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Corporation Tax Act 2010

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.

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