) and (2) provide that the “property rental business” (defined in section 519) must comprise at least three properties with no single property accounting for more than 40% of the total value of the properties involved in the business.

1638.Subsection (3) provides that, for the purposes of this section, the property rental business of a group is treated as single business.

1639.For the purposes of the conditions in subsections (1) and (2), all worldwide properties of non-UK companies are taken into account. This is because paragraph 6(1) of Schedule 17 to FA 2006 provides that “for the purposes of section 107(1) the property rental businesses of the members of the group shall be treated as a single business”.

1640.Paragraph 32(2) of Schedule 17 to FA 2006 provides that “business carried on by a non-UK resident company is property rental business for the purposes of this Part if the business would be property rental business within the meaning given by section 104 [of FA 2006] if it were carried on by a UK resident company”. So the property rental business includes the worldwide property rental business of non-UK companies. By including the worldwide property rental business of non-UK companies, condition A in section 529 is easier to satisfy. But condition B in section 529 may, depending on the circumstances, be more difficult to satisfy, for example where a non-UK company has an overseas property worth more than 40% of the total value of the properties involved in the property rental business.

1641.Subsection (5) excludes a percentage of the property rental business carried on by a subsidiary which is not wholly owned by the group UK REIT. The percentage is the percentage of the business excluded from the financial statements in accordance with section 533. See Change 42 in Annex 1.

Section 530: Condition as to distribution of profits

1642.This section sets out the distribution condition which needs to be satisfied by the principal company of a group or, in the non-group case, by a company. It is based on section 107(8) and (9) of, and paragraphs 6(4) and (5) and 32(8) of Schedule 17 to, FA 2006.

1643.Subsection (1) provides that, in relation to an accounting period of the principal company, the principal company must distribute at least 90% of the group’s “UK profits”.

1644.Subsection (2) defines “UK profits” as the sum of the profits shown in the financial statements under section 532(2)(b). Section 532(3) provides that this is the sum of the profits arising from the property rental business of the UK members of the group together with the profits arising from UK property rental business carried on by non-UK companies. Section 533(3) confirms that if a non-member of the group holds a percentage of the beneficial interest in a member of a group, that percentage is excluded from the financial statements and so also from the calculation of profits which this section requires to be distributed.

1645.Subsection (4) provides that, in relation to an accounting period of a company, the company must distribute at least 90% of profits of the company’s property rental business.

1646.The distribution requirement in this section also applies to the relevant proportion of profits generated by joint venture companies (regulations 6(1) and 10(3) of SI 2006/2866). See section 588(1)which treats a joint venture company as a member of the group UK REIT and section 588(2) which treats a company UK REIT and a joint venture company as forming a group UK REIT.

1647.The requirement to distribute at least 90% of the group’s “UK profits”, or “profits” in the case of a company UK REIT, does not extend to chargeable gains. This contrasts with section 121 of FA 2006, rewritten in section 548 (distribution treated as UK property business income in hands of shareholder) and section 973 of ITA (deduction of sums representing income tax at source) which apply to profits and gains of property rental business (or UK property rental business in the case of non-UK companies).

Section 531: Conditions as to balance of business

1648.This section sets out the balance of business conditions which need to be satisfied by a group or company. It is based on sections 108(2) and (3) and 134(1) of, and paragraphs 4 and 7 of Schedule 17 to, FA 2006.

1649.Subsection (1) provides that at least 75% of the “aggregate profits” of the group or company must relate to property rental business. “Aggregate profits” is defined in subsection (2) for groups and subsection (3) for companies.

1650.It is not clear from the source legislation whether the balance of business tests should include the worldwide profits and assets of non-UK companies. This section includes the worldwide profits and assets of non-UK companies for the purposes of the balance of business tests.

1651.The balance of business test in this section includes the relevant proportion of property rental business of a joint venture company. See section 588(1)which treats a joint venture company as a member of a group UK REIT and section 588(2) which treats a company UK REIT and a joint venture company as forming a group UK REIT.

Section 532:Financial statements for group UK REITs

1652.This section sets out the requirements which need to be satisfied for the purposes of section 527(2)(e). It is based on paragraphs 3(3), 31(2) and 32(8) of Schedule 17 to FA 2006.

1653.According to paragraph 32(2) of Schedule 17 to FA 2006:

business carried on by a non-UK resident company is property rental business for the purposes of the Part if the business would be property rental business … if it were carried on by a UK resident company

1654.It follows that a financial statement required byparagraph 31(2)(a) of Schedule 17 to FA 2006 includes theworldwide property rental business of a non-resident company. This is consistent with the rule about the profits and gains of a UK property rental business in paragraph 32(8)(d) of Schedule 17 to FA 2006.

1655.So subsection (2)(a) provides that the financial statements should include the worldwide property rental business of the group.

1656.Subsection (2)(b) provides that the principal company must prepare financial statements for the group’s property rental business in the United Kingdom. Subsection (3) defines the group’s property rental business in the United Kingdom as property rental business carried on by UK companies and UK property rental business of non-UK companies.

1657.Subsection (2)(c) provides that the principal company must prepare financial statements for the group’s residual business. Financial statements under subsection(2)(c) relate to all business which is not property rental business. For non-UK companies “residual business” includesworldwidebusiness which is not property rental business.

1658.The requirement to prepare financial statements under subsection (2)(a) and (b) also applies to venturing companies and venturing groups (defined in section 585) and the relevant percentage of profits of property rental business of the joint venture company. See section 588(1)which treats a joint venture company as a member of the group UK REIT and section 588(2) which treats a company UK REIT and a joint venture company as forming a group UK REIT.

1659.Financial statements under this section exclude any “non-member percentage” (that is, any percentage of the beneficial interest in a member of the group held by a non-member) – see section 533(3).

Section 533: Financial statements: supplementary

1660.This section sets out further requirements about the preparation of financial statements under section 532 and also contains a regulation-making power. It is based on paragraphs 31(3) to (7) and 32(8) of Schedule 17 to FA 2006.

1661.In subsection (4) the expression “equity holder” is not governed by the special definition in section 598.

1662.Subsection (5)(c) provides that the Commissioners may make regulations specifying the deadline for submitting a financial statement to an officer of Revenue and Customs. The section refers to an “an officer of Revenue and Customs” in subsection (5)(c) rather than to “the Commissioners”. See Change 5 in Annex 1.

Chapter 3: Tax treatment of profits and gains of UK REITs
Section 534: Profits

1663.This section sets out the tax treatment of profits of property rental business and residual business. It is based on sections 119 and 134(1) of, and paragraphs 17 and 32(4) of Schedule 17 to, FA 2006.

1664.Subsection (1) provides that profits of property rental business of a UK company (including a UK joint venture company) which is, or is a member of, a UK REIT are not charged to corporation tax.

1665.Subsection (2) provides that profits of UK property rental business of a non-UK member of a group UK REIT (including a non-UK joint venture company) are not charged to corporation tax.

1666.Subsection (3) provides that profits of residual business of a UK company which are charged to corporation tax are charged at a rate determined without reference to the small profits reliefs in sections 18 to 23 of this Act: those profits are charged at the main corporation tax rate.

1667.Subsection (3)(b) makes clear that subsection (3) is not a charging provision. The rule in this subsection applies only if the profits are already charged to corporation tax by another rule.

1668.Subsection (3) does not apply to non-UK companies (including non-UK joint venture companies). This is because the whole of section 119 of FA 2006 is disapplied by paragraph 17 of Schedule 17 to FA 2006 but only section 119(1) is reinstated by paragraph 32(4) of the Schedule.

1669.For non-UK companies subject to income tax, the normal tax rule is that they are charged to income tax at the basic rate under Chapter 2 of Part 2 of ITA on profits of residual business.

1670.Subsection (4) expands what is treated as profits of residual business for the purposes of corporation tax (and so charged to corporation tax at the main rate) to include the non-member percentage of profits which are excluded from the financial statements under section 533(3).

1671.Subsection (4) also applies to joint venture companies (including non-UK joint venture companies). So a percentage of profits of property rental business attributable to a non-member of a joint venture company is subject to tax at the main rate of corporation tax.

Section 535: Gains

1672.This section sets out how gains of property rental business and residual business are taxed. It is based on section 124, 127 and 134(1) of, and paragraphs 21 and 32(6) of Schedule 17 to, FA 2006.

1673.Subsections (1) to(3)and (8) provide that gains made by a company (including a joint venture company) which is, or is a member of, a UK REIT from property rental business are not chargeable gains.

1674.Subsections (4), (5) and (8) provide that if an asset is used partly for the purposes of property rental business (or UK property rental business in the case of a non-UK company), the gain attributable to the property rental business/UK property rental business is not a chargeable gain. These subsections also apply to joint venture companies.

1675.Subsection (6) provides that gains of residual business which are subject to corporation tax are charged at the main corporation tax rate.

1676.Subsection (6)(b) makes clear that subsection (6) is not a charging provision. The rule in this subsection applies only if the profits are already charged to corporation tax by another rule. See Change 41 in Annex 1.

1677.Subsection (6) also applies to joint venture companies (including non-UK joint venture companies). So a percentage of gains arising from property rental business attributable to a non-member of a joint venture company is subject to tax at the main rate of corporation tax.

1678.Subsection (7) expands what is treated as gains of residual business (and so potentially subject to corporation tax at the main rate) to include the non-member percentage of gains which are excluded from the financial statements under section 533(3). Subsection (7) applies also to non-UK companies and non-UK joint venture companies.

Chapter 4: Entering the UK REIT regime
Section 536: Effects of entry: corporation tax

1679.This section provides that, for corporation tax purposes, when a company (including a joint venture company) enters the UK REIT regime its property rental business ceases and recommences and it is deemed to sell and reacquire the assets involved in that business. This section is based on sections 111 and 134 of, and paragraphs 9, 10 and 33 of Schedule 17 to, FA 2006.

1680.Subsection (1) provides that property rental business (or UK property rental business of non-UK companies) carried on before entry to the UK REIT regime is treated as ceasing at entry for the purposes of corporation tax. As section 520(3) provides that profits of UK property rental business of non-UK companies are treated as liable to corporation tax, this section applies to all companies whether or not UK resident. See Change 41 in Annex 1.

1681.Subsections (2) to (4)provide that, for the purposes of corporation tax, assets involved in property rental business (or UK property rental business of non-UK companies) immediately before entry to the UK REIT regime are treated as being sold and reacquired at market value on entry. Any resulting gain is not chargeable to corporation tax. The only non-UK companies affected by this rule are those that are resident both in the United Kingdom and in another territory. See Change 41 in Annex 1.

1682.The final words of subsection (2)(b) ensure that the reacquired assets are held by the company within the UK REIT regime.

1683.Subsection (5) provides that, for corporation tax purposes, an accounting period ends and begins again on entry to the regime. The subsection also applies to non-UK companies. See Change 41 in Annex 1.

1684.Subsection (6)(a) provides that if a percentage of the assets of a member of a group UK REIT is excluded from the financial statements because that percentage is attributable to a non-member, the percentage is ignored for the purposes of subsection (2).

Section 537: Effects of entry: CAA 2001

1685.This section is supplementary to section 536 and modifies how CAA operates when a company (including a joint venture company) enters the UK REIT regime. It is based on sections 111(4) and 134(1) of, and paragraph 9 of Schedule 17 to, FA 2006.

Section 538: Entry charge

1686.This section provides for an amount of notional income (calculated in accordance with section 539) to be chargeable to tax on a company on entry to the UK REIT regime. It is based on sections 112(1), (2) and (4) and 134(1) of, and paragraphs 11 and 33 of Schedule 17 to, FA 2006.

1687.Subsection (2) provides that the notional amount is treated as arising in the company’s residual business. This ensures that the amount is not treated as arising in the company’s property rental business and so not chargeable to tax.

1688.It is not clear from section 112(2) of FA 2006 what rate of tax applies to UK joint venture companies. And SI 2006/2866 does not specify the rate of tax applicable for the purposes of section 112 of FA 2006. Subsection (3) of this section and section 539(5)(a) make it clear that UK joint venture companies are treated in the same way as other UK companies and consequently the rate of tax used is the rate used in section 534(3).

1689.From a practical point of view, this has no effect as the entry charge remains 2% of the market value of assets involved in UK property rental business.

1690.Subsection (4) provides that non-UK companies (including non-UK joint venture companies), are chargeable to income tax on the notional amount at the basic rate under section 11 of ITA.

Section 539: Calculation of the notional amount

1691.This section sets out how to calculate the amount of notional income for the purposes of section 538. It is based on sections 112(3) and 134(1) of, and paragraphs 9(4), 10(2) and 11(1) of Schedule 17 to, FA 2006.

1692.Subsection (3) defines “MV” as the total market value of assets which are involved in property rental business of the company (or UK property rental business in the case of non-UK companies) immediately before entry to the UK REIT regime.

1693.Subsection (4) provides that if a percentage of the assets is excluded from the financial statements because it is attributable to a non-member, that percentage is ignored for the purposes of “MV”.

1694.Subsection (5)(a) defines “TR” for UK companies as the rate mentioned in section 534(3) (the main rate of corporation tax).

1695.Subsection (5)(b) defines “TR” for non-UK companies (including non-UK joint venture companies) as the basic rate of income tax.

Section 540: Election to treat notional income as arising in instalments

1696.This section provides that a company (including a joint venture company) may elect to pay the entry charge in instalments. It is based on sections 112(5) to (7) and 134(1) of, and paragraph 11(1) of Schedule 17 to, FA 2006.

1697.Subsection (3)refers to an “officer of Revenue and Customs” rather than to “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

Chapter 5: Assets etc
Section 541: Ring-fencing of property rental business

1698.This section provides that, for corporation tax purposes, property rental business (or UK property rental business in the case of non-UK companies) is treated as a separate business from any other business carried on by a group UK REIT or by a company UK REIT. Also, to the extent that the UK REIT carries on such a business, it is treated as a separate group or company from the rest of the group or company. This section is based on sections 113(1) to(4) and 134(1) of, and paragraphs 12 and 32(3) of Schedule 17 to, FA 2006.

1699.Subsections (1)and (8) provide that this section applies to a group UK REIT, each member of the group (including a non-UK company) and a company UK REIT. See Change 41 in Annex 1.

1700.This section ring-fences the property rental business, rather than the “tax-exempt business”. This avoids the problem of how the section applies in a case where the company or group breaches the property rental business conditions in section 529. Such a breach apparently leads to the company or group no longer having “tax-exempt business” for the purpose of section 113 of FA 2006.

1701.This section applies to joint venture companies (including non-UK joint venture companies which are subject to corporation tax).

1702.Subsection (7) provides that if a percentage of the profits of property rental business are excluded from the financial statements because they are attributable to a non-member, that percentage is treated as profits of residual business.

Section 542: Disapplication of certain provisions

1703.This section applies to UK companies and allows losses from overseas property rental business to be used against other property rental business income and disapplies the exemption from the transfer pricing rules for small and medium sized enterprises. It is based on sections 113(5) and (6) and 134(1) of, and paragraph 12(2) of Schedule 17 to, FA 2006.

1704.Subsection (1) provides that section 66 of this Act (ring-fencing of losses from overseas property business) does not apply to property rental business of a UK company (including a UK joint venture company). The rule applies only to UK companies because non-UK resident companies are not subject to United Kingdom tax on the profits of an overseas property business.

1705.Subsection (2) provides that sections 166 to 171 of TIOPA (transfer pricing: exemption for small and medium sized enterprises) do not apply to a UK company. This means that all UK companiesregardless of size, which are subject to this Part, are subject to the transfer pricing rules.

Section 543: Profit: financing-cost ratio

1706.This section provides that if the result of the sum specified in subsection (2) is less than 1.25, “the excess” calculated in accordance with subsection (3) is charged to corporation tax. It is based on sections 115(1) to (3) and 134(1) of, and paragraph 4 of Schedule 17 to, FA 2006.

1707.This section enacts regulations 12 and 13 of SI 2006/2864. See Change 43 in Annex 1.

1708.Subsection (2)sets out the formula to calculate the ratio used to arrive at the “excess” in subsection (3). The definitions of “PP” and “PFC” refer to “property profits” and “property financing costs” and are defined further in section 544.

1709.This section applies to the relevant proportion of a joint venture company’s property profits and property financing costs in the same way as for any other member of a group UK REIT. See Change 43in Annex 1.

1710.Subsection (3)provides that the difference between the actual property financing costs of the UK REIT and the amount that would cause the sum specified in subsection (2) to be 1.25 (“the excess”), is charged to corporation tax. Subsections (4) and (5) provide that the excess amount is treated as if it were profits of residual business of the principal company of a group UK REIT or a company UK REIT. This means that the rate of tax is the main rate of corporation tax as mentioned in section 534(3).

Section 544: Meaning of “property profits” and “property financing costs”

1711.This section defines “property profits” and “property financing costs” for the purposes of section 543. It is based on sections 115(2) and (4), 120(1) and 134(1) of, and paragraphs 3 and 14 of Schedule 17 to, FA 2006.

1712.Subsections (1) and (3) define “property profits” and “property financing costs” respectively for the purposes of section 543.

Section 545: Cancellation of tax advantage

1713.This section provides that an officer of Revenue and Customs may counteract a tax advantage obtained by a company which is, or is a member of, a UK REIT (including a joint venture company) if the officer thinks that the company has tried to obtain a tax advantage. It is based on sections 117(1) to (5) and 134(1) of, and paragraph 15(1) of Schedule 17 to, FA 2006.

1714.Subsections (1), (4) and (6)refer to “an officer of Revenue and Customs” rather than to “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

1715.Subsection (3) sets out how a tax advantage may be counteracted. Subsection (3)(a) provides that an assessment may be made on the company. For non-UK companies, such an assessment may be to income tax or corporation tax.

1716.Subsection (4) provides that an officer of Revenue and Customs may assess (in addition to the assessment mentioned in subsection (3)(a)) a UK REIT to an amount of tax to cancel out the tax advantage.

Section 546: Appeal against notice under section 545

1717.This section provides that acompany which is, or is a member of, a UK REIT (including a joint venture company) may appeal against a notice given under section 545. It is based on section 117(6) to (8) and 134(1) of, and paragraph 15(2) of Schedule 17 to, FA 2006.

1718.Subsection (2)refers to “an officer of Revenue and Customs” rather than to “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

Section 547: Funds awaiting reinvestment

1719.This section determines how cash proceeds from the sale of assets used for property rental business are treated. It is based on sections 118 and 134(1) of, and paragraph 16 of Schedule 17 to, FA 2006.

1720.Subsection (1) provides that the section applies if a company which is, or is a member of, a UK REIT disposes of an asset used wholly and exclusively for the purposes of property rental business and holds the proceeds in cash.

1721.Section 118 of FA 2006 applies to a company that disposes of an asset and holds cash. Section 134 of FA 2006 applies the rule to a group as it applies to a company. A group cannot dispose of an asset but it may hold cash. There is no justification in section 134 of FA 2006 for saying that the cash has to be held in a particular place in the group.

1722.So this section refers to a member of a group disposing of an asset but makes clear that the proceeds may be held within the group by a company different from that which disposed of the asset.

1723.Subsection (5) deals with assets that have had mixed use. The “wholly and exclusively” rule in subsection (1)(a) is relaxed for periods of mixed use that are of at least one year. The section applies the one year test to the aggregate of the periods of mixed use.

1724.This section also applies to:

  • the worldwide property rental business of non-UK companies; and

  • joint venture companies (including non-UK joint venture companies).

Chapter 6:Distributions
Section 548: Distributions: liability to tax

1725.This section provides that distributions of profits and gains of property rental business in the United Kingdom are treated as income of a UK property business rather than as dividend income in the hands of the shareholder. It is based on sections 121(1), (2) and (8) and 134(1) of, and paragraphs 18(1) and (3) and 32(8) of Schedule 17 to, FA 2006.

1726.Subsections (1) and (3) provide that the section applies to a distribution of “profits or gains (or both)”. This is reflects the inclusion of gains by section 121(8)(b) of FA 2006. The inclusion of gains here contrasts with the rule in section 530 (the distribution of profits test), where the test is concerned only with the (income) profits of property rental business.

1727.Subsection (5) provides that if the shareholder is within the charge to corporation tax, the distribution is treated as profits of a UK property business. So the income falls within Part 4 of CTA 2009. Section 931W(2) of CTA 2009 ensures the distribution is not charged to tax under Part 9A of CTA 2009.

1728.Subsection (6) (which is based on section 121(1)(b) of FA 2006) provides that if the shareholder is within the charge to income tax, the distribution is treated as profits of a UK property business. So the income falls within Part 3 of ITTOIA. Section 366(2) of ITTOIA ensures that the distribution is not treated as savings and investment income (including dividends).

1729.Section 121(2)(a) of FA 2006 is not rewritten because it deals with a case (non-UK resident company within the charge to corporation tax) that is already covered by section 121(1)(a) (shareholder within the charge to corporation tax).

1730.Section 121(2)(b) of FA 2006 is not rewritten because it deals with a case (non-UK resident not within the charge to corporation tax) that is already covered by section 121(1)(b) (shareholder within the charge to income tax).

1731.Subsection (7) provides that in the case of a non-UK resident shareholder, a distribution is not subject to a duty to deduct at source in accordance with regulations made under section 971 of ITA. Schedule 1 to this Act amends section 972(6) of ITA so that it refers to this subsection.

Section 549: Distributions: supplementary

1732.This section makes further provision about section 548. It is based on sections 121(3) to (7) and 134(1) of, and paragraphs 18(1) and (2) and 32(8) of Schedule 17 to, FA 2006.

1733.Subsection (1) provides that section 548 does not apply to certain types of shareholders.

1734.Subsection (2) (together with subsection (3)) provides that neither section 397 of ITTIOA nor section 1109 of this Act (tax credits in respect of (exempt) qualifying distributions) do not apply to distributions made by the principal company of a group UK REIT or by a company UK REIT of profits or gains (or both) of property rental business.

1735.Section 121(8)(b) of FA 2006 applies only to section 121(1) of FA 2006. So it is arguable that it does not apply to the rule in section 121(5). But subsection (4) of this section applies to the same distributions (including distributions of gains) as are dealt with by section 548.

1736.Subsection (4) provides that relevant distributions (as defined in subsection (3)) are treated as profits of a single business separate from the businesses mentioned in subsection (5).

Section 550: Attribution of distributions

1737.This section sets out how distributions are attributed between the property rental business of a UK REIT and any other business. It is based on sections 123 and 134(1) of, and paragraph 20 of Schedule 17 to, FA 2006.

Section 551: Tax consequences of distribution to holder of excessive rights

1738.This section sets out the tax consequences of a distribution made to a “holder of excessive rights” (defined in section 553) if the distributing company has not taken steps to prevent it. It is based on section 114 of, and paragraph 13 of Schedule 17 to, FA 2006.

1739.This section enacts regulation 10 of SI 2006/2864. See Change 43 in Annex 1.

1740.Subsections (1)to (3) provide that when a distribution is made to a holder of excessive rights and the distributing company has not taken reasonable steps to prevent its being made, the distributing company is treated as receiving an amount of income calculated in accordance with section 552.

1741.Subsections (4)to (6) provide that the amount is charged to corporation tax as if it were profits of residual business of the distributing company. This means that the rate of tax is the main rate of corporation tax as mentioned in section 534(3).

Section 552: “The section 552 amount”

1742.This section sets out how the “section 552 amount” is calculated for the purposes of section 551. It is based on section 114(2) of, and paragraphs 2 and 13 of Schedule 17 to, FA 2006.

1743.This section enacts regulation 10 of SI 2006/2864. See Change 43 in Annex 1.

1744.Subsections (2)and (3) define “DO” (distribution in respect of ordinary shares) and “DP” (distribution in respect of preference shares) for a group UK REIT by reference to the group’s “UK profits” (as defined in section 530(2)). For a company UK REIT,“DO” and “DP” are defined by reference to the “profits of property rental business of the company”.

Section 553: Meaning of “holder of excessive rights”

1745.This section defines “holder of excessive rights”. It is based on section 114(1) and 134(1) of, and paragraph 13 of Schedule 17 to, FA 2006.

1746.This section enacts regulation 1(2) of SI 2006/2864. See Change 43 in Annex 1.

Section 554: Regulations: distributions to holders of excessive rights

1747.This section allows the Treasury to make regulations dealing with distributions made to holders of excessive rights. It is based on section 114 of, and paragraph 13 of Schedule 17 to, FA 2006.

1748.The section reproduces neither the general regulation-making power in section 114(1) nor the specific power in section 114(2)(a) of FA 2006. See Change 43 in Annex 1.

Chapter 7: Gains etc
Section 555: Assets: change of use

1749.This section sets out how gains made on the disposal of an asset used in property rental business (or UK property rental business of non-UK companies) are treated. It also makes provision for repayment of a proportion of the entry charge in certain circumstances. It is based on sections 125 and 134 of, and Schedule 17 to, FA 2006.

1750.S ubsections (1) to (3) and (7) apply if an asset which has been used wholly and exclusively for the purposes of property rental business (or UK property rental business in the case of non-UK companies) begins to be used for the purposes of residual business. The asset is deemed to be sold and reacquired at market value. In accordance with section 535(1) any resulting gain is not a chargeable gain.

1751.Subsection (4) provides that any sale and reacquisition under subsection (2) is at written down value for the purposes of CAA.

1752.Subsection (5) provides that if a percentage of the gains of property rental business is excluded from the financial statements because the gains are attributable to a non-member, that percentage of the gains is treated as gains of residual business.

1753.This section also applies to joint venture companies, including non-UK resident joint venture companies (see section 588).

Section 556: Disposal of assets

1754.Subsections (1) to (3) and (6) deal with the case where an asset which has been used wholly and exclusively for the purposes of the property rental business (or UK property rental business in the case of non-UK companies) is disposed of in the course of a trade. Usually such a disposal takes place some time after the asset has been removed from the company’s property rental business (when there was a deemed disposal and reacquisition under section 555(2)).

1755.Subsection (2) provides that the deemed disposal and reacquisition under section 536(2) is ignored. Instead the asset is treated as disposed of in the course of the company’s residual business. In accordance with section 535(6) any resulting gain which is subject to corporation tax is taxed at the main rate of corporation tax.

1756.Subsection (5) provides that if a percentage of the gains of property rental business is excluded from the financial statements because the gains are attributable to a non-member, that percentage of the gains is treated as gains of residual business.

1757.This section also applies to joint venture companies, including non-UK resident joint venture companies (see section 588).

Section 557: Movement of assets into ring fence

1758.This section provides that if an asset used by the residual business of a company (including a non-UK company) begins to be used by the company for the purposes of property rental business (or UK property rental business, in the case of a non-UK company), it is treated as disposed of and reacquired at market value. It also provides that, for the purposes of CAA, the transfer of the asset is treated as made at the tax written-down value. It is based on sections 126 and 134(1) of, and paragraphs 21 and 32(6) of Schedule 17 to, FA 2006.

1759.In accordance with section 535(6), if a gain arises under this section and the gain is subject to corporation tax, it is charged at the main rate.

1760.Subsection (5) provides that if a percentage of the gains of property rental business is excluded from the financial statements because the gains are attributable to a non-member, that percentage of the gains are treated as gains of a residual business.

1761.This section also applies to joint venture companies, including non-UK resident joint venture companies (see section 588).

Section 558: Demergers: disposal of asset

1762.This section makes provision for a company UK REIT to dispose of an asset to a 75% subsidiary which subsequently becomes a member of a group UK REIT. It is based on section 126A of FA 2006.

Section 559: Demergers: company leaving group UK REIT

1763.This section makes provision for a company to cease to be a member of a group UK REIT but to continue within the UK REIT regime. It is based on paragraph 34 of Schedule 17 to FA 2006.

1764.Subsection (9) makes clear that the conditions in the section are to be met by the company giving the notice (not necessarily the exiting company).

Section 560: Interpretation of Chapter

1765.This section provides that the Chapter (apart from section 559) is to be read as if it were contained in TCGA. It is based on section 127 of FA 2006.

Chapter 8: Breach of conditions in Chapter 2
Section 561: Notice of breach of relevant Chapter 2 condition

1766.This section provides that if certain conditions in Chapter 2 are not met, the principal company of a group UK REIT or a company UK REIT must notify an officer of Revenue and Customs of the breach. It is based on sections 116(1) and (2) and 134(1) of FA 2006.

1767.Subsectio ns (1 )and (2)refer to an “officer of Revenue and Customs” rather than to the “Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

1768.Subsection (4) enacts the information requirements in regulation 9 of SI 2006/2864. See Change 43 in Annex 1.

Section 562: Breach of conditions C and D in section 528 (conditions for company)

1769.This section makes provision about breaches of conditions C and D in section 528. It is based on sections 116(1) and (3) and 134(1) of, and paragraph 4 of Schedule 17 to, FA 2006.

1770.This section enacts regulations 1 to 4 of SI 2006/2864. See Change 43in Annex1.

1771.Subsection (2) provides that if a principal company of a group UK REIT or a company UK REIT becomes a member of a pre-existing group UK REIT, and by doing so fails to satisfy condition C (shares are listed) and condition D (not a close company) in section 528, the breaches are ignored.

1772.As indicated in section 569, this section is subject to section 572 which allows an officer of Revenue and Customs to issue a notice of termination of the UK REIT regime in some circumstances.

Section 563: Breach of conditions as to property rental business

1773.This section provides that conditions A or B of section 529 can be breached without causing the UK REIT regime to terminate. It is based on section 116(1) and (3) of FA 2006.

1774.This section enacts regulation 5(1) and (2) of SI 2006/2864. See Change 43in Annex 1.

1775.As indicated in section 569, this section is subject tosection 572, which allows an officer of Revenue and Customs to issue a notice of termination of the UK REIT regime in some circumstances.

Section 564: Breach of condition as to distribution of profits

1776.This section sets out how the distribution condition in section 530 can be breached without causing the UK REIT regime to terminate. It is based on section 116(1) and (3) of FA 2006.

1777.This section enacts regulation 6(1) to (3) and (5) to (8) of SI 2006/2864. See Change 43in Annex 1.

1778.Subsection (2) provides that the breach is ignored if the company does not meet the distribution condition in section 530, but an amount calculated under section 565 is charged to corporation tax. The amount is charged to corporation tax as if it were profits of residual business of the distributing company. Accordingly the rate of tax is the main rate of corporation tax.

1779.As indicated in section 569, this section is subject to section 572 which allows an officer of Revenue and Customs to issue a notice of termination of the UK REIT regime in some circumstances.

Section 565: “The section 565 amount”

1780.This section sets out how to calculate “the section 565 amount” for the purposes of section 564. It is based on section 116(1) and (3) of FA 2006.

1781.This section enacts regulation 6(4) of SI 2006/2864. See Change 43in Annex1.

1782.This section provides that an “officer of Revenue and Customs” rather than “the Commissioners” may specify a date before which profits are to be distributed. See Change 5 in Annex 1.

Section 566: Breach of condition B in section 531 in accounting period 1

1783.This section sets out how condition B in section 531 (balance of business: assets involved in property rental business) can be breached in the first accounting period (“accounting period 1” – see section 609) of a UK REIT without causing the UK REIT regime to terminate. It is based on section 116(1) and (3) of FA 2006.

1784.This section enacts regulations 7 and 7A of SI 2006/2864. See Change 43in Annex1.

1785.This section provides that if the balance of business assets test in section 531(5) is not met in accounting period 1, the breach is ignored, but an amount calculated in accordance with section 567 is charged to corporation tax. The amount is charged to corporation tax as if it were profits of residual business of the principal company of the group UK REIT or company UK REIT. Accordingly the rate of tax is the main rate of corporation tax.

1786.As indicated in section 569, this section is subject to section 572 which allows an officer of Revenue and Customs to issue a notice of termination of the UK REIT regime in some circumstances.

Section 567: Meaning of “the notional amount”

1787.This section sets out how to calculate “the notional amount” for the purposes of section 566. It is based on section 116(1) and (3) of FA 2006.

1788.This section enacts regulation 7A(4) to (7) of SI 2006/2864. See Change 43in Annex 1.

1789.In regulation 7A(5) of SI 2006/2864. the aggregate market value of assets involved in the UK property rental business excludes assets attributable to any percentage of the assets held by a non-member of the group. Subsection (4)(c) of the section makes that exclusion, as in section 539(4). See Change 44in Annex 1.

Section 568: Breach of balance of business conditions after accounting period 1

1790.This section sets out how the balance of business conditions in section 531 can be breached in the accounting periods following the first accounting period (“accounting period 1” – see section 609) of the UK REIT without causing the UK REIT regime to terminate. It is based on section 116(1) and (3) of FA 2006.

1791.This section enacts regulation 7B(1) to (3) of SI 2006/2864. See Change 43in Annex 1.

1792.As indicated in section 569, this section is subject to section 572 which allows an officer of Revenue and Customs to issue a notice of termination of the UK REIT regimein some circumstances.

Section 569: Chapter subject to section 572

1793.This section provides that this Chapter is subject to section 572 (termination of UK REIT regime by officer of Revenue and Customs). It is based on section 116(4) of FA 2006.

Chapter 9: Leaving the UK REIT regime
Section 570: Overview of Chapter

1794.This section is an overview of the Chapter. It is new.

Section 571: Termination by notice: group or company

1795.This section provides that the principal company of a group UK REIT or a company UK REIT may give notice to an officer of Revenue and Customs for the UK REIT regime to cease for the group or company. It is based on sections 128 and 134(1) of, and paragraph 23 of Schedule 17 to, FA 2006.

1796.Subsection (3) requires the notice to be given to an “officer of Revenue and Customs” rather than to “the Commissioners of Her Majesty’s Revenue and Customs”. Subsection (4) requires that the date on the notice must be after the date the “officer” receives the notice. See Change 5 in Annex 1.

Section 572: Termination by notice: officer of Revenue and Customs

1797.This section provides that, in certain circumstances, an officer of Revenue and Customs may give a notice to the principal company of a group UK REIT or a company UK REIT that the group or company ceases to be within the UK REIT regime. It also provides a right of appeal. It is based on sections 129 and 134(1) of, and paragraphs 23 and 24 of Schedule 17 to, FA 2006.

1798.Subsections (1), (2) and (4) require the notice to be given by an “officer of Revenue and Customs” rather than by “the Commissioners for Her Majesty’s Revenue and Customs”. Subsection (5) provides that an appeal must be made by the UK REIT by giving notice in writing to an “officer of Revenue of Customs” rather than to “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

Section 573: Notice under section 572: tax advantage

1799.This section provides that if, during a ten year period, two notices have been given under section 545 (cancellation of tax advantage), an officer of Revenue and Customs may give a notice under section 572 terminating the UK REIT regime. It is based on sections 129(2) and 134(1) of FA 2006.

1800.Subsection (1) requires the notice to be given by an “officer of Revenue and Customs” rather than by “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

1801.Subsections (2) to (4) enact regulation 14 of SI 2006/2864. See Change 43in Annex 1.

Section 574: Notice under section 572: serious breach

1802.This section provides that if an officer of Revenue and Customs thinks a breach of a condition in sections 529 to 531 is so serious that the UK REIT regime should be terminated, the officer may give a notice under section 572 terminating the regime. It is based on sections 116(1) and (3), 129(2) and 134(1) of FA 2006.

1803.Subsection (1) requires the notice to be given by an “officer of Revenue and Customs” rather than by “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

1804.Subsections (2) and (3) enact regulation 7(4) and (5) of SI 2006/2864. See Change 43in Annex 1.

Section 575: Notice under section 572: breach of conditions as to property rental business

1805.This section sets out the circumstances in which an officer of Revenue and Customs may issue a notice under section 572 to terminate the UK REIT regime if there is a breach of either condition A or B in section 529. It is based on sections 116(1) and (3), 129(2) and 134(1) of FA 2006.

1806.Subsection (1) requires the notice to be given by an “officer of Revenue and Customs” rather than by “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

1807.This section enacts regulation 5(2) and (5) of SI 2006/2864. See Change 43in Annex 1.

Section 576: Notice under section 572: breach of conditions as to balance of business

1808.This section sets out the circumstances in which an officer of Revenue and Customs may issue a notice under section 572 to terminate the UK REIT regime if there is a breach of either condition A or B in section 531. It is based on sections 116(1) and (3), 129(2) and 134(1) of FA 2006.

1809.Subsection (1) requires the notice to be given by an “officer of Revenue and Customs” rather than by “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

1810.This section enacts regulation 7B(4) to (7) of SI 2006/2864. See Change 43in Annex 1.

Section 577: Notice under section 572: multiple breaches of conditions in Chapter 2

1811.This section provides that if there are multiple breaches of certain Chapter 2 conditions, an officer of Revenue and Customs may issue a notice under section 572 to terminate the UK REIT regime. It is based on sections 129(2) and (3) and 134(1) of FA 2006.

1812.Subsection (1) requires the notice to be given by an “officer of Revenue and Customs” rather than by “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

1813.This section enacts regulation 8 of SI 2006/2864. See Change 43in Annex 1.

1814.Subsection (7)(a) provides that if a member of a group UK REIT or a company UK REIT becomes a member of a pre-existing group UK REIT, and by doing so fails to satisfy condition C (shares are listed) or condition D (not a close company) in section 528, the breaches are ignored.

Section 578: Automatic termination for breach of certain conditions in section 528

1815.This section provides that the UK REIT regime automatically terminates if condition A, B, E or F in section 528 is breached. The company which gave notice under section 523 or 524 must notify an officer of Revenue and Customs of the breach. The section is based on sections 130 and 134(1) of, and paragraphs 4 and 23 of Schedule 17 to, FA 2006.

1816.Subsection (3) requires the notice to be given to an “officer of Revenue and Customs” rather than to “the Commissioners for Her Majesty’s Revenue and Customs”. See Change5 in Annex 1.

Section 579: Effects of cessation: corporation tax

1817.This section sets out what happens if a group UK REIT, a member of a group UK REIT (including a joint venture company) or a company UK REIT ceases to be within the UK REIT regime. It is based on sections 131 and 134 of, and paragraphs 25, 26 and 33 of Schedule 17 to, FA 2006.

1818.This section also applies to non-UK companies (including non-UK joint venture companies). See Change 41 in Annex 1.

1819.Subsections (3) and (8)provide that property rental business (or UK property rental business in the case of a non-UK company) of an exiting company is treated for corporation tax purposes as ceasing immediately before cessation of the UK REIT regime.

1820.Subsections (4)and (8) provide that assets “involved” in the property rental business (or UK property rental business in the case of a non-UK company) immediately before cessation are treated as being sold immediately before cessation and reacquired immediately afterwards. See section 608(3) for the definition of an asset “involved” in property rental business.

Section 580: Effects of cessation: CAA 2001

1821.This section is supplementary to section 579 and modifies how CAA operates if a company (including a joint venture company) ceases to be in the UK REIT regime. It is based on sections 131(4) and 134(1) of, and paragraphs 25(1) and 26(1) of Schedule 17 to, FA 2006.

Section 581: Early exit by notice

1822.This section sets out what happens if a UK REIT or a member of a group UK REIT (including a joint venture company) that was within the UK REIT regime for less than ten years disposes of an asset within two years of giving notice to leave the UK REIT regime. It is based on sections 132 and 134(1) of, and paragraphs 4, 27 and 28 of Schedule 17 to, FA 2006.

1823.This section applies to UK property rental business of non-UK companies (including non-UK joint venture companies) and subsection (7) applies to non-UK companies. See Change 41 in Annex 1.

1824.Subsection (4) provides that one of the conditions for subsection (6) to apply is that assets “involved” in the property rental business (or UK property rental business in the case of a non-UK company) are disposed of within two years of cessation of the UK REIT regime. See section 608(3) for the definition of an asset “involved” in property rental business.

Section 582: Early exit

1825.This section allows HMRC to make certain directions if a group UK REIT or company UK REIT ceases to be a UK REIT within ten years of entering the regime as a result of section 572 (termination by officer) or section 578 (automatic termination). It is based on sections 133 and 134(1) of, and paragraph 4 and 29 of Schedule 17 to, FA 2006.

1826.Subsection (2) allows an “officer of Revenue and Customs” to make the direction rather than “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

Chapter 10: Joint ventures
Section 583: Overview of Chapter

1827.This section is an overview of the Chapter. It is new.

Section 584: Meaning of “joint venture company” and “joint venture group”

1828.This section defines “joint venture company” and “joint venture group” for the purposes of the Chapter. It is based on section 138(1) of FA 2006.

1829.This section enacts parts of SI 2006/2866 and SI 2007/3425. See Change 43 in Annex 1.

Section 585: Meaning of “venturing group” and “venturingcompany”

1830.This section defines “venturing company” and “venturing group” for the purposes of the Chapter. It is based on section 138(1) of FA 2006.

1831.This section enactsparts of SI 2006/2866 and SI 2007/3425. See Change 43 in Annex 1.

Section 586: Notice for Part to apply: joint venture company

1832.This section provides that a group UK REIT or a company UK REIT may bring a joint venture company (including a non-UK joint venture company) into the regime if certain conditions are met. It is based on section 138(1) and (3) of FA 2006.

1833.This section enacts parts of SI 2006/2866. See Change 43 in Annex 1.

1834.Subsection (1)provides that the principal company of a group UK REIT may give notice that the Part is to apply in relation to property rental business carried on by a joint venture company. Subsection (2) makes similar provision in relation to a company UK REIT.

1835.Giving a notice under subsection (2) does not mean that the company UK REIT is treated as giving a group notice under section 523(1). So it is not required to bring all its subsidiaries into the UK REIT regime.

1836.Condition 7 of regulations 3(1) and 10(1) SI 2006/2866 provides that, in order for a notice to be made in respect of a joint venture company, the joint venture company must satisfy the balance of business tests in section 108 of FA 2006. But a joint venture notice must be made at the beginning of the accounting period and the balance of business tests cannot be satisfied until the end of the accounting period. So it is unclear when a notice can be made.

1837.The balance of business tests are rewritten in section 591, putting joint venture companies on the same basis as joint venture groups. Condition 7 is not rewritten.

1838.Subsection (6)(b) requires the “consent” of the joint venture company. This requirement replaces the need for the notice to be “signed by the company secretary or a director”. So the section is consistent with the possibilities that the notice may be given electronically and that, following the Companies Act 2006, the company may not have a company secretary or a director.

1839.Subsection (6)(d) provides that the notice must be given to an “officer of Revenue and Customs” rather than to “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

Section 587: Notice for Part to apply: joint venture group

1840.This section provides that a group UK REIT or a company UK REIT may bring a joint venture group (including a non-UK member of a joint venture group) into the regime if certain conditions are met. It is based on section 138(1) and (3) of FA 2006.

1841.This section enacts parts of SI 2007/3425. See Change 43 in Annex 1.

1842.Subsection (1)provides that the principal company of a group UK REIT may give notice that the Part is to apply in relation to property rental business carried on by the members of a joint venture group. Subsection (2) makes similar provision in relation to a company UK REIT.

1843.Giving a notice under subsection (2) does not mean that the company UK REIT is treated as giving a group notice under section 523(1). So it is not required to bring all its subsidiaries into the UK REIT regime.

1844.Subsection (6)(b) requires the “consent” of the principal company of the joint venture group. This requirement replaces the need for the notice to be “signed by the company secretary or a director”. So the section is consistent with the possibilities that the notice may be given electronically and that, following the Companies Act 2006, the company may not have a company secretary or a director.

1845.Subsection (6)(d) provides that the notice must be given to an “officer of Revenue and Customs” rather than to “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

Section 588: Effect of notice under section 586

1846.This section makes general modifications to the Part to take into account joint venture companies. It is based on section 138(1) and (2) of, and paragraph 3(1) of Schedule 17 to, FA 2006.

1847.This section enacts parts of SI 2006/2866. See Change 43 in Annex 1.

1848.Subsection (1)provides that, if the principal company of a group UK REIT gives notice in relation to a joint venture company, the Part applies in relation to property rental business carried on by the joint venture company as if it were a member of the group UK REIT.

1849.Subsection (2) provides that, if a company UK REIT gives notice in relation to a joint venture company, the Part applies in relation to property rental business carried on by the joint venture company as if the company UK REIT and the joint venture company were members of a new group UK REIT.

Section 589: Effect of notice under section 587

1850.This section makes general modifications to the Part to take into account members of a joint venture group. It is based on section 138(1) and (2) of FA 2006.

1851.This section enacts parts of SI 2007/3425. See Change 43 in Annex 1.

1852.Subsection (1)provides that, if the principal company of a group UK REIT gives notice in relation to members of a joint venture group, the Part applies in relation to property rental business carried on by the members of the joint venture group as if they were members of the group UK REIT.

1853.Subsection (2) provides that, if a company UK REIT gives notice in relation to members of a joint venture group, the Part applies in relation to property rental business carried on by the members of the joint venture group as if the company UK REIT and the members of the joint venture group were members of a new group UK REIT.

Section 590: Duration of notice under section 586 or 587

1854.This section provides for a notice under section 586 or 587 to cease to have effect.It is based on section 138(1) and (2) of FA 2006.

1855.This section enacts parts of SI 2006/2886 and SI 2007/3425. See Change 43 in Annex 1.

1856.Subsections (1)(b)and (2)(b) provide that if the venturing group or venturing company ceases to be a UK REIT, the notice under section 586 ceases to have effect. For joint venture companies, this is not explicit in regulations 4 and 11 of SI 2006/3425. But it is implicit that a joint venture company ceases to be within the UK REIT regime if the company which made the notice ceases to be a UK REIT. Subsections (1)(b) and (2)(b) make this explicit. So the positions for joint venture companies and joint venture groups are the same.

1857.Subsection (6) provides that if a notice under section 586 or 587 ceases to have effect, section 581 (early exit) continues to have effect. The joint venture company regulations do not contain a provision similar to that for joint venture groups. But it is implicit from the regulations that section 581 continues to have effect once the joint venture company ceases to be in the UK REIT regime. So subsection (6) applies to joint venture companies as it does to joint venture groups.

1858.Subsection (7) defines “the 40% tests” by reference to the type of notice given. For each of subsections (1) to (4) a different version of the 40% tests applies. See:

  • in the case of subsection (1), the tests in section 586(4);

  • in the case of subsection (2), the tests in section 586(5);

  • in the case of subsection (3), the tests in section 587(4); and

  • in the case of subsection (4), the tests in section 587(5).

Section 591: Conditions as to balance of business

1859.This section provides that the balance of business tests in section 531 must be met by the joint venture company or joint venture group. It is based on section 138(1) and (2) of FA 2006.

1860.This section enacts parts of SI 2006/2866 and SI 2007/3425. See Change 43 in Annex 1.

Section 592: Joint venture groups: financial statements

1861.This section provides that the principal company of a joint venture group must prepare financial statements for the group. It is based on section 138(1) and (2) of FA 2006.

1862.This section enacts parts of SI 2007/3425. See Change 43 in Annex 1.

1863.Subsection (5) provides that the financial statements must be submitted to an “officer of Revenue and Customs” rather than to “the Commissioners for Her Majesty’s Revenue and Customs”. See Change 5 in Annex 1.

Section 593: Financial statements under section 532: joint venture groups

1864.This section provides that the amount to be included in the financial statements under section 532 should include only the “relevant percentage” of profits, expenses, gains, losses, assets and liabilities. It is based on section 138(1) and (2) of FA 2006.

1865.This section enacts parts of SI 2007/3425. See Change 43 in Annex 1.

Section 594: Modifications of Chapter 3

1866.This section makes specific modifications to the Part in relation to property rental business carried on by a joint venture company or by one or more members of a joint venture group. It is based on sections 138(1) and (2) of FA 2006.

1867.This section enacts parts of SI 2006/2866 and SI 2007/3425. See Change 43 in Annex 1.

Section 595: Joint venture company liable for additional charge

1868.This section provides that a joint venture company is chargeable to an additional amount of entry charge in certain circumstances. It is based on sections 138(1) and (2) of FA 2006.

1869.This section enacts regulation 14 of SI 2006/2866. See Change 43 in Annex 1.

1870.This sectionprovides that a joint venture company is chargeable to tax under section 538 in respect of the “reduced notional amount” if either:

  • a venturing company becomes a principal company of a group UK REIT and it increases its holding in a joint venture company; or

  • a venturing group increases its holding in a joint venture company to more than 75%.

1871.Subsection (7) defines “reduced notional amount”.

1872.If more than 75% of the shares of the joint venture company are held by the company, the joint venture company is a subsidiary and is covered by the section 523(1) notice. It is not possible to give a further notice under section 586.

Section 596: Member of joint venture group liable for additional charge

1873.This section provides that a member of a joint venture group is chargeable to an additional amount of entry charge in certain circumstances. It is based on sections 138(1) and (2) of FA 2006.

1874.This section enacts parts of SI 2007/3425. See Change 43 in Annex 1.

1875.Subsections (1) to (3) provide that a member of a joint venture group is chargeable to tax under section 538 in respect of “the reduced notional amount” if a venturing company increases its holding in a member of a joint venture group with the result that it becomes a principal company of a group.

1876.Subsections (4) and (5)provide that a member of a joint venture group is chargeable to tax under section 538 in respect of the “reduced notional amount” if a venturing group increases its holding in a member of a joint venture group to at least 75% with the result that the member of the joint venture group becomes a member of the venturing group.

1877.Regulation 14(6) of SI 2006/2866 refers to the case where “a venturing group … increases its shareholding … to 75% or more” in a joint venture company. These words include the possibility that the 75% comprises smaller shareholdings by members of the venturing group.

1878.Regulation 24(1) of SI 2007/3425 refers to the case where “a member of a venturing group … increases its shareholding … to 75% or more” in a member of a joint venture group. These words seem to require that the 75% holding must be by a single member of the venturing group.

1879.The result in each case is that the joint venture company (or member of the joint venture group) becomes a member of a group UK REIT. Chapter 3 of Part 24 of this Act provides that indirect shareholdings are to be taken into account in determining whether a company is a member of a group. So the SI 2006/2866 approach is more logical than that of 2007/3425 and is the one adopted by the section in both cases.

1880.Subsections (6) defines “reduced notional amount”.

Section 597: Cases where no additional charge due

1881.This section provides that neither a joint venture company nor a member of a joint venture group is chargeable to an additional amount in respect of the entry charge if there is no increase in shareholding. It is based on sections 138(1) and (2) of FA 2006.

1882.This section enacts parts of SI 2006/2866 and SI 2007/3425. See Change 43 in Annex 1.

Section 598: Chapter 10: supplementary

1883.This section explains what is meant by “equity holder” and percentages of beneficial interest for the purposes of the Chapter. It is based on section 138(1) of FA 2006.

1884.This section enacts parts of SI 2006/2866 and SI 2007/3425.See Change 43 in Annex 1.

1885.Subsection (1)(b) defines “equity holder” for the purposes of the Chapter by reference to a loan creditor other than a loan in relation to a “normal commercial loan”. This is based on regulation 4(1) of SI 2007/3425. SI 2006/2866 does not define “normal commercial loan” for joint venture companies. This section applies the definition for both joint venture groups and joint venture companies.

1886.The exclusions for “owner-occupied” property in Condition 6 of regulations 3(1) and 10(1) of SI 2006/2866 are rewritten in subsection (3). These exclusions are the equivalent of the exclusion for owner-occupied property in section 604(2), which may not apply to a joint venture company or a joint venture group.

Chapter 11: Part 12: supplementary
Section 599: Calculation of profits

1887.This section provides for the calculation of profits for the purposes of certain provisions in the Part. It is based on section 120 of FA 2006.

1888.This section applies to non-UK companies and joint venture companies (including non-UK ones).

1889.Subsection (7) requires income and expenditure to be “apportioned on a just and reasonable basis”. It is based on section 120(6) of FA 2006 which states that income and expenditure be “apportioned reasonably”. See Change 33 in Annex 1.

Section 600: Power to make regulations about cases involving related persons

1890.This section allows the Treasury, by order, to treat persons as forming part of a group REIT. It is based on section 136A of FA 2006.

1891.An order under this section is intended to counteract arrangements by which a company with non-qualifying activities is artificially excluded from a group of companies with the result that the balance of business tests are satisfied.

1892.In subsection (2) “REIT company” is defined, for the purpose of subsection (1) only, to include the members of a group UK REIT. In this respect it differs from the definitions in section 518(4).

1893.Subsection (5) ensures that this section is an exception to the general rule about orders and regulations in section 1171(4).

Section 601: Availability of group reliefs

1894.This section provides that the part of a group UK REIT that carries on property rental business is treated as a separate group from the part that carries on other business for the purposes of various group-related provisions. It is based on section 136 of FA 2006.

Section 602: Effect of deemed disposal and reacquisition

1895.This section provides that a deemed disposal and reacquisition of an asset under this Part has effect for any future disposal. It is based on section 141 of FA 2006.

Section 603: Regulations

1896.This section provides that regulations made under the Part may make provision for various other purposes. It is based on section 144 of FA 2006.

1897.This section is in line with other general regulation-making provisions and includes a specific reference to the making of “supplemental” provision.

Section 604: Property rental business: exclusion of listed business

1898.This section provides a list of classes of businesses that are not property rental business. It is based on section 104(2) of, and paragraphs 1 to 5 and 14 of Schedule 16 to, FA 2006.

Section 605: Property rental business: exclusion of business producing listed income

1899.This section provides that business is not property rental business in so far as it gives rise to certain income. It is based on section 104(2) of, and paragraphs 6 to 14 of Schedule 16 to, FA 2006.

1900.Subsection (1) provides that business is not property rental business in so far as it gives rise to income of a class referred to in subsection (2). Section 104(2)(b) of FA 2006 refers to “income or profits…”. It is unclear what the reference to “profits” is intended to catch. So this section omits the reference to profits.

Section 606: Groups

1901.This section sets out which companies are treated as part of a group for the purposes of the Part. It is based on section 134(2) to (6) of FA 2006.

1902.Subsection (3) provides that a company cannot be a member of more than one group. But that rule is disapplied for the joint venture Chapter bysubsection (4).So a company may be a member of a joint venture group (see section 584(2)) and a member of another group. And a company may be a member of more than one group UK REIT.

Section 607: Meaning of “entry” and “cessation” etc

1903.This section contains definitions related to a company or group becoming, or ceasing to be, a UK REIT. It is based on sections 105(1) and (2) and 134(1) of, and paragraphs 4 and 10 to 12 of Schedule 17 to, FA 2006.

Section 608: References to assets

1904.This section explains what is meant by a reference to an asset and when that asset is “involved” in a business. It is based on sections 108(3), 111(6), 131(6), 132(3) and 142 of FA 2006.

Section 609: Definitions

1905.This section contains a list of definitions for this Part. It is based on section 142 of FA 2006.

Part 13: Other special types of company etc

Overview

1906.This Part contains rules for special types of company etc.

1907.Chapter 1 is about corporate beneficiaries under trusts.

1908.Chapter 2 is about authorised investment funds.

1909.Chapter 3 is about unauthorised unit trusts.

1910.Chapter 4 is about securitisation companies.

1911.Chapter 5 is about companies in liquidation or administration.

1912.Chapter 6 is about banks in compulsory liquidation.

1913.Chapter 7 is about co-operative housing associations.

1914.Chapter 8 is about self-build societies.

1915.Chapter 9 is about community amateur sports clubs.

Chapter 1: Corporate beneficiaries under trusts
Overview

1916.This Chapter contains rules that apply to the income of corporate beneficiaries of settlements. The first section concerns payments made at the discretion of the trustees. The second section concerns cases where the beneficiary is entitled to a share of the settlement income as it arises (often described as having an “interest in possession”).

Section 610: Discretionary payments by trustees to companies

1917.This section provides that discretionary payments by trustees to which sections 494 and 495 of ITA apply are ignored in calculating the beneficiary’s liability to corporation tax. It is based on section 687A of ICTA.

1918.Under subsection (2), this provision does not apply to payments made to charitable and similar bodies. These bodies have their own rules (see Part 11).

1919.The word “profits” in section 687A of ICTA does not have a defined meaning: the interpretation in section 6(4)(a) of ICTA does not apply to this section. Subsections (3) and (4) of this section refer to the “income” of the company for corporation tax purposes instead as this fits with the charge to corporation tax on income (see for example section 4(3) of this Act) and with Chapter 7 of Part 9 of ITA (discretionary payments).

1920.Under subsection (3)(b), the payments are income for corporation tax purposes under section 493 of ITA but are ignored for the purpose of determining the income that is chargeable to corporation tax.

1921.The beneficiary is treated under section 494 of ITA as having paid income tax on the grossed-up amount of the discretionary payment and the trustees are liable for that tax under section 496 of ITA. But subsection (3)(a) provides that the tax is not available for set-off against corporation tax or any other income tax for which the beneficiary has to account and subsection (3)(c) provides that the deemed income tax is not repaid to the company.

Section 611: Income tax provisions to apply in relation to trustees’ expenses

1922.This section applies the rules in sections 500 and 503 of ITA. It is based on section 698B of ICTA. These provisions are concerned with the treatment of trustees’ expenses in a case where the beneficiary is entitled to trust income as it arises. This is where the beneficiary has an interest in possession (IIP).

1923.It is very rare for a company to be an IIP beneficiary of a trust so this is a case where it seems preferable to have this section read across to, rather than duplicate, the income tax provisions.

1924.Much of the content of sections 500 and 503 ITA was new as there was very little statutory guidance about how trustees’ expenses affect the measure of a beneficiary’s income. The principles were mainly derived from trust and tax law, but are well understood and are the subject of guidance issued by HMRC. See Change 45in Annex 1.

Chapter 2: Authorised investment funds
Overview

1925.This Chapter rewrites sections 468, 468A and 469A of ICTA and provides rules about authorised investment funds.

1926.The term “authorised investment funds” is not defined in this Chapter because it is not used in the body of the sections. But it is defined in other legislation and is commonly understood to refer to both open-ended investment companies (OEICs) and authorised unit trusts (AUTs). The Chapter also provides rules about court investment funds, which are treated as AUTs.

Section 612: Overview of Chapter

1927.This section provides an overview of what is in the Chapter. It is new.

Section 613: Meaning of “open-ended investment company”

1928.This section sets out the definition of an “open-ended investment company” (an OEIC). It is based on section 468A(2) of ICTA.

Section 614: Applicable corporation tax rate

1929.This section, which is based on section 468A(1) of ICTA, provides that the rate of corporation tax applicable to an OEIC is the income tax basic rate (see section 6 of ITA).

Section 615: Umbrella companies

1930.This section sets out the definition of “umbrella company” and how such a company is treated. It is based on section 468A(3) and (4) of ICTA.

1931.An umbrella company is an OEIC whose investments are pooled separately in sub-funds which may have different investment objectives. As in section 235 of FISMA, this practice is referred to in this section in terms of separate pooling and separate parts. References in the section to a part of an umbrella company are to a separate pool (subsection (2)).

1932.Each separate part of an umbrella company is treated as a separate OEIC while the umbrella company as a whole is not treated as an OEIC. This mirrors the provision made for umbrella schemes by section 619.

Section 616: Meaning of “authorised unit trust” and “unit holder”

1933.This section defines these terms for the purposes of the Chapter. It is based on section 468(6) of ICTA.

Section 617: Authorised unit trust treated as UK resident company

1934.This section provides that the Tax Acts have effect as if the trustees of an AUT were a UK resident company, and as if the rights of the unit holders were shares in the company. It is based on section 468(1) and (3) of ICTA.

1935.Detailed rules for the taxation of both an AUT as an institution, and unit holders as investors, are set out in the Authorised Investment Funds (Tax) Regulations 2006 (SI 2006/964).

1936.Subsection (3) makes it clear that the treatment in subsection (1)(b) does not affect the rules which enable an AUT to make distributions which are interest distributions to unit holders. The term “interest distribution” is currently defined in regulation 18(3) of SI 2006/964.

Section 618: Applicable corporation tax rate

1937.This section states that a special rate of corporation tax is applicable to AUTs. It is based on section 468(1A) of ICTA.

1938.The applicable rate is the income tax basic rate (see section 6 of ITA).

Section 619: Umbrella schemes

1939.This section sets out the definition of an “umbrella scheme” and how such a scheme is treated. It is based on section 468(7), (8) and (9) of ICTA.

1940.An umbrella scheme is a fund which is divided into sub-funds which may have different investment objectives. As in section 235 of FISMA, this practice is referred to in this section in terms of separate pooling and separate parts. References in the section to a part of an umbrella scheme are to the pooling arrangements that relate to a separate pool.

1941.Each separate part of an umbrella scheme is treated as a separate AUT while the umbrella scheme as a whole is not treated as an AUT. This mirrors the provision made for umbrella companies by section 615.

Section 620: Court investment funds

1942.This section sets out the treatment of court investment funds. It is based on section 469A of ICTA.

1943.In section 469A of ICTA the fund is described as a court common investment fund but for capital gains tax purposes (see section 100(3) of TCGA) the same kind of account is named a court investment fund. We have changed the term to be consistent with the simpler and clearer description in TCGA.

1944.A court investment fund is defined in subsection (1) as a fund set up under section 42 of the Administration of Justice Act 1982.

1945.The effect of the section is that the Tax Acts apply to a court investment fund as if it were an AUT (with the investment manager of the fund in the role of trustee) and as if the persons with qualifying interests in the fund (see the table insubsection (3)) were unit holders in the AUT.

Chapter 3: Unauthorised unit trusts
Overview

1946.This Chapter contains special rules relating to the income and capital expenditure of unit trusts. It is based on section 469 of ICTA. The corresponding income tax provisions are in Chapter 9 of Part 9 of ITA.

Section 621: Treatment of income

1947.This section is based on sections 469(1) and (2) of ICTA. The corresponding rule for income tax is in section 504 of ITA.

1948.Subsection (2) provides that for the purposes of the Corporation Tax Acts income arising to the trustees is treated as their income and not as the income of the unit holders.

Section 622: Treatment of capital expenditure

1949.This section is based on sections 469(1) and (2) of ICTA. The corresponding rule for income tax is in section 504A of ITA, as inserted by the Income Tax Act 2007 (Amendment) Order 2009 (SI 2009/23).

1950.The effect of this special rule is that all allowances and charges under rules relating to capital expenditure are enjoyed or suffered by the trustees and not the unit holders.

Chapter 4: Securitisation companies
Overview

1951.This Chapter deals with securitisation companies. It is based on section 84 of FA 2005.

1952.Section 84 of FA 2005 consisted primarily of a Treasury power to determine how the Corporation Tax Acts were to apply to securitisation companies. It also contained a Treasury power to refine, for the purposes of those regulations, the basic section 84 definition of a securitisation company .

1953.The rewritten sections separate the two regulation making powers. The power to refine the definition of a securitisation company is in subsection (2)(b) of section 623. The power to make regulations governing the taxation of securitisation companies comprises the whole of section 624.

1954.Section 83 of FA 2005 also deals with securitisation companies although the definition of “securitisation companies” for the purposes of section 83 is not the same as that for section 84. Section 83 governs the application of accounting standards to certain securitisation companies for periods of account beginning on or after 1January2005 and ending before 1January 2008. That period has,however, now been extended, (in accordance with the power in subsection (7A)) by the Securitisation Companies (Application of section 83(1) of the Finance Act 2005: Accounting Standards) Regulations 2007(SI 2007/3338), to 1 January 2017 in a limited number of cases. As section 83 has a finite life and a limited application it is not rewritten.

Section 623: Meaning of “securitisation company”

1955.This section provides a definition of “securitisation company”. It is based on section 84(2) and (6) of FA 2005.

1956.Subsections (3) to (5) set out the conditions that must be met if a company is to be a “securitisation company”. Subsection (2) includes the proviso that in addition to meeting the conditions in subsections (3) to (5) the company must also meet any conditions set out in regulations. Such conditions are in regulation 4 of the Taxation of Securitisation Companies Regulations 2006 (SI 2006/3296).

Section 624: Power to make regulations about the taxation of securitisation companies

1957.This section sets out how the Treasury may make regulations governing the taxation of securitisation companies. It is based on section 84(1), (3) and (6) of FA 2005.

Section 625: Regulations: supplementary

1958.This section contains provisions that supplement the regulation-making powers conferred by sections 623 and 624. It is based on section 84(4) and (5) of FA 2005.

Chapter 5: Companies in liquidation or administration
Overview

1959.This Chapter deals with the taxation of companies in liquidation or administration. It is based on sections 342 and 342A of ICTA.

1960.The rules governing the accounting periods of such companies are in Chapter2 of Part 2 of CTA 2009.

Section 626: Meaning of “final year”, “penultimate year” etc

1961.This section defines a number of the terms used in the Chapter. It is based on sections 6(4), 342(1) and 342A(1) of ICTA.

Section 627: Meaning of “rate of corporation tax” in case of companies with small profits

1962.This section defines “rate of corporation tax” for companies with small profits subject to this Chapter. It is based on section 342(2) and (3) and section 342A(2) and (3) of ICTA.

Section 628: Company in liquidation: corporation tax rates

1963.This section sets out the corporation tax rates that are to be applied in the final or penultimate year of the liquidation period of a company that is being wound up. It is based on section 342(2), (3) and (8) of ICTA.

1964.If the rates of corporation tax have been either fixed or proposed for the final year or the penultimate year then the proposed or fixed rates are to be used. Accordingly in the vast majority of cases the normal corporation tax rates apply.

1965.Corporation tax rates are generally proposed in the PBR (Pre-Budget Report). The PBR takes place in autumn. The PBR in the autumn of Financial Year 1 proposes corporation tax rates for Financial Year 3. The same PBR proposes the rate of corporation tax for companies with small profits and fractions for Financial Year 2. The associated Finance Act usually becomes law in July of Financial Year 2. The corporation tax rates for Financial Year 3 become fixed in Financial Year 2 and the rate for companies with small profits and fractions for Financial Year 2 also become fixed in Financial Year 2.

1966.The section assists liquidators seeking to finalise a company’s liability in advance of a formal winding up by setting out the rates to be used even in those rare cases where corporation tax rates have not been fixed at the time when a liquidator wishes to make an assessment to tax.

Section 629: Company in liquidation: making of assessment to tax

1967.This section enables a liquidator to make a corporation tax self-assessment for an accounting period that has not finished. It is based on section 342(4), (5) and (6) of ICTA.

1968.In normal circumstances it is not possible to make a corporation tax self-assessment before the end of an accounting period. In the majority of instances the profits for the period are not known in advance and the relevant corporation tax rates may not have been fixed.

1969.Liquidators may seek to finalise a company’s liability to corporation tax in advance of the completion of a formal winding up. This section enables the liquidator to do so by making a corporation tax self-assessment before the end of an accounting period.

1970.The rules about accounting periods for companies being wound up are in section 12 of CTA 2009 (see in particular subsection (3)).

Section 630: Company in administration: corporation tax rates

1971.This section sets out the corporation tax rates that are to be applied in the final year and the penultimate year of an administration period that concludes with the company’s dissolution. It is based on section 342A(2), (3) and (10) of ICTA.

1972.If the rates of corporation tax have been either fixed or proposed for the final year or the penultimate year then the proposed or fixed rates are to be used. Accordingly in the vast majority of cases the normal corporation tax rates apply.

1973.The section assists administrators seeking to finalise a company’s liability in advance of an anticipated dissolution date by setting out the rates to be used even in those rare cases where corporation tax rates have not been fixed at the time when the administrator wishes to make an assessment to tax.

Section 631: Company in administration: making of assessment to tax

1974.This section enables an administrator to make a corporation tax self-assessment for an accounting period that has not finished. It is based on section 342A(6), (7) and (8) of ICTA.

1975.In normal circumstances it is not possible to make a corporation tax self-assessment before the end of an accounting period. In the majority of instances the profits for the period are not known in advance and the relevant corporation tax rates may not have been fixed.

1976.Administrators may seek to finalise a company’s liability to corporation tax in advance of an anticipated dissolution date. This section enables the administrator to do so by making a corporation tax self-assessment before the end of an accounting period.

1977.The rules about determining the end of an accounting period are in section 10 of CTA 2009 (see particularly subsection (3)).

Section 632: Meaning of rate being “fixed” or “proposed”

1978.This section defines terms used in the previous sections. It is based on section 342(7) and 342A(9) of ICTA.

Section 633: Exemption for interest on overpaid tax in final accounting period

1979.This section provides a limited exemption for interest on overpaid tax received or paid in the final accounting period. It is based on sections 342(3A) and 342A(4), (5) of ICTA.

1980.The rules about accounting periods for companies being wound up are in section 12 of CTA 2009 (see in particular subsection (4)).

Chapter 6: Banks etc in compulsory liquidation
Overview

1981.This Chapter deals with the taxation of banks in compulsory liquidation. It is based on Schedule 12 to F(No 2)A 1992.

Section 634: Overview of Chapter

1982.This section gives an overview of the Chapter. It is new.

Section 635: Application of Chapter

1983.This section sets out the conditions that a company must meet in order for the Chapter to apply. It is based on paragraph 1 of Schedule 12 to F(No 2)A 1992.

1984.Subsection (6) refers to an EEA firm with permission under paragraph 15 of Schedule 3 to FISMA. The source qualified this by adding “(as a result of qualifying for authorisation by virtue of paragraph 12 of that Schedule)”. This qualification is considered unnecessary as the only way in which permission under paragraph 15 may be given is by virtue of paragraph 12. These words are therefore repealed without replacement.

Section 636: Charge to corporation tax on winding up receipts

1985.This section charges amounts received during the winding up period. It is based on paragraph 3(1), (1A), (2) and (3) of Schedule 12 to F(No 2)A 1992.

Section 637: Transfer of rights to payment

1986.This section charges sums received in respect of transfers of rights as if those sums were winding up receipts. It is based on paragraph 5 of Schedule 12 to F(No 2)A1992.

1987.In the case of a non-arm’s length transaction the source provided that market value was to be substituted for the consideration received. However, the tax charge was based on amounts received. In relation to the deemed amounts arising from non-arm’s length transactions the source,therefore, stated that “references … to sums received shall be construed accordingly.”

1988.Although the meaning was not in doubt the source was not as clear as it might have been. In the rewritten section a slightly different approach is adopted by explicitly treating the value of transferred rights as winding up receipts.

Section 638: Allowable deductions

1989.This section provides rules for setting allowable deductions against winding up receipts. It is based on paragraph 4 of Schedule 12 to F(No 2)A 1992.

Section 639: Election to carry back

1990.This section gives a company the right to elect to carry back a winding up receipt to the date that the business ceased. It is based on paragraph 6 of Schedule 12 to F(No 2)A 1992.

Section 640: Relationship of Chapter with other corporation tax provisions

1991.This section gives priority to a charge under this Chapter over potential charges arising under other provisions. It is based on paragraph 3(4) and (5) of Schedule 12 to F(No 2)A 1992.

Section 641: Interpretation of Chapter

1992.This section sets out a number of definitions and interpretations relevant to the Chapter. It is based on paragraph 2 of Schedule 12 to F(No 2)A 1992.

Chapter 7: Co-operative housing associations
Overview of Chapter

1993.This Chapter rewrites section 488 of ICTA. It provides tax rules forco-operative housing associations and an approvals process that underpins those rules. The approvals process has been modified significantly for Scotland and Wales as a result of devolution. The rewritten legislation incorporates these effects.

Section 642: Disregard of rent from members and of interest payable

1994.This sectionprovides that, where an approved housing association makes a claim, any rent that it receives from its members is ignored for tax purposes and any interest that it pays is treated by the association as not payable. It is based on section 488(1) and (2) of ICTA.

1995.The source legislation is based on tax years, but as these bodies are subject to corporation tax it is more appropriate to operate on the basis of accounting periods. Moving to this basis also brings the disregard of rent and interest into line with the chargeable gains exemption in section 643. See Change 46 in Annex 1.

Section 643: Exemption for gains on a sale of property

1996.This section exempts an approved housing association from corporation tax on gains on sales of property to its members. It is based on section 488(5) of ICTA.

Section 644: Approval of housing associations

1997.This section sets out the process by which housing associations are approved for the purposes of this Chapter. It is based on section 488(6) and (7) of ICTA.

1998.Since section 488 of ICTA was enacted, a number of changes to the approvals regime have been made as a result of devolution.

1999.Specified functions have been transferred:

  • to the Scottish Ministers by the Scotland Act 1998 (Transfer of Functions to the Scottish Ministers etc) Order 2004 (SI 2004/2030), articles2(1) and 3; and

  • to the Welsh Ministers by the National Assembly for Wales (Transfer of Functions) Order 1999 (SI 1999/672), article 2 and Schedule 1 and by the Government of Wales Act2006,paragraphs 30(1) and (2) of Schedule 11.

2000.The effects of these modifications are included explicitly in this Chapter.

2001.In order to reflect changes in the responsibilities of the Department of the Environment and the Department for Social Development, the approvals process for Northern Ireland refers to the Department for Social Development instead of the Head of the Department of the Environment for Northern Ireland. See Change 47 in Annex 1.

2002.Subsection (4) provides a signpost to a saving provision in Schedule 2 concerning the concurrent exercise of these functions in relation to Wales by the Secretary of State and the Welsh Ministers where the association is a “cross-border body”.

Section 645: Tests to be satisfied by the association

2003.This section sets out the tests which housing associations have to satisfy in order to be approved for the purposes of this Chapter. It is based on section 488(6) of ICTA.

2004.As mentioned in relation to section 644, since section 488 of ICTA was enacted, a number of changes to the approvals regime have been made as a result of devolution.

2005.So far as exercisable in relation to Wales, the functions under section 488(6) have been transferred to the Welsh Ministers by the National Assembly for Wales (Transfer of Functions) Order 1999 (SI 1999/672), article 2 and Schedule 1 and by the Government of Wales Act 2006, paragraphs 30(1) and(2) of Schedule 11.

2006.Article 5 of the Scotland Act 1988 (Transfer of Functions to the Scottish Ministers etc) Order 2004 (SI 2004/2030) amended section 488(6)(iii). The effect of the amendment on the approvals process for Northern Irelandis discussed inChange 47 in Annex 1.

Section 646: Delegation of powers to the Regulator of Social Housing

2007.This section permits the Secretary of State’s functions under section 644 or 645 to be delegated to the Regulator of Social Housing. It is based on section 488(7A) of ICTA.

2008.The Housing and Regeneration Act 2008 established the Regulator of Social Housing in place of the Housing Corporation as the body responsible for regulating social housing in England. This section incorporates the prospective amendments made by paragraph 13 of Schedule 9 to the Housing and Regeneration Act 2008 which come into force from a day to be appointed by Order (section 325(1) of that Act). Until the Order is made this section is subject to the provisions for co-operative housing associations and self-build societies in Schedule 2.

Section 647: Claims under section 642 or 643

2009.This section sets out the conditions that must be met for a claim under section 642 or 643 to be made. It is based on section 488(9), (10) and (11) of ICTA.

2010.Claims under the source legislation in relation to rent and interest are based on tax years, but as these bodies are subject to corporation tax it is more appropriate to operate on the basis of accounting periods. Moving to this basis also brings those claims into line with the claim for the chargeable gains exemption in section 643. See Change 46 in Annex 1.

Section 648: Adjustments of liability

2011.This section sets out how adjustments to an association’s corporation tax liability may be made as a result of a claim or an amendment of a claim. It is based on section 488(4) and (11A) of ICTA.

2012.Adjustments under the source legislation as a result of claims in relation to rent and interest may be based on tax years or accounting periods, but as these bodies are subject to corporation tax it is more appropriate to operate on the basis of accounting periods. See Change 46 in Annex 1.

Section 649: Power to make further provision

2013.This section sets out the power to make further provision by statutory instrument or, in Northern Ireland, by statutory rule. It is based on section 488(8) of ICTA.

2014.Powers to make regulations under this provision in relation to Wales were transferred to the Welsh Ministers by the National Assembly for Wales (Transfer of Functions) Order 1999 (SI 1999/672), article 2 and Schedule 1 and by the Government of Wales Act 2006, paragraphs 30(1) and (2) of Schedule 11.

2015.In order to reflect changes in the responsibilities of the Department of the Environment and the Department for Social Development,the powers to make regulations under this provision for the purposes of housing associations in Northern Ireland refer to the Department for Social Development rather than the Head of the Department of the Environment for Northern Ireland. See Change 47 in Annex 1.

Chapter 8: Self-build societies
Overview of Chapter

2016.This Chapter rewrites section 489 of ICTA. It provides tax rules for self-build societies and an approvals process that underpins those rules. The approvals process has been modified significantly for Wales as a result of devolution. The draft legislation incorporates these effects on the face of the legislation.

Section 650: Meaning of “self-build society”

2017.This section sets out the meaning of “self-build society” for the purposes of the Chapter. It is based on section 489(11) of ICTA.

Section 651: Disregard of rent from members

2018.This section sets out that where a self-build society is approved and makes a claim, any rent that it receives from its members is ignored for tax purposes. It is based on section 489(1) and (11) of ICTA.

2019.The source legislation is based on tax years, but as these bodies are subject to corporation tax it is more appropriate to operate on the basis of accounting periods. Moving to this basis also brings the disregard for rent into line with the chargeable gains exemption in section 652. See Change 46 in Annex 1.

Section 652: Exemption for gains on disposals of land to members

2020.This section exempts an approved society from corporation tax on chargeable gains on sales of property to its members. It is based on section 489(3) of ICTA.

Section 653: Approval of self-build societies

2021.This section sets out the process by which self-build societies become approved for the purposes of this Chapter. It is based on section 489(4), (5) and (12) of ICTA.

2022.Approvals under this section for self-build societies in Wales have been transferred to the Welsh Ministers by article 2 of and Schedule 1 to the National Assembly for Wales (Transfer of Functions) Order 1999 (SI 1999/672), and paragraphs 30(1) and (2) of Schedule 11 to the Government of Wales Act 2006.The effects of these modifications are included explicitly in this Chapter.

2023.In order to reflect changes in the responsibilities of the Department of the Environment and the Department for Social Development, the approvals process for Northern Ireland refers to the Department for Social Development instead of the Department of the Environment for Northern Ireland. See Change 47 in Annex 1.

2024.Subsection (5) provides a signpost to a saving provision in Schedule 2 concerning the concurrent exercise of these functions in relation to Wales by the Secretary of State and the Welsh Ministers where the society is a “cross-border body”.

Section 654: Delegation of powers to the Regulator of Social Housing

2025.This section permits the Secretary of State’s functions under section 653 to be delegated to the Regulator of Social Housing. It is based on section 489(5A) of ICTA.

2026.The Housing and Regeneration Act 2008 established the Regulator of Social Housing in place of the Housing Corporation as the body responsible for regulating social housing in England. This section incorporates the prospective amendments made by paragraph 14 of Schedule 9 to the Housing and Regeneration Act 2008 which come into force from a day to be appointed by Order (section 325(1) of that Act). Until the Order is made this section is subject to the provisions for co-operative housing associations and self-build societies in Schedule 2.

Section 655: Claims under section 651 or 652

2027.This section sets out the conditions that must be met for a claim under section 651 or 652 to be made. It is based on section 489(7) to (10) of ICTA.

2028.Claims under the source legislation in relation to rent are based on tax years, but as these bodies are subject to corporation tax it is more appropriate to operate on the basis of accounting periods. Moving to this basis also brings those claims into line with the claim for the chargeable gains exemption in section 652. See Change 46 in Annex 1.

Section 656: Adjustments of liability

2029.This section sets out how adjustments to a society’s corporation tax liability may be made as a result of a claim or an amendment of a claim. It is based on section 489(2) and (9A) of ICTA.

2030.Adjustments under the source legislation as a result of claims in relation to rent may be based on tax years or accounting periods, but as these bodies are subject to corporation tax it is more appropriate to operate on the basis of accounting periods. See Change 46 in Annex 1.

Section 657: Power to make further provision

2031.This section sets out the power to make further provision by statutory instrument or, in Northern Ireland, by statutory rule. It is based on section 489(6) and (12) of ICTA.

2032.Powers to make regulations under this provision for the purposes of self-build societies in Wales were transferred to the Welsh Ministers by the National Assembly for Wales (Transfer of Functions) Order 1999 (SI 1999/672), article 2 and Schedule 1 and by the Government of Wales Act 2006, paragraphs 30(1) and (2) of Schedule 11.

2033.In order to reflect changes in the responsibilities of the Department of the Environment and the Department for Social Development,powers to make regulations under this provision for the purposes of self-build societies in Northern Irelandrefer to the Department for Social Development instead of the Head of the Department of the Environment for Northern Ireland. See Change 47 in Annex 1.

Chapter 9: Community amateur sports clubs
Overview

2034.This Chapter provides for the registration of community amateur sports clubs (CASCs) and exemptions from tax of registered clubs. It is based on Schedule 18 to FA 2002.

2035.Paragraph 9 of that Schedule has not been rewritten in this Chapter.

2036.Paragraph 9(1) is merely a signpost to Chapter 2 of Part 8 of ITA (gift aid) which treats a registered club as a charity (see section 430 of ITA). Paragraph 9(1) is not rewritten as it is unnecessary.

2037.The remaining provisions of paragraph 9 are rewritten in this Act by amending the provisions of IHTA, TCGA and CAA to which they cross–refer. See Schedule 1.

Section 658: Meaning of “community amateur sports club” and “registered club”

2038.This section sets out the three qualifying conditions which must be met for a club to be entitled to be registered as a CASC and be able to obtain an exemption from tax on relevant income or gains. It is based on paragraphs 1, 11(1) to (3) and (5) and 15(2) of Schedule 18 to FA 2002.

2039.In subsections (2) to (4) there is a reference to “an officer of Revenue and Customs”. This is a change from the source legislation in Schedule 18 to FA 2002 where the reference is to “the Inland Revenue” which is a reference to “the Board” under paragraph 15(2) of Schedule 18 to FA 2002. See Change 5 in Annex 1.

2040.There is also a change in the words used in subsection (5). In this case the change is to replace a reference to “Inland Revenue” which is a reference to “the Board” under paragraph 15(2) in the source legislation witha reference to “Her Majesty’s Revenue and Customs” for the publication of the names and addresses of clubs.See Change 5 in Annex 1.

Section 659: Meaning of “open to the whole community”

2041.This section defines the term “open to the whole community”, which is the first of the qualifying conditions for being a registered club. It is based on paragraph 2 of Schedule 18 to FA 2002.

Section 660: Meaning of “organised on an amateur basis”

2042.This section defines the term “organised on an amateur basis”, which is the second of the qualifying conditions for being a registered club. It is based on paragraph 3 of Schedule 18 to FA 2002.

2043.“Match officials” in subsection (4)(h) includes coaches.

2044.This section does not rewrite the requirement in paragraph 3 of Schedule 18 to FA 2002 for certain formalities to apply if a club member supplies goods or services to the club or is employed by the club. See Change 48 in Annex 1.

Section 661: Meaning of “eligible sport”, “qualifying purposes” etc

2045.This section sets out the definitions of “eligible sport”, “qualifying purposes”, “non-qualifying purposes” and “non-qualifying expenditure” specific to this Chapter. It is based on paragraphs 8(1) and (7), 14(1), and 16 of Schedule 18 to FA 2002.

2046.There is an additional definition for “non-qualifying expenditure” which is implicit in the source legislation but this is now made explicit in the rewritten legislation.

2047.This section omits the provision in paragraph 14(2) of Schedule 18 to FA 2002 that a Treasury order designating a sport as an “eligible sport” is subject to annulment in pursuance of a resolution of the House of Commons. That provision is unnecessary as this Act contains general provisions to the same effect in section 1171.

Section 662: Exemption for UK trading income

2048.This section provides for the trading income of a registered club to be exempt from tax if the relevant conditions are met. It is based on paragraph 4 of Schedule 18 to FA 2002.

Section 663: Exemption for UK property income

2049.This section provides for the property income of a registered club to be exempt from tax if the relevant conditions are met. It is based on paragraph 6 of Schedule 18 to FA 2002.

Section 664: Exemption for interest and gift aid income

2050.This section provides for the interest and gift aid income of a registered club to be exempt from tax if the relevant conditions are met. It is based on paragraph 5 of Schedule 18 to FA 2002.

2051.Subsection (2) provides that if a club is registered for only part of an accounting period, that part is treated as a separate accounting period and the club’s interest income for that separate period is proportionately reduced. This approach follows that of the source legislation.

2052.In subsection (3) thedefinition of “gift aid income” now relies on Chapter 2 of Part 8 of ITA rather than section 25(10) of FA 1990 (see paragraph 5(3)(b) of Schedule 18 to FA 2002). Paragraph 5(4) of that Schedule is not now necessary because section 430 of ITA itself includes CASCs within the definition of charities for the purposes of gift aid.

Section 665: Exemption for chargeable gains

2053.This section provides for the chargeable gains of a registered club to be exempt from tax. It is based on paragraphs 7 and 16 of Schedule 18 to FA 2002.

Section 666: Exemptions reduced if non-qualifying expenditure incurred

2054.This section provides for exemptions to be restricted if the club incurs expenditure for non-qualifying purposes. It is based on paragraphs 8 and 16 of Schedule 18 to FA 2002.

2055.The reference to “income receipts” replaces the reference in paragraph 8 to “income (whether taxable or not and before deduction of expenses)”.

2056.Paragraph 8(5) of Schedule 18 to FA 2002 provides a formula to ascertain the relevant surplus amount of non-qualifying expenditure. This is unpacked and set out in narrative form.

Section 667: Rules for attributing surplus amount to earlier periods etc

2057.This section supplements section 666. It is based on paragraph 8(5) to (8) of Schedule 18 to FA 2002.

Section 668: How income and gains are attributed

2058.This section provides that a club may specify or be required to specify how the exempted income and gains are to be reduced in accordance with section 666. It is based on paragraphs 8(9) and 15(1) of Schedule 18 to FA 2002.

Section 669: Asset ceasing to be held for qualifying purposes etc

2059.This section provides that the exemption for chargeable gains on assets is not available if the club ceases to be registered or to hold the asset for qualifying purposes. It is based on paragraphs 10 and 16 of Schedule 18 to FA 2002.

2060.Paragraph 10 of Schedule 18 to FA 2002 refers to “property” but TCGA refers to disposals of “assets”. Consequently, the section refers to disposals of “assets” for the purposes of TCGA rather than disposals of “property”.

2061.Subsections (5) and (6) separate and clarify the process for making assessments and the time limit for doing so. These are dealt with together in paragraph 10(3) of Schedule 18 to FA 2002.

Section 670: Notification of HMRC decision

2062.This section provides for the notification of the decision by HMRC for registering a club, the refusal to register a club and the cancellation of the registration of a club. It is based on paragraphs 11(4) and 15(2) of Schedule 18 to FA 2002.

2063.Reference to “the Inland Revenue”, which is a reference to “the Board” under paragraph 15(2) in the source legislation,is replaced with a reference to “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Section 671: Appeals

2064.This section sets out the provisions relating to appeals against decisions concerning a club’s application or registration. It is based on paragraphs 13 and 15 of Schedule 18 to FA 2002.

2065.In subsections (1), (5) and (6), reference to “the Inland Revenue”,which is a reference to “the Board” under paragraph 15(2) in the source legislation, has been replaced with a reference to “an officer of Revenue and Customs”. See Change 5in Annex 1.

Part 14: Change in company ownership

Overview

2066.Sections 767A to 769 of, and Schedule 28A to, ICTA have been enacted and amended piecemeal over many years; what is now section 768 of ICTA made its first appearance as section 30(1) to (4) of FA 1969 and paragraphs 8 to 10 of Schedule 15 to that Act. The structure of the legislation is tight and intricate – see, for example, section 768C(5).

2067.The opportunity has been taken to restructure the source legislation to make it easier for users to navigate. In summary, this Part of the Act has the following structure.

2068.Chapter 1 provides a bird’s eye view of the Part.

2069.Chapter 2 disallows trading losses in defined situations. It applies both to companies with investment business and to companies without investment business. It is based on sections 768 and 768A of ICTA.

2070.Chapters 3 and 4 apply to companies with investment business. They impose restrictions on corporation tax relief. Chapter 3 provides the general rules and Chapter4 deals with special circumstances involving the transfer of an asset within a corporate group. Chapter 3 is chiefly based on sections 768B, 768D and 768E of ICTA and paragraphs 1 to 9A of Schedule 28A to that Act. Chapter 4 is based on sections 768C to 768E of, and paragraphs 10, 10A and 13 to 17 of Schedule 28A to, ICTA.

2071.Chapter 5 applies to companies without investment business. It disallows property losses. It is based on section 768D of ICTA.

2072.Chapter 6 is concerned with recovery of unpaid corporation tax. It is based on sections 767A to 767B of ICTA.

2073.Chapter 7 defines the key expression “change in the ownership of a company” for the purposes of the Part. It is based on section 769 of ICTA.

2074.Chapter 8 is supplementary.

Chapter 1: Introduction
Section 672: Overview of Part

2075.This section introduces the Part. It is new.

2076.Subsection (6) signposts the Chapter on recovery of unpaid corporation tax due from non-UK resident companies. It is similar to Chapter 6, but is not located in this Part because it applies whether or not there is a change in company ownership.

2077.Subsection (7) signposts three important definitions.

Chapter 2: Disallowance of trading losses
Overview

2078.Chapter 2 is the first of four Chapters dealing with variations on the theme of “loss buying”.

2079.Companies can obtain corporation tax relief for various expenses and losses in different periods from the periods in which the expenses or losses arise. They can,however, only turn these reliefs into a reduction in tax liability if they have taxable profits against which the expenses or losses can be set. The shareholders of an unsuccessful company might therefore wish to monetise these tax reliefs by selling the company to people who might be able to make use of them. Sections 768 to 768E of, and Schedule 28A to, ICTA are directed against such “loss buying”.

2080.This Part of the Act does not deal with the buying in of group relief. Section 142, which is based on section 403A(9) and (10) of ICTA, prevents companies claiming group relief in relation to expenses and losses arising before a company joined the group.

2081.The loss buying provisions of TCGA are outside the scope of this Act. See, however, the commentary on section 694.

Section 673: Introduction to Chapter

2082.This section introduces the Chapter. It is based on sections 6, 768, 768A and 834 of ICTA.

2083.Subsections (1) to (3) lay down the conditions for the Chapter to apply.

2084.Subsection (2) omits as otiose the words “either earlier or later in the period, or at the same time” in sections 768(1) and 768A(1) of ICTA.

2085.Section 767A(4)(b) of ICTA refers to a “significant revival” of activities; sections 768(1)(b) and 768B(1)(c) of ICTA refer to a “considerable revival” of a trade or business. Sections 768(1)(b) and 768B(1)(c) contrast “considerable” with “small or negligible”; in section 767A(4)(b), the contrast is not only with “small or negligible” but also with cessation. The rewrite of these provisions eliminates this variation by consistently using “significant” in subsection (3)and sections 677(2) and (4), 704(3) and 705(3).

2086.Subsection (4) defines, non-exhaustively, “major change in the nature or conduct of a trade”. The phrase “major change” has been retained in this definition, because there is case law on it: Willis v Peeters Picture Frames Ltd(1982), 56 TC 436 CA(NI)(3) and Purchase v Tesco Stores Ltd (1984), 58 TC 46 HC.(4) For the same reason, the phrase “major change” has also been retained in the similar definitions in sections 677(5), 704(10) and 705(9).

2087.Subsection (5) defines “the change in ownership”, “the company” and “trade” for the purposes of this Chapter. It defines “trade” to include an office, but does not define “trade” to include “vocation”. This is a minor change in the law. See Change 4 in Annex 1.

Section 674: Disallowance of trading losses

2088.This section restricts relief for trading losses in cases in which this Chapter applies. It is based on sections 768 and 768A of ICTA.

2089.Subsection (1) restricts relief under sections 37 and 42(relief for trade losses). It is aimed at the abuse known as “profits buying” or “loss capacity buying” whereby a trading company with large profits is sold to new owners who feed new activities into the trade which result in heavy initial losses for which early relief would not otherwise be available. The price paid to the old owners would reflect the tax benefit expected to accrue to the new owners.

2090.Subsection (2) restricts relief under section 45(carry forward of trade loss against subsequent trade profits).

2091.Section 768(1) of ICTA refers to “relief … given under section 393 [of that Act] by setting a loss incurred by the company … against any income or other profits …”. But section 393 of ICTA only gives relief for losses against “trading income” (as defined in section 393(8) of that Act). The reference to “other profits” is a missed consequential amendment. The words should have been omitted when FA1991 replaced section 393(2) of ICTA with section 393A of ICTA. Subsection (2) of this section therefore omits the reference to “other profits”.

2092.Section 768(3) of ICTA provides:

The apportionment under subsection (2) above shall be on a time basis according to the respective lengths of those parts except that if it appears that that method would work unreasonably or unjustly such other method shall be used as appears just and reasonable. (emphasis added)

2093.Subsection (5) omits the first instance of “appears” in section 768(3) of ICTA for the sake of consistency with sections 685(3) and 702, which are based on paragraphs 8 and 17 respectively of Schedule 28A to ICTA, and sections 704(7) and 705(7), which are based on section 768D(4) of ICTA. It also omits the second instance of “appears” in section 768(3) of ICTA to sharpen the drafting.

Section 675: Disallowance of trading losses: calculation of balancing charges

2094.This section prevents double taxation in cases in which this Chapter applies. It is based on section 768 of ICTA.

2095.If section 674(2) restricts relief for trading losses carried forward under section 45, the underlying computations of capital allowances are not affected, because the trade itself does not cease. This means that if, at the time of the change of ownership, a company owns assets on which capital allowances have been given, it can be effectively penalised twice by:

  • disallowance of any unused capital allowances included in the losses disallowed; and

  • a balancing charge when the assets are disposed of.

2096.Subsections (2) and (3) solve this problem. If an extinguished loss includes unallowed capital allowances, those capital allowances are treated as not having been given when calculating the balancing charges on an asset owned at the date of the change in ownership and disposed of later.

2097.Subsection (4) sets an identification rule. If, in any period, both losses and capital allowances were available for setting against profits, capital allowances are treated as set off before other losses. As requested by respondents, we have sharpened the drafting of this subsection.

2098.Section 768(6) and (7) of ICTA use the expression “allowance or deduction”. Since “or deduction” adds nothing to “allowance”, subsections (2) to (4) omit “or deduction” as otiose.

Section 676: Disallowance of trading losses where company reconstruction without change in ownership

2099.This section deals with the interaction between sections 674(2) and 944(3). It is based on section 768 of ICTA.

2100.When a trade is transferred from a predecessor company to a successor company, and the relevant conditions are met for a company reconstruction without a change in ownership, section 944(3) provides for the successor to be entitled to relief under section 45 for a trading loss made by the predecessor. Section 674(2) restricts relief under section 45 if there is a change in company ownership. If there is both a company reconstruction without a change in ownership (such that section 944(3) applies) and, separately, a change in ownership (such that section 674(2) applies), then this section extends section 674(2) to restrict relief given under section 944(3).

2101.Section 768(5) of ICTA refers to “section 343” of that Act. But section 768(5) only operates on section 768(1) of ICTA, and section 768(1) only restricts relief under section 393 of that Act. The only provision of section 343 of ICTA which gives relief under section 393 of that Act is section 343(3).This section refers precisely to section 944(3), which is based on section 343(3) of ICTA.

Chapter 3: Company with investment business: restrictions on relief: general provision
Overview

2102.Chapter 3 is the second of four Chapters dealing with various kinds of loss buying. It has the following structure.

  • Section 677 (introduction) lays down the conditions for the Chapter to apply and defines some key terms.

  • If the Chapter applies, section 678 (notional split of accounting period in which change in ownership occurs) sets the stage. It splits the period in which the change in ownership occurs into two notional accounting periods, and indicates that certain amounts need to be apportioned between these two periods.

  • Sections 679 to 684 are a group of six sections restricting various kinds of corporation tax relief. If, having reviewed them, the reader is satisfied that in the case under review these sections make no practical difference, the reader is able to conclude that there is in practice no need to make the apportionments required by section 678.

  • Sections 685 and 686 are the detailed rules for making apportionments of amounts for the purposes of this Chapter.

  • Section 687 provides for the adjustment of balancing charges in certain cases in which corporation tax relief is restricted.

  • Sections 688 to 691 define “significant increase in the amount of a company’s capital”.

Section 677: Introduction to Chapter

2103.This section introduces the Chapter. It is based on sections 768B, 768D and 768E of ICTA. If, having read this section, the reader is satisfied that the conditions for this Chapter to apply are not met, the reader need read no further in this Chapter.

2104.Subsections (1) to (4) lay down the conditions for the Chapter to apply.

2105.Subsection (1) is based on, among other things, section 768D(1)(a)(i) of ICTA. Unlike section 768D(1) of ICTA, subsection (1) does not refer to a change in the ownership of a company carrying on a UK property business; it refers to a change in the ownership of a company with investment business. The reason is that, if section 768D(1)(a)(i) of ICTA applies, then:

  • There is a change in the ownership of a company carrying on a UK property business (see the opening words of section 768D(1)); and

  • The company whose ownership has changed is a company with investment business (see the opening words of section 768D(1)(a)).

2106.Accordingly, if section 768D(1)(a)(i) of ICTA applies, there is by implication a change in the ownership of a company with investment business. There is therefore no need for section 768D(1)of ICTA to pick up the opening words of section 768B of that Act.

2107.Subsection (5) defines, non-exhaustively, “major change in the nature or conduct of a business”.

Section 678: Notional split of accounting period in which change in ownership occurs

2108.This section deems the accounting period in which the change in ownership occurs to be split into two notional accounting periods for the purposes of this Chapter. It is based on sections 768B, 768D and 768E of ICTA.

2109.Subsection (3) requires amounts for the actual accounting period to be apportioned between the two notional accounting periods in accordance with section 685.

Section 679: Restriction on debits to be brought into account

2110.This section restricts debits on the company’s loan relationships in cases in which this Chapter applies. It is based on section 768B of ICTA and paragraph 9 of Schedule 28A to that Act.

2111.This section is the first of a group of six sections (sections 679 to 684) imposing restrictions on corporation tax relief. The first four of these sections restrict reliefs given by CTA 2009, and are arranged in the order in which those reliefs appear in that Act. The fifth and sixth of those sections restrict relief for property business losses, and are arranged in the order in which those reliefs appear in Chapter 4 of Part 4 of this Act.

2112.Section 574 of CTA 2009 provides that non-trading credits and debits from derivative contracts are to be brought into account as if they were non-trading credits or non-trading debits for the purposes of Part 5 of CTA 2009 in respect of loan relationships of the company. The reference to that section in section 768B(10) of ICTA is otiose. Subsection (1) therefore omits it.

2113.Subsections (2) to (4) set out the consequences of the apportionment made under section 678.

2114.“Relevant non-trading debits” in subsections (2) and (3) translates “debitsfalling within paragraph 11 below” in paragraph 9(2) of Schedule 28A to ICTA. Subsection (5) tells the reader where this expression is defined.

Section 680: Restriction on the carry forward of non-trading deficit from loan relationships

2115.This section restricts relief for the company’s non-trading deficit on its loan relationships in cases in which this Chapter applies. It is based on section 768B of, and paragraph 9A of Schedule 28A to, ICTA.

2116.Debits and deficits have different functions in the loan relationships regime, therefore this Chapter imposes different restrictions on them.

2117.Section 574 of CTA 2009 provides that non-trading credits and debits from derivative contracts are to be brought into account as if they were non-trading credits or non-trading debits for the purposes of Part 5 of CTA 2009 in respect of loan relationships of the company. The reference to that section in section 768B(10) of ICTA is otiose. Subsection (1) therefore omits it.

Section 681: Restriction on relief for non-trading loss on intangible fixed assets

2118.This section restricts relief for the company’s non-trading loss on its intangible fixed assets in cases in which this Chapter applies. It is based on section 768E of ICTA.

2119.Subsection (3) corrects a drafting error in section 768E(5) of ICTA. This is a minor change in the law. See Change 49 in Annex 1. A similar correction is made in section 698(4).

Section 682: Restriction on the deduction of expenses of management

2120.This section restricts relief for the company’s expenses of management in cases in which this Chapter applies. It is based on section 768B of ICTA.

2121.In rewriting section 768B(6), subsection (2) inserts “as” before the second occurrence of “expenses of management”, to correct a drafting slip in paragraph 3(3)(b) of Schedule 6 to FA 2004.

2122.Section 768B(7) and (9)(b) of ICTA are not rewritten. See the commentary on the amendments made to that section by Schedule 1.

Section 683: Disallowance of UK property business losses

2123.This section restricts relief for the company’s UK property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA.

Section 684: Disallowance of overseas property business losses

2124.This section restricts relief for the company’s overseas property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA.

2125.Section 768D(9) of ICTA has to be read as implying that, in a case in which section 768D applies in relation to an overseas property business, references to section 392A of ICTA have to be read as references to the corresponding provisions of section 392B of ICTA. Otherwise section 768D of ICTA applies in such a case but does not actually do anything. This section therefore refers to section 66, which is based on section 392B of ICTA.

2126.Section 768D(5) of ICTA can have no application in relation to an overseas property business, and is therefore not rewritten in this section.

Section 685: Apportionment of amounts

2127.This section stipulates how various amounts are to be apportioned for the purposes of this Chapter. It is based on section 768E of, and paragraphs 6, 7 and 8 of Schedule 28A to, ICTA.

2128.The source legislation obliges the reader to tally sub-paragraphs of paragraph 6 of Schedule 28A to ICTA with sub-paragraphs of paragraph 7(1) of that Schedule. This is inconvenient, as the sub-paragraphs are not always in one-to-one correspondence and the legislation has been amended several times. Paragraphs 6 and 7(1) of that Schedule have therefore been rewritten in subsection (2) as a two-column table.

2129.Detailed comments on the table are given below.

RowOrigin
1 and 2Paragraphs 6(da) and 7(1)(c) of Schedule 28A to ICTA. In rows 1 and 2, the opportunity has been taken to deal with profits and deficits separately.
3Paragraphs 6(db) and 7(1)(d)(i) and (e)(i) of Schedule 28A to ICTA.
4Paragraphs 6(dc) and 7(1)(b) of Schedule 28A to ICTA.
5Paragraphs 6(de) and 7(1)(g) of Schedule 28A to ICTA.
6Paragraphs 6(df) and 7(1)(h) of Schedule 28A to ICTA.
7Paragraphs 6(a) and 7(1)(a) of Schedule 28A to ICTA.
Paragraphs 6(b) and 7(1)(aa) of Schedule 28A to ICTA are repealed as obsolete. See the commentary on the amendments made to section 768B of ICTA by Schedule 1.
8Paragraphs 6(c) and 7(1)(b) of Schedule 28A to ICTA.
9Paragraphs 6(d) and 7(1)(c) of Schedule 28A to ICTA.
10Paragraphs 6(e) and 7(1)(c) of Schedule 28A to ICTA.

2130.In rewriting paragraph 8 of Schedule 28A to ICTA, subsection (3) omits both instances of “appears”. See the commentary on section 674.

Section 686: Meaning of certain expressions in section 685

2131.This interpretative section is based on paragraphs 6, 6A and 7 of Schedule 28A to ICTA. The subsections of this section are arranged in the order of the rows to which they refer in the table in section 685(2).

Section 687: Adjustment to balancing charges if relief is restricted

2132.This section prevents double taxation in certain cases within sections 679, 680 and 682. It is based on sections 768 and 768B of ICTA.

2133.This section has the same function in this Chapter as section 675 has in Chapter 2. See the commentary on that section.

2134.Section 574 of CTA 2009 provides that non-trading credits and debits from derivative contracts are to be brought into account as if they were non-trading credits or non-trading debits for the purposes of Part 5 of that Act in respect of loan relationships of the company. The reference to that section in section 768B(13) of ICTA is otiose. Subsection (2) therefore omits it.

2135.Section 768(6) and (7) of ICTA use the expression “allowance or deduction”. Since “or deduction” adds nothing to “allowance”, subsections (4) to (6) omit “or deduction” as otiose.

Section 688: Meaning of “significant increase in the amount of a company’s capital”

2136.This section is the first of a group of four sections which together define “significant increase in the amount of a company’s capital” for the purposes of condition A in section 677(2). It is based on paragraphs 1 and 2 of Schedule 28A to ICTA.

Sections 689 and 690: Amount A; amount B

2137.Theseinterpretative sectionsare based on paragraphs 3 and 4 of Schedule 28A to ICTA.

Section 691: Meaning of “amount of capital”

2138.This interpretative section is based on paragraph 5 of Schedule 28A to ICTA.

2139.In paragraph 5(1) of Schedule 28A to ICTA, “the capital of a company” has to be read as “the amount of the capital of a company”. Otherwise, in paragraph 3(1) of that Schedule, “the amount of the company’s capital” has to be read as “the amount of the aggregate of (a) the amount of …”. Subsection (2) makes this clear.

2140.Paragraph 5(3) of Schedule 28A to ICTA provides for amounts of capital to be rounded up to the nearest pound.Subsection (4) omits this requirement because it has no practical effect.

Chapter 4: Company with investment business: restrictions on relief: asset transferred within group
Overview

2141.Chapter 4 is the third of four Chapters dealing with various kinds of loss buying. It rewrites section 768C of ICTA and the corresponding provisions of sections 768D and 768E of ICTA.

2142.Section 768C of ICTA was inserted by FA 1995 to block the following scheme. A company is about to realise a chargeable gain on an asset. The company purchases a company with excess management expenses. Relief for these is not restricted by section 768B of ICTA, because the conditions in section 768B(1)(a) to (c) are not met. The asset is transferred to the newly purchased company at no gain/no loss under section 171 of TCGA. When the transferee company disposes of the asset and crystallises the chargeable gain, it can use its pre-acquisition management expenses to shelter the gain.

2143.Sections 768D and 768E of ICTA (inserted by FA 1998 and FA 2002 respectively) included provisions corresponding to section 768C to cover pre-acquisition property losses and pre-acquisition non-trading losses on intangible fixed assets: see sections 768D(1)(a)(ii) and 768E(1)(b).

2144.Section 768C(13) (inserted by FA 2002) extended section 768C to cover tax-neutral intra-group transfers of intangible fixed assets.

2145.Chapter 4 is similar in many respects to Chapter 3, but there are important differences of detail because, unlike Chapter3, Chapter 4 needs to cater for chargeable gains and realisation gains on intangible fixed assets.

2146.Chapter 4 has the following structure.

  • Sections 692 to 694 lay down the conditions for the Chapter to apply and define some key terms.

  • If the Chapter applies, section 695 (notional split of accounting period in which change in ownership occurs) sets the stage. It splits the period in which the change in ownership occurs into two notional accounting periods, and indicates that certain amounts need to be apportioned between these two periods.

  • Sections 696 to 701 are a group of six sections restricting various kinds of corporation tax relief. If, having reviewed them, the reader is satisfied that in the case under review these sections makes no practical difference, the reader is able to conclude that there is in practice no need to make the apportionments required by section 695.

  • Sections 702 and 703 contain the detailed rules for making apportionments of amounts for the purposes of this Chapter.

Section 692: Introduction to Chapter

2147.This section introduces the Chapter. It is based on sections 768C, 768Dand 768E of ICTA. If, having read this section, the reader is satisfied that the conditions for this Chapter to apply are not all met, the reader need read no further in this Chapter.

2148.Subsections (1) to (4) lay down the conditions for the Chapter to apply.

2149.Subsection (1) is based on, among other things, section 768D(1)(a)(ii) of ICTA. Unlike section 768D(1) of ICTA, subsection (1) does not refer to a change in the ownership of a company carrying on a UK property business; it refers to a change in the ownership of a company with investment business. The reason is that, if section 768D(1)(a)(ii) of ICTA applies, then:

  • There is a change in the ownership of a company carrying on a UK property business (see the opening words of section 768D(1)); and

  • The company whose ownership has changed is a company with investment business (see the opening words of section 768D(1)(a)).

2150.Accordingly, if section 768D(1)(a)(ii) of ICTA applies, there is by implication a change in the ownership of a company with investment business. There is therefore no need for section 768D(1)of ICTA to pick up the opening words of section 768B of that Act.

2151.Subsections (5) and (6) supplement subsection (4).

2152.Subsection (7) defines “the change in ownership”, “the company”, “non-trading chargeable realisation gain” and “the relevant gain” for the purposes of this Chapter.

Section 693: Meaning of “amount of profits which represents a relevant gain”

2153.This interpretative section is based on section 768C of ICTA.

Section 694: Meaning of “the relevant provisions”

2154.This interpretative section is based on section 768C of, and paragraph 13 of Schedule 28A to, ICTA.

2155.Paragraph (a) refers to section 8(1) of TCGA, which provides (in summary) that the chargeable gains included in a company’s total profits are its chargeable gains after deducting allowable losses. Paragraph (a) also refers to Schedule 7A to that Act. That Schedule is directed against another kind of loss buying, namely the purchase of allowable losses for the purposes of corporation tax on chargeable gains. In summary, if that Schedule bites, relief for allowable losses is restricted to the extent that (1) they accrued before the company joined the relevant group and (2) they cannot be deducted from chargeable gains accruing before that date. Defining “the relevant provisions” in this way ensures that Schedule 7A to TCGA is applied before the provisions of this Chapter are applied.

2156.The concept of “the relevant provisions” is used, in particular, in row 1 in the table in section 702(2).

2157.In a case in which section 768C of ICTA applies in relation to an asset to which Part 8 of CTA 2009 (intangible fixed assets) applies, section 768C(13)(d) of ICTA applies not only to section 768C(12) of that Act but also to paragraph 13(2) of Schedule 28A to that Act.

Section 695: Notional split of accounting period in which change in ownership occurs

2158.This section deems the accounting period in which the change in ownership occurs to be split into two notional accounting periods for the purposes of this Chapter. It is based on sections 768C, 768D and 768E of ICTA.

2159.Subsection (3) requires amounts for the actual accounting period to be apportioned between the two notional accounting periods in accordance with section 702.

Section 696: Restriction on debits to be brought into account

2160.This section restricts debits on the company’s loan relationships in cases in which this Chapter applies. It is based on section 768C of, and paragraph 10 of Schedule 28A to, ICTA.

2161.This section is the first of a group of six sections (sections 696 to 701) imposing restrictions on corporation tax relief. The first four of these sections restrict reliefs given by CTA 2009, and are arranged in the order in which those reliefs appear in that Act. The fifth and sixth of these sections restrict relief for property losses, and are arranged in the order in which those reliefs appear in Chapter 4 of Part 4 of this Act.

2162.Subsection (1) states the purpose of the section.

2163.Section 574 of CTA 2009 provides that non-trading credits and debits from derivative contracts are to be brought into account as if they were non-trading credits or non-trading debits for the purposes of Part 5 of CTA 2009 in respect of loan relationships of the company. The reference to that section in section 768C(9) of ICTA is therefore otiose. Subsection (1) therefore omits it.

2164.Subsection (2) limits the scope of the section to cases in which gains arise or accrue as discussed in the ‘overview’ paragraphs of thecommentary on this Chapter. Its inclusion here emphasises the point that the section only makes a difference in practice if there are both debits to be restricted and a gain to be sheltered by those debits.

2165.Subsections (3) to (5) set out the consequences of the apportionment made in accordance with section 702.

2166.The other five sections in this group have a similar structure.

Section 697: Restriction on the carry forward of non-trading deficit from loan relationships

2167.This section restricts relief for the company’s non-trading deficit on its loan relationships in cases in which this Chapter applies. It is based on section 768C of, and paragraph 10A of Schedule 28A to, ICTA.

2168.Debits and deficits have different functions in the loan relationships regime, therefore this Chapter imposes different restrictions on them.

Section 698: Restriction on relief for non-trading loss on intangible fixed assets

2169.This section restricts relief for the company’s non-trading loss on its intangible fixed assets in cases in which this Chapter applies. It is based on section 768E of ICTA.

2170.Subsection (2) makes it clear that section 768E(5)(b) of ICTA refers to section 768C(6) of that Act by implication. This clarification is a minor change in the law: see Change 50 in Annex 1.

2171.Subsections (4)and (5) include a minor change in the law. See Change 49 in Annex 1 and the commentary on section 681.

Section 699: Restrictions on the deduction of expenses of management

2172.This section restricts relief for the company’s expenses of management in cases in which this Chapter applies. It is based on section 768C of ICTA.

2173.Subsection (4) only operates on subsection (5). The corresponding provision in the other sections in this group operates, in each case, on the whole section.

Section 700: Disallowance of UK property business losses

2174.This section restricts relief for the company’s UK property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA.

2175.Subsection (2) makes it clear that section 768D(6)(b) of ICTA refers by implication to section 768C(6) of that Act. This clarification is a minor change in the law: see Change 50 in Annex 1.

Section 701: Disallowance of overseas property business losses

2176.This section restricts relief for the company’s overseas property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA.

2177.Section 768D(9) of ICTA has to be read as implying that, in a case in which section 768D of ICTA applies in relation to an overseas property business, references to section 392A of ICTA have to be read as references to the corresponding provisions of section 392B of that Act. Otherwise section 768D of that Act applies in such a case but does not actually do anything. Subsections (1) and (3) therefore refer to section 66, which is based on section 392B of ICTA.

2178.Subsection (2) includes a minor change in the law. See Change 50 in Annex 1 and the commentary on section 700.

Section 702: Apportionment of amounts

2179.This section stipulates how various amounts are to be apportioned for the purposes of this Chapter. It is based on sections 768C and 768E of, and paragraphs 13 to 17 of Schedule 28A to, ICTA.

2180.The source legislation obliges the reader to tally sub-paragraphs of paragraph 13(1) of Schedule 28A to ICTA with sub-paragraphs of paragraphs 15 and 16(1) of that Schedule. This is inconvenient, as the sub-paragraphs are not always in one-to-one correspondence and the legislation has been amended several times. Paragraphs 13(1), 15 and 16(1) of that Schedule have therefore been rewritten in subsection (2) as a two-column table.

2181.Detailed comments on the table are given below.

RowOrigin
1Paragraphs 13(1)(a) and 15 of Schedule 28A to ICTA.
2 and 3Paragraphs 13(1)(ea) and 16(1)(c) of that Schedule. The opportunity has been taken to deal with profits and deficits separately.
4Paragraphs 13(1)(eb) and 16(1)(d) and (e) of that Schedule.
5Paragraphs 13(1)(ec) and 16(1)(b) of that Schedule.
6Paragraphs 13(1)(ee) and 16(1)(g) of that Schedule.
7Paragraphs 13(1)(ef) and 16(1)(h) of that Schedule.
8Paragraphs 13(1)(b) and 16(1)(a) of that Schedule.
Paragraphs 13(1)(c) and 16(1)(aa) of that Schedule are repealed as obsolete. See the commentary on the amendments made to section 768B of ICTA by Schedule 1.
9Paragraphs 13(1)(d) and 16(1)(b) of  Schedule 28A.
10Paragraphs 13(1)(e) and 16(1)(c) of that Schedule.
11Paragraphs 13(1)(f) and 16(1)(c) of that Schedule.
Section 703: Meaning of certain expressions in section 702

2182.This interpretative sectionis based on paragraphs 13, 13A and 16 of Schedule 28A to ICTA.

Chapter 5: Company without investment business: disallowance of property losses
Overview

2183.Chapter 5 is the fourth of four Chapters dealing with various kinds of loss buying.

Section 704: Company carrying on UK property business

2184.This section restricts relief for UK property losses in cases in which this Chapter applies. It is based on section 768D of ICTA.

2185.Subsections (1) to (3) lay down the conditions for the section to apply.

2186.Subsection (4) states the purpose of the section. In subsection (4), “the company” has the meaning given by subsection (1).

2187.Subsection (5) deems the accounting period in which the change of ownership occurs to be two separate accounting periods. The profits or losses of the actual accounting period must then be apportioned to the two notional accounting periods in accordance with subsections (6) and (7).

2188.Subsections (8) and (9) set out the consequences of this apportionment.

2189.Subsection (10) defines “major change in the nature or conduct of a trade or UK property business”.

Section 705: Company carrying on overseas property business

2190.This section restricts relief for the company’s overseas property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA, and has a similar structure to section 704 of this Act.

2191.Section 768D(9) of ICTA has to be read as implying that, in a case in which section 768D applies in relation to an overseas property business, references to section 392A of ICTA have to be read as references to the corresponding provisions of section 392B of that Act. Otherwise section 768D of that Act applies in such a case but does not actually do anything. Subsections (4) and (8) therefore refer to section 66, which is based on section 392B of ICTA.

2192.Section 768D(5) of ICTA can have no application in relation to an overseas property business, and is therefore not rewritten in this section.

Chapter 6: Recovery of unpaid corporation tax
Overview

2193.This Chapter is based on sections 767A to 767B of ICTA.

2194.Sections 767A and 767B of ICTA were introduced by FA 1994 to counter the use of company purchase schemes to avoid the payment of corporation tax. In a typical case a profitable company is stripped of its trade or business, usually by way of transfer to another member of its group, leaving it only with sufficient cash to settle its outstanding corporation tax. The company is then sold – for a sum equivalent to a proportion of the tax outstanding – to a third party (often non-resident) who arranges for the company to participate in arrangements intended to eliminate the tax liability. On the assumption that the arrangements will be successful, the new owner then arranges for the cash to be withdrawn.

2195.If the avoidance arrangements are effective, the company has no corporation tax to pay. But if they are found to be ineffective, HMRC have little or no prospect of collecting the unpaid tax from the company, because the company is left with no funds. Sections 767A and 767B of ICTA enable HMRC to collect the unpaid corporation tax from a person linked with the company as mentioned in section 767A(2).

2196.Subsequently, alternative schemes were developed that attempted to find ways around sections 767A and 767B of ICTA. For example, as sections 767A and 767B of ICTA only applied to tax liabilities for accounting periods beginning before the change in ownership, the new schemes ensured that the tax liability crystallised in an accounting period beginning after that date. They did this by using provisions such as rollover relief that postponed the tax charge or other provisions that involved income or gains being taxed in periods other than that in which they accrued. Section 767AA of ICTA was introduced by FA 1998 to block such schemes. If it bites, HMRC can collect the unpaid corporation tax from a person linked with the company as mentioned in section 767AA(4).

2197.This Chapter has the following structure.

  • Sections 706 to 709 define some key expressions for the purposes of the Chapter.

  • Sections 710 to 712 enable HMRC to recover unpaid corporation tax for an accounting period beginning before the change in ownership. They are based on sections 767A and 767B of ICTA.

  • Sections 713 to 715 enable HMRC to recover unpaid corporation tax for an accounting period ending on or after the change in ownership. They are based on section 767AA of ICTA.

  • Sections 716 to 718 are miscellaneous provisions.

Section 706: Meaning of “linked” person

2198.This interpretative section explains when a person is “linked” to a company for the purposes of this Chapter. It is based on sections 767A and 767AA of ICTA.

2199.If the statutory conditions are met, such a person may be assessed and charged to an amount of unpaid corporation tax under section 710(2) or, as the case may be, section 713(2).

Section 707: Meaning of “control”

2200.This interpretative section is based on section 767B of ICTA.

Section 708: Rights to be attributed for the purposes of section 707

2201.This section supplements section 707. It is based on section 767B of ICTA.

Section 709: Meaning of “the relevant period”

2202.This interpretative section is based on sections 767A and 767AA of ICTA.

2203.Subsection (3) makes an exception to the general rule laid down by subsection (2). Suppose A sells a company to B without intending to avoid tax and B enters into a company purchase scheme with C: B may be liable under this Chapter but A may not. The rationale is that A can be expected to ensure, when selling the company to B, that B does not behave in a way which would trigger this Chapter, but A cannot be expected to ensure that B does not enter into arrangements with C whereby C triggers this Chapter. Subsection (3) begins “But if …” to make it clear that subsection(2) is subject to subsection (3).

Section 710: Recovery of unpaid corporation tax for accounting period beginning before change

2204.This section enables an officer of Revenue and Customs to assess and charge a linked person to an amount of unpaid corporation tax for an accounting period beginning before the change in the ownership of a company. It is based on section 767A of ICTA.

2205.Section 767A(1) of ICTA gives this assessment function to “the Board”, ie to the Commissioners for HMRC. In practice, the Commissioners delegate this function to officers of Revenue and Customs, and subsections (1) and (2) reflect this. This is a minor change in the law. See Change 5 in Annex1. In practice, the administration of sections 767A and 767AA of ICTA and the provisions which supplement them is restricted to a specialist group of officers. Change 5 has no effect on this practice.

2206.Like the source legislation, subsection (2) provides that “[a person]… may be assessed …”. This gives officers the power, but not the obligation, to assess linked persons, and therefore allows HMRC to exercise managerial discretion.

Section 711: Conditions relating to company’s trade or business

2207.This section lists three conditions which relate to the company’s trade or business; if none of these conditions is met, section 710 does not apply. This section is based on sections 767A and 767B of ICTA.

2208.The meaning of “connected” in subsection (5) is given by section 1176(1). Section 767B(9) of ICTA is therefore not rewritten as a separate proposition.

Section 712: Meaning of “a major change in the nature or conduct of a trade or business”

2209.This interpretative section is based on section 767B of ICTA.

2210.Section 767B(7) of ICTA refers to section 245 of that Act. In repealing section 245 of ICTA, FA 1998 inadvertently omitted to make the necessary consequential amendment to section 767B(7) of ICTA.

2211.As it stood before its repeal, section 245(4)(a) of ICTA read:

In subsection (1) above “a major change in the nature or conduct of a trade or business” includes –

(a)

a major change in the type of property dealt in, or services or facilities provided, in the trade or business; or

(b)

a major change in customers, outlets or markets of the trade or business; or

(c)

a change whereby the company ceases to be a trading company and becomes an investment company or vice versa; or

(d)

where the company is an investment company, a major change in the nature of the investments held by the company.

2212.Before its repeal, section 245(5) of ICTA defined “trading company” and “investment company” for the purposes of that section:

  • “trading company” means a company whose business consists wholly or mainly of the carrying on of a trade or trades and

  • “investment company” means a company (other than a holding company) whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom;

  • “holding company” means a company whose business consists wholly or mainly in the holding of shares or securities of companies which are its 90 per cent subsidiaries and which are trading companies.

2213.Departmental practice in applying section 767B(7) of ICTA has not changed since 1998.

2214.If the repeal of section 245(4) of ICTA repealed section 767B(7) of that Act by implication, then it enabled the taxpayer to argue that a change which used to be mentioned in section 245(4) was not necessarily a major change in the nature or conduct of a trade or business.

2215.Section 245 of ICTA was one of a number of provisions repealed by Schedule 3 to FA 1998 as part of the abolition of advance corporation tax (ACT). It would be anomalous if, as part of the abolition of ACT, Parliament implicitly repealed section 767B(7) of ICTA and thereby weakened section 767A of that Act. It would be particularly anomalous if Parliament did this in FA 1998, since FA 1998 inserted section 767AA of ICTA to catch schemes which section 767A of that Act did not. In statutory interpretation, there is a presumption that Parliament wishes to avoid an anomalous result. Accordingly, the repeal of section 245 of ICTA did not by implication repeal section 767B(7) of that Act.

2216.Accordingly, this section draws on section 245 of ICTA (repealed) to rewrite section 767B(7) of ICTA.

Section 713: Recovery of unpaid corporation tax for accounting period ending on or after change

2217.This section enables an officer of Revenue and Customs to assess and charge a linked person to an amount of unpaid corporation tax for an accounting period ending on or after the change in the ownership of a company. It is based on section 767AA of ICTA.

2218.Section 767AA(1) of ICTA gives this assessment function to “the Board”, ie to the Commissioners for HMRC. In practice, the Commissioners delegate this function to officers of Revenue and Customs, and subsections (1) and (2) reflect this. This is a minor change in the law. See Change 5 in Annex1. In practice, the administration of sections 767A and 767AA of ICTA and the provisions which supplement them is restricted to a specialist group of officers.Change 5has no effect on this practice.

2219.Like the source legislation, subsection (2) provides that “[a person]… may be assessed …”. This gives officers the power, but not the obligation, to assess linked persons, and therefore allows HMRC to exercise managerial discretion.

2220.For the sake of consistency, subsection (1)(b) has been brought into line with section 710(1)(b).

Section 714: The expectation condition

2221.This section spells out the expectation condition mentioned in section 713(1)(d). It is based on section 767AA of ICTA.

2222.Subsection (2) omits as otiose “either or both of” in section 767AA(2) of ICTA.

2223.In subsection (4)(a), the words in brackets warn the reader that “an associated company” is not necessarily the “associated company” mentioned in section 713(1)(b). Which company in a group has a corporation tax liability may depend on (for example) how the group allocates its group relief.

Section 715: Meaning of “transaction entered into in connection with change in ownership”

2224.This interpretative section is based on section 767AA of ICTA.

Section 716: Interest

2225.This section imposes interest on tax which has been assessed under section 710 or section 713 and is overdue. It is based on section 767B of ICTA.

Section 717: Effect of payment in pursuance of assessment under section 710 or713

2226.This section is about payments in pursuance of an assessment under section 710 or 713. It is based on section 767B of ICTA.

2227.Subsection (1) disallows such a payment. Subsection (2) gives the maker of such a payment a right of recovery.

Section 718: Meaning of “associated company”

2228.This interpretative sectionis based on section 767AA of ICTA.

Chapter 7: Meaning of “change in the ownership of a company”
Overview

2229.This Chapter defines “change in the ownership of a company” for the purposes of this Part. It applies both for the purposes of Chapters 2 to 5 (restriction of corporation tax reliefs) and for the purposes of Chapter 6 (recovery of unpaid corporation tax).

2230.This Chapter is based on section 769 of ICTA. Section 769 of ICTA does not expressly mention section 768E of that Act, but the references in section 769 of ICTA to sections 768B and 768C of that Act include by implication references to section 768E of that Act.

Section 719: Meaning of “change in the ownership of a company”

2231.This section gives the basic definition of “change in the ownership of a company” for the purposes of this Part of the Act. It is based on section 769 of ICTA.

2232.Section 769(1)(a) of ICTA is satisfied “if a single person acquires more than half the ordinary share capital of the company”. This raises the question: is this a reference to acquiring:

  • An additional holding (A);

  • The existing holding (X);

  • The total holding after the acquisition (T = A + X); or

  • T, but only if X<50%?

2233.Section 769(1)(a) of ICTA cannot be read as referring to the acquisition of X. Otherwise, a person who held more than 50% of the ordinary share capital and did not acquire any more shares would “acquire more than half the ordinary share capital”. As a matter of normal English usage, “acquires” cannot imply that.

2234.Section 769(1)(a) of ICTA cannot be read as referring to the acquisition of T, whether or not X<50%. According to Bramwell et al.(5):

If one person owns 50 per cent. of a company’s shares and then buys 1 per cent. more, he does not thereby “acquire more than half” of the shares – he acquires 1 per cent. [Section 769(1)(b) and (c) of ICTA] refers to any number of persons acquiring holdings of shares that together amount to more than half of the ordinary shares in a company, but [section 769 (1)(c)] makes it clear that acquired holdings must be distinguished from existing holdings.

2235.Bramwell et al. are correct on this point, because:

  • There is no indication that “acquire” has to have a different scope in section 769(1)(a) and (c) of ICTA;

  • Since Parliament has not said “acquires a total of more than half the ordinary share capital” it is not legitimate for any such words to be read in; and

  • Section 769(2)(b) of ICTA says “… may be regarded as having acquired a percentage holding equal to the increase” (emphasis added).

2236.The acquisition of “more than half the ordinary share capital” in section 769(1)(a) of ICTA is therefore a reference to the acquisition of the additional holding, A. Accordingly, to sharpen the drafting, subsection (2) expressly refers to the acquisition of “a holding of more than half the ordinary share capital”.

2237.Section 769(1)(c) of ICTA says “less that 5 per cent”.Subsection (5) corrects this typo.

Section 720: Section 719: supplementary

2238.This interpretative sectionis based on section 769 of ICTA.

2239.The meaning of “connected” in subsection (4) is given by section 1122, which is applied “for the purposes of this Act” by section 1176(1). Unlike section 769(2)(c) of ICTA, therefore, subsection (4) does not specifically apply the definition of “connected persons” in section 839 of that Act.

2240.Section 769(2)(d) of ICTA has the expression “under the will or on the intestacy of a deceased person”. The words “of a deceased person” add nothing and so subsection (5) compresses that expression to “under a will or on intestacy”.

Section 721: When things other than ordinary share capital may be taken into account: Chapters 2 to 5

2241.This section allows other interests in a company, such as voting power attaching to shares, to be taken into account in determining whether there has been a change in ownership. It applies in cases when applying the “ordinary share capital” test in section 719 would give anomalous results. It is based on section 769 of ICTA.

2242.Section 769(3) of ICTA uses the expression “under the articles of association or under any other document regulating the company”. Subsection (2) compresses this to “under any document regulating the company”.

2243.Section 769(3) of ICTA uses the old-fashioned term “enure”. In response to representations, the term “enure” was retained in section 723(1) of ITA (transfer of assets abroad: charge where power to enjoy income: enjoyment conditions). It has therefore also been retained in subsection (3).

2244.Section 769(3) of ICTA uses the expression “all kinds of share capital, including preference shares”. Subsection (4)(a) compresses this to “all kinds of share capital”.

Section 722: When things other than ordinary share capital may be taken into account: Chapter 6

2245.In cases when applying the “ordinary share capital” test in section 719 would give anomalous results, this section allows other interests in a company, such as voting power attaching to shares, to be taken into account in determining whether there has been a change in ownership. It is based on section 769 of ICTA.

Section 723: Changes in indirect ownership

2246.This section extends the basic rule about changes in company ownership in section 719. It is based on section 769 of ICTA.

2247.The basic rule in section 719 only relates to the direct ownership of a company. It does not capture a change in the ultimate ownership of a company, so this section contains additional rules for groups of companies.

Section 724: Disregard of change in company ownership

2248.This section excludes certain changes in company ownership from the scope of Chapters 2 to 6. It is based on section 769 of ICTA.

Section 725: Provision applying for the purposes of Chapters 2 to 5

2249.This supplementary section is based on section 769 of ICTA.

2250.Subsection (2) is a “tie-breaker” provision, to deal with shareholdings being acquired piecemeal.

2251.Subsections (3) to (6) explain how the three-year maximum in section 720(2)is to be applied in cases involving (for example) options or contracts for future delivery.

Section 726: Interpretation of Chapter

2252.This interpretative section is based on section 769 of ICTA.

Chapter 8: Supplementary provision
Sections 727 to 730: Extended time limit for assessment; provision of information about ownership of shares etc; meaning of “company with investment business”; meaning of “relevant non-trading debit”

2253.Thesesections extend the time limit for assessments giving effect to the provisions of Chapters 2 to 6 of this Part of the Act, enable officers of Revenue and Customs to obtain information about the ownership of shares, stock and securities for the purposes of this Part, and define “company with investment business” and “relevant non-trading debit”. They are based on sections 767B and 768 to 768E of,and paragraphs 11 and 12 of Schedule 28A to, ICTA.

Part 15: Transactions in securities

Overview

2254.This Part rewrites sections 703 to 705 and 707 to 709 of ICTA for the purposes of corporation tax.

2255.Sections 703 to 709 of ICTA were enacted as a wide-ranging anti-avoidance rule which would enable the Crown to counter all manner of devices to avoid tax involving transactions in shares or other securities or the manipulation of a company’s assets or both, and to forestall the creation of such devices in future.

2256.Chapter 1 of Part 13 of ITA rewrote sections 703 to 709 of ICTA for the purposes of income tax, and paragraphs 154 to 161 of Schedule 1 to ITA consequentially amended those sections to apply solely for the purposes of corporation tax.

2257.This Part replicates Chapter 1 of Part 13 of ITA as far as possible. It differs from Chapter 1 of Part 13 of ITA in two respects.

2258.First, where this Part rewrites provisions of ICTA which are corporation tax specific there are no corresponding provisions in ITA. These are noted in detail in the commentary on section 735. In addition there are some provisions in ITA which are not reflected in this Part. Sections 703 to 709 of ICTA, as amended, do not include any provisions corresponding to sections 699 and 712 of ITA (limit on amount assessed in section 689 and 690 cases; application of Chapter where individual within section 684 dies), because these sections are income tax specific; accordingly, no such provisions appear in this Part.

2259.Second, where necessary this Part uses terminology specific to corporation tax where Chapter 1 of Part 13 of ITA uses terminology specific to income tax. For example, since persons other than companies are not liable to corporation tax, this Part uses the word “company” to refer to the taxpayer where Chapter 1 of Part 13 of ITA uses the word “person”.

Sections 731 to 734: Overview of Part; meaning of “corporation tax advantage”; company liable to counteraction of corporation tax advantages; exception where no tax avoidance object shown

2260.These sections introduce the Part and provide definitions of “corporation tax advantage” and the company liable to counteraction. They are based on sections 703(1) and (2) and 709(1) and (2A) of ICTA.

2261.Except as noted in the Overview above, these sections replicate exactly sections 682 to 685 of ITA.

Section 735: Abnormal dividends used for exemptions or reliefs (circumstance A)

2262.This sectionis the first in a sequence of sections in which the sets of circumstances in section 704 of ICTA are laid out and expanded in five separate sections. It is based on sections 704 A and 709(3) of ICTA.

2263.This section is similar to section 686 of ITA. The main change is in subsection (4) wherethepurpose stated differs from those listed in section 686(4) of ITA to cater for the application of the section to companies.

2264.Section 704 A(a) to (c) of ICTA are no longer capable of having any practical effect for corporation tax purposes and are therefore not rewritten.

2265.To avoid confusion, this sequence of sections has been given the same titles as the corresponding provisions of Chapter 1 of Part 13 of ITA. There is accordingly no mention of “circumstance B”, because section 704 B of ICTA was repealed by FA 2008.

Sections 736 to 738: Receipt of consideration representing company’s assets, future receipts or trading stock (circumstance C); receipt of consideration in connection with relevant company distribution (circumstance D); receipt of assets of relevant company (circumstance E)

2266.These sections are based on sections 704 C, D and E and 709 of ICTA.

2267.Except as noted in the Overview above, these sections replicate exactly sections 688 to 690 of ITA.

Section 739: Meaning of “relevant company” in sections 737 and 738

2268.This section defines “relevant company” in the same way as section 691 of ITA. It is based on section 704 D of ICTA.

Section 740: Abnormal dividends: general

2269.This sectionis the first of three interpretative sections about abnormal dividends. It is based on section 709(4) of ICTA. This section and section 692 of ITA are identical.

2270.This section replaces the reference to “the Board” with a reference to “an officer of Revenue and Customs”. See Change 5 in Annex 1.

2271.HMRC internal procedures restrict the exercise of the Commissioners for HMRC’ functions under Chapter 1 of Part 17 of ICTA to a small group of specialist officers. This change in the law has no effect on this practice.

Sections 741 and 742: Abnormal dividends: the excessive return condition and the excessive accrual condition

2272.These interpretative sections are based on section 709(4) to (6) of ICTA.

2273.Except as noted in the Overview above