Chapter 3: Miscellaneous provisions
Overview
232.This Chapter contains miscellaneous provisions relating to DTR. It has the following structure.
Sections 105 and 106 concern the application of this Part to capital gains tax.
Sections 107 to 110 provide for foreign tax to be disregarded in certain circumstances when this Part is applied for corporation tax purposes.
Section 111 makes special rules for discretionary trusts.
Sections 112 to 115 allow a deduction for foreign tax in cases in which no credit is allowed.
Sections 116 to 123 concern the Mergers Directive.
Sections 124 and 125 deal with cases about being taxed otherwise than in accordance with DTAs.
Sections 126 to 128 deal with the Arbitration Convention.
Section 129 concerns the disclosure of information.
Sections 130 to 133 make provision about the interpretation of rules in DTAs.
Section 134 concerns assessments.
Section 105: Meaning of “chargeable gain”
233.This interpretative section is based on section 831(5) of ICTA and section 277(1) of TCGA.
Section 106: Chapters 1 and 2 apply to capital gains tax separately from other taxes
234.This section ensures that, to the extent that DTR is available for foreign capital gains tax against United Kingdom capital gains tax under Chapters 1 and 2, DTR is not available for it against United Kingdom income tax or United Kingdom corporation tax. It is based on section 277(1) and (3) of TCGA.
Section 107: Disregard of foreign tax referable to derivative contract
235.This section requires foreign tax referable to a derivative contract (such as an interest-rate swap) to be ignored to the extent that the foreign tax is attributable to a time when the taxpayer company was not a party to the derivative contract. It is based on section 807A(1), (2) and (7) of ICTA.
236.Under the derivative contracts and loan relationships regimes, income is (broadly speaking) recognised for tax purposes in the periods in which gains are recognised in the accounts. By contrast, withholding taxes are generally imposed on cash flows. This section is the first of a group of sections which (to summarise) adjust DTR attributable to cash flows from derivative contracts and loan relationships in order to bring the DTR into line with the taxation of income.
Section 108: Disregard of foreign tax attributable to interest under a loan relationship
237.This section requires foreign tax referable to a loan relationship to be ignored if the foreign tax is attributable to a time when the taxpayer company was not a party to the loan relationship. It is based on section 807A(1) to (2A) of ICTA.
Section 109: Repo cases in which no disregard under section 108
238.This section makes an exception to section 108 in cases involving repos. It is based on section 807A(2A), (6A) and (6B) of ICTA and paragraph 5(1) of Schedule 2 to CTA 2009.
Section 110: Stock-lending cases in which no disregard under section 108
239.This section makes an exception to section 108 in cases involving stock lending. It is based on section 807A(2A), (6A) and (6C) of ICTA.
Section 111: When payment to beneficiary treated as arising from foreign source
240.This section lays down special rules for discretionary trusts. It is based on section 809 of ICTA.
241.A body of trustees is treated for income tax purposes as a separate person from the settlor and the beneficiaries of the trust. In certain circumstances, a payment by discretionary trustees is (a) treated as income in the hands of the recipient and (b) treated as received under deduction of income tax. See sections 493 and 494 of ITA. Broadly speaking, for income tax purposes such a payment effectively transfers income from the trustees to the recipient. And income tax suffered by the trustees on such income is credited to the recipient.
242.In such circumstances, this section enables credit relief to be transferred from the trustees to the recipient.
Section 112: Deduction from income for foreign tax (instead of credit against UK tax)
243.This section provides that, in certain circumstances in which credit is not allowed for foreign tax paid on income, the amount of the income is to be reduced for the purposes of the Tax Acts. It is based on sections 807(4) and 811 of ICTA.
244.The section should be read with section 189 (interaction between section 112 and certain transfer-pricing claims).
Section 113: Deduction from capital gain for foreign tax (instead of credit against UK tax)
245.This section allows, in certain circumstances in which credit is not allowed for foreign tax chargeable on the disposal of an asset, a deduction in calculating the gain on the disposal for the purposes of capital gains tax and corporation tax on chargeable gains. It is based on sections 8(3) and 278(1) of TCGA.
Section 114: Time limits for action if tax adjustment makes reduction too large or too small
246.This section permits assessments or claims to be made after the normal time limits, if the reduction given under section 112(1) or 113(2) is found to be excessive or insufficient by reason of an adjustment of the amount of tax payable. It is based on section 811(4) of ICTA and section 278(2) of TCGA.
Section 115: Duty to give notice that adjustment has rendered reduction too large
247.This section requires the taxpayer to give notice that an adjustment of the amount of tax payable has rendered the reduction excessive. It is based on section 811(5) to (10) and 832(1) of ICTA, sections 278(3) to (7) and 288(1) of TCGA and section 989 of ITA.
Section 116: Introduction to section 117
248.This section is the first of a series of sections dealing with European cross-border transfers of business and mergers under the Mergers Directive; introducing section 117, it concerns cross-border transfers of business. It is based on section 807B of ICTA.
249.This section and sections 117 to 121 and 123 rewrite sections 807B to 807G of ICTA; they largely replicate the source legislation, which was inserted by CTA 2009. The need for DTR provisions to take account of the Mergers Directive is discussed in the commentary on section 122, which rewrites section 815A of ICTA.
Section 117: Tax treated as chargeable in respect of transfer of loan relationship, derivative contract or intangible fixed assets
250.This section provides for tax to be treated as chargeable, for DTR purposes, in respect of the transfer of loan relationships, derivative contracts or intangible fixed assets if tax would have been chargeable but for the Mergers Directive. It is based on section 807C of ICTA.
Section 118: Introduction to section 119
251.This section, which concerns cross-border mergers, introduces section 119. It is based on section 807D of ICTA.
Section 119: Tax treated as chargeable in respect of transfer of loan relationship, derivative contract or intangible fixed assets
252.This section provides for tax to be treated as chargeable, for DTR purposes, in respect of the transfer of loan relationships, derivative contracts or intangible fixed assets if tax would have been chargeable but for the Mergers Directive. It is based on sections 807D(12) and 807E of ICTA.
Section 120: Introduction to section 121
253.This section, which concerns transparent entities involved in cross-border transfers and mergers, introduces section 121. It is based on section 807F of ICTA.
Section 121: Tax treated as chargeable in respect of relevant transactions
254.This section provides for tax to be treated as chargeable, for DTR purposes, in respect of the transfer of loan relationships, derivative contracts or intangible fixed assets if tax would have been chargeable but for the Mergers Directive. It is based on section 807G of ICTA.
Section 122: Tax treated as chargeable in respect of gains on transfer of non-UK business
255.This section provides for tax to be treated as chargeable, for DTR purposes, in respect of certain (a) transfers of non-UK businesses, (b) transfers of parts of non-UK businesses and (c) mergers if tax would have been chargeable but for the Mergers Directive. It is based on section 815A of ICTA.
256.Suppose that a non-UK business is transferred. The Mergers Directive applies if (to summarise the main conditions):
company A has a permanent establishment in another member State (the host State);
company A transfers the assets it uses for the purposes of the business it carries on through the permanent establishment to a company (the transferee) resident in a member State other than company A’s home State; and
the transfer is in exchange for shares or debentures in the transferee.
257.If the Mergers Directive applies, the general rule is that neither company A’s home State, nor the host State, is permitted to tax any capital gain arising on the transfer. But there is an exception if company A’s home State operates, as the United Kingdom does, a system of taxing worldwide profits. If the exception applies, company A’s home State may tax the gain, but only if it allows relief for the tax that would have been charged in the host State but for the Directive. This section gives relief for the notional tax in cases where the United Kingdom is company A’s home State.
258.The legislation needs:
to specify when the relief is to be given;
to say how to calculate the relief; and
to lay down rules determining the corporation tax against which the notional tax can be credited.
259.Sections 140C and 140F of TCGA specify when the relief applies. Section 140C(1) of TCGA deals with the transfer of a non-UK business (as in the example above) or part of a non-UK business, but only if the transferee is resident in an EU member State other than the United Kingdom. Section 140C(1A) of TCGA deals with the transfer of part of a non-UK business. Section 140F of TCGA deals with cross-border mergers of companies etc each resident in an EU member State (but not all resident in the same State). Under subsection (1)(a), section 140C or 140F needs to apply if relief is to be given under subsection (3).
260.Subsection (1)(b) lays down the other condition for relief to be given under subsection (3), namely that (to summarise) the Mergers Directive has sheltered gains from foreign tax.
261.Subsection (3) enables credit relief to be given for notional foreign tax. This section is, however, located in Chapter 3 rather than Chapter 2 of this Part, because its potential application is not limited to credit relief.
262.Subsections (4) and (5) say how the notional foreign tax is to be calculated.
263.Section 140C(3) or, as the case may be, section 140F(3) of TCGA has two consequences. First, the allowable losses accruing to the UK-resident transferor company on the transfer are set off against the chargeable gains so accruing. Second, the transfer is treated as giving rise to a single chargeable gain equal to the aggregate of those gains after deducting the aggregate of those losses. These provisions enable credit relief for the notional foreign tax to be capped by section 42.
264.The Corporation Tax (Implementation of the Mergers Directive) Regulations 2007 (SI 2007/3186) amended section 140C of TCGA and substituted new section 140F of TCGA. They did not, however, amend section 815A of ICTA. But each of sections 140C and 140F continues to say that if it applies then section 815A of ICTA also applies. Accordingly, this section rewrites section 815A of ICTA in a way which gives effect to that legislative intention.
265.Two verbal changes have been made. First, the definition of “host State” in subsection (2) follows sections 140C and 140F of TCGA in referring to the company’s “business” rather than section 815A of ICTA, which refers to the company’s “trade”. As it happens, section 140F of TCGA always referred to a “business” rather than a “trade”, and both “trade” and “business” on the one hand, and the Mergers Directive’s “branch of activity” on the other, refer to the same thing. Second, subsection (2) refers expressly to section 140C(1A) of TCGA, which was inserted in 2007 and, as noted above, deals with certain transfers of part of a non-UK business. These are drafting clarifications which do not change the law.
266.In the parenthetical descriptions in the definition of “the transfer subsections” in subsection (2), the word “company” appears in inverted commas because it is used in an extended sense. See section 140L of TCGA.
Section 123: Interpretation of sections 116 to 122
267.This interpretative section is based on sections 807B(9), 807D(11), 807F(6) and 815A(6) of ICTA.
268.Council Directive 90/434/EEC of 23 July 1990 has been codified (i.e. repealed and its provisions restated without substantive change) by Council Directive 2009/133/EC of 19 October 2009. In particular, the Annex to the 1990 Directive has become Part A of Annex I to the 2009 Directive.
Section 124: Giving effect to solutions to cases and mutual agreements resolving cases
269.This section is a machinery provision for resolving disputes under DTAs. It is based on section 815AA(1) to (3) of ICTA, section 277(1) of TCGA and section 194(1) of FA 1993.
270.Subsection (4) extends the scope of the section to include the enactments relating to capital gains tax and the enactments relating to PRT. This brings the law into line with practice. See Change 8 in Annex 1. The same change is made in section 125.
Section 125: Effect of, and deadline for, presenting a case
271.This section supplements section 124. It is based on section 815AA(4) to (6) of ICTA, section 277(1) of TCGA and section 194(1) of FA 1993.
272.Subsection (2)(a) includes a minor change in the law. See the commentary on section 124(4) and Change 8 in Annex 1.
Section 126: Meaning of “the Arbitration Convention”
273.This interpretative section is based on sections 815B(4) and 816(2A) of ICTA.
Section 127: Giving effect to agreements, decisions and opinions under the Convention
274.This section is a machinery provision relating to the Arbitration Convention. It is based on section 815B(1) to (3) of ICTA.
275.Subsection (4) specifically refers to “the allowance of credit against tax payable in the United Kingdom” for the sake of consistency with section 124(3). This does not change the law, because the added words are implicit in “or otherwise”.
Section 128: Disclosure under the Convention
276.This section supplements section 127. It is based on section 816(2A) and (5) of ICTA.
Section 129: Disclosure where relief given overseas for tax paid in the United Kingdom
277.This section permits Revenue and Customs officials to disclose information in cases in which other jurisdictions give relief for United Kingdom tax. It is based on sections 790(12) and 816(1) and (5) of ICTA, section 277(1) and (4) of TCGA and section 194(5) of FA 1993.
Section 130: Interpreting provision about UK taxation of profits of foreign enterprises
278.This section ensures that a specific provision commonly found in DTAs (that is designed largely to limit the rights of the States to tax the business profits of residents of the other State) cannot be read as preventing the income of UK residents being charged to United Kingdom tax. It is based on section 815AZA of ICTA.
Section 131: Interpreting provision about interest influenced by special relationship
279.This section explains how the provisions of certain DTAs about amounts of interest are to be interpreted. It is based on section 808A of ICTA.
Section 132: Interpreting provision about royalties influenced by special relationship
280.This section explains how the royalties provisions of certain DTAs are to be interpreted. It is based on section 808B(1) to (4), (8) and (9) of ICTA.
Section 133: Special relationship rule for royalties: matters to be shown by taxpayer
281.This section supplements section 132. It is based on section 808B(5) to (7) of ICTA.
Section 134: Correcting assessments where relief is available
282.This section allows correcting assessments to be made in DTR cases. It is based on sections 788(7) and 790(11) of ICTA, section 277(1) of TCGA and section 195(2) of FA 1993.
283.In relation to income tax and corporation tax, sections 788(7)(a) and 790(11) of ICTA refer to “any income or chargeable gain”. At first sight, in relation to capital gains tax, the substitution rule in section 277(1) of TCGA would seem to require references to “capital” gains in subsections (1)(a) and (2)(a), since it is possible that a DTA might provide for relief in the non-UK territory to be given in respect of tax in respect of a capital gain that is not a chargeable gain.
284.But the references to capital gains tax in conditions A and B in this section are necessarily references to UK capital gains tax. The gain therefore has to be a “chargeable” gain. Subsections (1)(a) and (2)(a) therefore refer to “any chargeable gain” in relation both to corporation tax and to capital gains tax.
285.The tail words of section 790(11) of ICTA refer to a “chargeable gain” being “entrusted to … [a person] … for payment”. It is not clear how a chargeable gain can be entrusted to a person for payment, and subsection (6) omits these words.
286.Subsection (7) reflects administrative reality by giving the function of making PRT amendments to officers of Revenue and Customs. This is a minor change in the law. See Change 2 in Annex 1.
