Explanatory Notes

Finance Act 2012

2012 CHAPTER 14

17 July 2012

Introduction

1.These explanatory notes relate to Finance Act 2012 that received Royal Assent on 17 July 2012. They have been prepared jointly by HM Revenue & Customs and HM Treasury in order to assist the reader in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament.

2.The notes are designed to be read alongside with the Act. They are not, and are not meant to be, a comprehensive description of the Act. So, where a section or part of a section does not seem to require any explanation or comment, none is given.

3.Terms used in the Act are explained in these notes where they first appear. Hansard references are provided at the end of the notes.

Section 1: Charge for 2012-13 and Rates for 2012-13 and Subsequent Tax Years

Summary

1.Section 1 provides for income tax for the 2012-13 tax year and sets the main rates of income tax for 2012-13 and 2013-14. The section also makes changes consequent to an additional rate of 45 per cent for 2013-14.

Details of the Section

2.Subsection 1 provides for income tax for 2012-13 and sets the main rates of income tax.

3.Subsection 2 sets the main rates of income tax for 2013-14.

4.Subsection 3 reduces the dividend additional rate to 37.5 per cent; the trust rate to 45 per cent; the dividend trust rate to 37.5 per cent.

5.Subsection 4 reduces the charge on relevant benefits provided under employer-financed retirement benefits schemes, in section 394 (Employer-financed Retirement Benefit Schemes) of Income Tax (Earnings and Pensions) Act 2003 (ITEPA), from 50 per cent to 45 per cent when section 394(2) ITEPA applies because the person receiving the benefits is not an individual.

6.Subsection 5 provides for a consequential amendment to section 640(6) (Grossing-up of Deemed Income) of Income Tax (Trading and Other Income) Act 2005 (ITTOIA).

7.Subsection 6 provides that the amendments made by subsections 3 to 5 inclusive have effect from 2013-14.

Background Note

8.Income tax is an annual tax.  It is for Parliament to impose income tax for a tax year.

9.The rates of income tax for the main rates are determined by Parliament for a tax year.  The main rates of income tax currently provided for are the basic rate, the higher rate and the additional rate.

10.Other rates of income tax are included within the Tax Acts.

11.There are alternative rates of income tax for dividends.  The dividend additional rate applies to dividend income that would otherwise be taxable at the additional rate.

12.The trust rate of tax is the rate of tax paid by trustees that generally applies to the income of discretionary or accumulation trusts.  Trustees are liable to tax on income received at the trust rate of tax, but dividends and other similar income are chargeable at the dividend trust rate.

13.Section 394 of ITEPA prevents individuals, who are liable to the highest rate of income tax, avoiding tax by transferring rights to receive retirement benefits to another person such as a company, which is not liable to the top rate of income tax.

14.Section 640 of ITTOIA sets out the amount of notional tax credit attached to certain capital payments, made by trustees to settlors, that are deemed for tax purposes to be income.  A charge to tax on the settlor arises when the capital payment can be matched with undistributed income in the trust.  A payment is matched first with the earlier income of the trust.  The notional credit is linked to the rate of tax that the trustees have paid on the income with which the capital payment is matched.  As the trust rate will decrease to 45 per cent for 2013-14 onwards, the amendment ensures that the notional tax credit for capital payments matched with undistributed income of 2013-14 onwards is also decreased to 45 per cent.

Section 2: Basic Rate Limit for 2012-13

Summary

1.This section sets the amount of the basic rate limit for income tax at £34,370 for 2012-13.

Details of the Section

2.Subsection (1) replaces the existing amount of the basic rate limit in section 10(5) of the Income Tax Act 2007 (£35,000) with £34,370 for 2012-13.

3.Subsection (2) disapplies the indexation provisions for the basic rate limit for 2012-13.

Background Note

4.An individual’s taxable income is charged to tax at the basic rate of tax up to the basic rate limit.

5.The basic rate limit is subject to indexation (an annual increase based upon the percentage increase to the retail prices index).  Parliament can over-ride indexed amounts by a provision in the Finance Act.

6.The table below sets out the amount of the basic rate limit for 2011-12, the indexed amount for 2012-13 and the amount specified by this section for 2012-13:

2011-122012-13 indexed2012-13 by this section
£35,000£37,000£34,370

7.The effect of this section is to over-ride the indexed amount for the basic rate limit.  This section is part of a package of measures, together with a further section in this Act that sets the personal allowance for those aged under 65 in an amount above indexation.

Section 3: Personal Allowance for 2012-13 for Those Aged under 65

Summary

1.This section sets the amount of the personal allowance for those aged under 65 at £8,105 for 2012-13.

Details of the Section

2.Subsection 1 replaces the existing amount of the personal allowance for those aged under 65 in section 35(1) of the Income Tax Act 2007 (£7,475) with £8,105 for 2012-13.

3.Subsection 2 disapplies the indexation provisions for the personal allowance for those aged under 65 for 2012-13.

Background Note

4.An individual is entitled to a personal allowance for income tax.  The amount depends upon the individual’s age and income.

5.Income tax personal allowances are subject to indexation (an annual increase based upon the percentage increase to the retail prices index).  Parliament can over-ride indexed amounts by a provision in the Finance Act.

6.The table below sets out the amount of the personal allowance for those aged under 65 for 2011-12, the indexed amount for 2012-13 and the amount specified by this section for 2012-13:

2011-122012-13 indexed2012-13 by this section
£7,475£7,895£8,105

7.The effect of this section is to over-ride the indexed amount for the personal allowance for those aged under 65.  This section is part of a package of measures together, with a further section in this Act, that sets the basic rate limit in an amount below indexation.

Section 4: Personal Allowances from 2013

Summary

1.This section amends the income tax personal allowances currently available for people aged under 65, aged 65 to 74 or aged 75 and over in a tax year.  It changes entitlement from age to date of birth and fixes the amount of the allowances for people born before 6 April 1948 until the personal allowance for people born after 5 April 1948 is a greater amount.

Details of the Section

2.Subsection 1 provides that the income tax personal allowances currently available for people aged under 65, aged 65 to 74 or aged 75 and over in a tax year are amended in accordance with this section.

3.Subsection 2 provides that section 35 Income Tax Act 2007 (ITA) (personal allowance for those aged under 65) is amended so that the personal allowance that it provides is available to people born after 5 April 1948.

4.Subsection 3(a) provides that section 36 ITA (personal allowance for those aged 65 to 74) is amended so that the personal allowance that it provides, or the allowance provided by section 35, whichever is the greater, is available to people born after 5 April 1938 but before 6 April 1948.

5.Subsection 3(b) provides that the income-related reduction to the allowance provided by section 36 ITA, only applies if the allowance is greater than the allowance provided by section 35 ITA.  The section 36 allowance is not reduced below the amount of the section 35 allowance.

6.Subsection (3)(c) inserts a new section for section 36 ITA that defines “the section 35 amount” as the amount the individual would have been entitled to if they had been born after 5 April 1948.

7.Subsection 4(a) provides that section 37 ITA (personal allowance for those aged 75 and over) is amended so that the personal allowance that it provides or the allowance provided by section 35 ITA, whichever is the greater, is available to people born before 6 April 1938.

8.Subsection 4(b) provides that the income-related reduction to the allowance provided by section 37 ITA, only applies if the allowance is greater than the allowance provided by section 35.  The section 37 allowance is not reduced below the amount of the section 35 allowance.

9.Subsection (4)(c) inserts a new section for section 37 ITA that defines “the section 35” amount as the allowance the individual would have been entitled to if they had been born after 5 April 1948.

10.Subsection 5 provides that section 41 ITA (allowances in the year of death), which clarifies that the higher allowance is due if an individual dies before they reach the age of 65 or 75 in the year of their death, is amended to remove specific references to sections 36 and 37 ITA.

11.Subsection 6 provides that the amended allowance provided by section 35 ITA is subject to indexation as provided for by section 57 ITA (indexation of allowances).  It also removes the amended allowances provided by section 36 and 37 ITA from the indexation provisions.

12.Subsection 7 amends the references to section 35 ITA in section 508A Income and Corporation Taxes Act 1988.

13.Subsection 8 provides that this section has effect from the 2013-14 tax year and subsequent years.

Background Note

14.There are currently three income tax personal allowances provided by reference to an individual’s age; one for people aged under 65 in the tax year; one for people aged 65 to 74 in the tax year; one for people aged 75 and over in the tax year.

15.This section provides that from 2013-14, an individual is entitled to a personal allowance by reference to their date of birth.

16.This section also provides that from 2013-14, the allowances for people born before 6 April 1948 are removed from the indexation provisions for personal allowances.

17.For 2012-13, the amount of these allowances will be:

Individual aged under 65 in the tax year£8,105
Individual aged 65 to 74 in the tax year£10,500
Individual aged 75 and over in the tax year£10,660

18.The amount of the personal allowance for people aged under 65 will be set by a separate section in this Act.  The allowances for people aged 65 to 74 and aged 75 and over are set by The Income Tax (Indexation) Order 2011 No. 2926 made on 6 December 2011.

19.The Chancellor has announced that for 2013-14, the personal allowance provided for by section 35 ITA will be £9,205.  This will be provided for in Finance Bill 2013.

20.Taken together with the powers provided by this section, the personal allowances for 2013-14 will be:

Individual born after 5 April 1948£9,205
Individual born after 5 April 1938 but before 6 April 1948£10,500
Individual born before 6 April 1938£10,660

21.Existing legislation specifically clarifies that the allowances for people aged 65 to 74 and aged 75 and over in a tax year are unaffected where the individual dies before their birthday.  Setting a personal allowance by reference to an individual’s date of birth removes the requirement for this clarification.

Section 5: Main Rate of Corporation Tax for Financial Year 2012

Summary

1.Section 5 reduces the corporation tax (CT) main rate for profits other than ring fence profits for the financial year beginning 1 April 2012.  It sets the main rate of CT at 24 per cent on non-ring fence profits effective from 1 April 2012.

Details of the Section

2.Subsections (1) and (2) substitute the corporation tax main rate of 25 per cent set in Finance Act 2011 with a rate of 24 per cent for the main rate of CT on non ring fence profits for the financial year 2012, with effect on and after 1 April 2012.

Background Note

3.The main rate of CT is paid by companies with profits of more than £1,500,000 (the upper profits limit).

4.Where two or more companies are associated with one another, the profits limit is reduced. This is done by dividing the limit by the number of associated companies.

5.Profits from oil extraction and oil rights in the UK and the UK Continental Shelf (“ring fence profits”) will continue to be subject to a separate main rate of CT applicable to those ring fenced profits. Profits from activities which are not ring fenced will continue to be charged at the main rate of CT applicable to all other profits.

Section 6: Corporation Tax: Charge and Main Rate for Financial Year 2013

Summary

1.Section 6 charges corporation tax (CT) for the financial year beginning 1 April 2013 and sets the main rate of CT at 30 per cent on oil and gas ring fence profits and 23 per cent on non-ring fence profits.

Details of the Section

2.Subsections (1) and (2) set the charge and the main rate of CT for the Financial Year 2013.

Background Note

3.The main rate of CT is paid by companies with profits of more than £1,500,000 (the upper profits limit).

4.Where two or more companies are associated with one another, the profits limit is reduced. This is done by dividing the limit by the number of associated companies.

5.Profits from oil extraction and oil rights in the UK and the UK Continental Shelf (“ring fence profits”) will continue to be subject to a separate main rate of CT applicable to those ring fenced profits. Profits from activities which are not ring fenced will continue to be charged at the main rate of CT applicable to all other profits.

Section 7: Corporation Tax: Small Profits Rate and Fractions for Financial Year 2012

Summary

1.Section 7 sets the small profits rate of corporation tax (CT) for the financial year beginning 1 April 2012 at 20 per cent for all profits apart from “ring fence profits” of North Sea oil companies, where the rate is set at 19 per cent. Additionally, it sets the fraction used in calculating marginal relief from the main rate at 1/100 for all profits apart from “ring fence profits”, where the fraction is set at 11/400.

Details of the Section

2.Subsection (1) sets the small profits rate of CT for the financial year 2012.

3.Subsection (2) sets the marginal relief standard and ring fence fractions.

Background Note

4.Companies with profits up to £300,000 pay CT at the small profits rate.

5.Companies with profits between £300,000 and £1,500,000 (the lower and upper limits) benefit from marginal relief from the main rate.

6.Marginal relief has the effect of gradually increasing the rate of tax for a company as its profits move from the lower to the upper profits limit.

7.The example below illustrates the effect of marginal relief for a company with taxable non-ring fence profits of £500,000. Its tax liability is calculated as follows:

*

£1,000,000 is the difference between the upper limit and the profit.

£500,000 @ 24 per cent£120,000
minus 1/100 of £1,000,000*£10,000
Tax payable:£110,000

8.The example below illustrates the effect of marginal relief for a company with taxable ring fence profits of £500,000. Its tax liability is calculated as follows:

*

£1,000,000 is the difference between the upper limit and the profit.

£500,000 @ 30 per cent£150,000
minus 11/400 of £1,000,000*£27,500
Tax payable: £122,500

9.Where two or more companies are associated with one another, the profits limits are divided by the number of associated companies.

Section 8 Schedule 1: High Income Child Benefit Charge

Summary

1.Section 8 and Schedule 1 impose a new income tax charge on taxpayers whose adjusted net income exceeds £50,000 in a tax year and who are in receipt of child benefit, and to taxpayers whose adjusted net income exceeds £50,000 and whose partner is in receipt of child benefit.  In the event that both partners have an adjusted net income that exceeds £50,000, the charge will apply only to the partner with the highest income.

2.The amount of the charge will be 1 per cent of the amount of child benefit for every £100 of income above £50,000. The charge will be on the full amount of child benefit where the individual’s adjusted net income exceeds £60,000.

3.The charge will be called the high income child benefit charge and will come into effect from 7 January 2013.

Details of the Schedule

4.Paragraph 1 inserts details of the charge into Part 10 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) by creating new sections.

5.New section 681B as well as naming the charge, also identifies the person (P) with adjusted net income of more than £50,000 who will be liable to the new charge if one or both of the conditions set out in subsections (3) and (4) are met.

6.Subsection (3) explains the first condition. Condition A is where P is the claimant entitled to receive child benefit and who, if P has a partner, has an adjusted net income that is greater than that of their partner. The reference to each week reflects the weekly nature of child benefit.

7.Subsection (4) explains the second condition. Condition B provides for P to be charged if their partner (Q) is the claimant entitled to receive child benefit and P’s income is more than Q’s.

8.The effect of this section is that where there are two partners who both have adjusted net income of more than £50,000, the charge rests with the partner with the highest income. If both partners have the same income, the charge rests with the claimant to child benefit.

9.Because the charge is by reference to weeks, this sub-section also makes clear in the case of two people living together as partners that the charge will only apply to those weeks of the tax year for which the partnership exists. If the couple break up, P as the partner with the highest income will only be liable for the period from 6 April to the week in which the break up occurs. Conversely, if a couple come together and child benefit is already being paid, the partner with the highest income will only be liable to the charge for those weeks from the date the couple start living together until the end of the tax year.

10.New section 681C details the amount of the charge by reference to a formula, which applies a percentage to the total amount of child benefit received in the year by reference to conditions A and B. The percentage is the lower of 100 per cent and 1 per cent of child benefit for every £100 of adjusted net income above £50,000. The effect of the taper is to gradually increase the percentage charged between income of £50,000 and £60,000. The charge equals the full amount of child benefit for someone with adjusted net income of more than £60,000.

11.Subsection (3) applies a rounding rule that rounds down the result of applying every stage of the formula to the nearest whole number. For example, if someone has income of £57,750 and their partner receives child benefit for two children of £1752 for a whole year, the charge will be 77 per cent of the £1,752 child benefit = £1,349. The percentage is determined as follows £57,750 - £50,000 = 7,750 /100 = 77.

12.New subsection 681D extends the charge where a child is not living with the claimant but with either one or two other individuals who have income over £50,000. It ensures that those with income over £50,000 who live with a child and who receive the value of child benefit directly or indirectly from the claimant are in the same position as someone with income over £50,000 who lives with a child and claims, or whose partner claims, child benefit.

13.Subsection (1) identifies the circumstances under which the new section will apply. These are that:

a)

a person (R) claims child benefit on the basis that they are not living with the child for which they claim but are contributing to the child’s upkeep. Under child benefit rules, this amount must be at least equal to the amount of child benefit claimed.

b)

neither R, or where appropriate, R’s partner is liable to the charge in new section 681B.

c)

the child for whom R claims is living with a person (S).

14.Subsection (2) applies the charge under new section 681B to S as if that person had claimed the child benefit. This addresses the situation where S or S’s partner have adjusted net income over £50,000 and receive directly or indirectly from R an amount equivalent to what they would have received if they had claimed child benefit directly.

15.Subsection (4) creates an exemption to the circumstances outlined in subsection (1). This is where R had previously claimed child benefit on the basis that they were living with the child and, after a period of less than 52 weeks, resumes the claim on the same basis. A common example of this is where a parent moves away temporarily for work purposes and leaves the child with a family member until they return.

16.New section 681E details specific situations that are subject to special rules. Section (1) details the two circumstances where amounts of child benefit are disregarded. The first in subsection (a), disapplies the charge and clarifies the effect of the interaction between the charge in new section 681B which is based on entitlement and the election in new 13A Social Security Administration Act 1992 and 11A Social Security Administration Act (Northern Ireland) 1992 which also refers to entitlement. It also removes the need to notify liability to the income tax charge under section 7 Taxes Management Act 1970 which arises on entitlement to child benefit but where, as the result of the election, the amount received is nil. The second in subsection (b) makes clear that no liability arises in respect of any child benefit payment made after the death of a child.

17.Subsections (2) and (3) refer to the situation where there are more than two persons in a relationship, for example, in the case of polygamous marriages that were contracted outside the UK. The provision makes clear that the same amount of the charge applies, whether under new section 681B or under section 681B as extended by section 681D. It also make clear that the charge will apply to the partner with the highest income.

18.New section 681F provides the power for the Treasury to make an order that amends either the amount of the income limit in new section 681B or the  amount (X) in the formula in new section 681C (2) (b). Any such order must be made before the start of the relevant tax year. If the effect of the Order is to increase a person’s liability, it must be made under the draft affirmative procedure.

19.New section 681G defines the meaning of “partner” for the purposes of this charge and is based on the definition used for Tax Credits because child benefit is a social security benefit.

20.New section 681H contains interpretative provisions. Subsection (2) confirms that the term “adjusted net income” is given its existing meaning as defined in section 58 Income Tax Act (ITA) 2007. This is currently used to determine the amount of the personal allowance for someone aged 65 or over who has income over £100,000.

21.Adjusted net income is calculated in a series of steps. The starting point is “net income” which is the total of the individual’s income subject to income tax less specified deductions, the most important of which are trading losses and payments made gross to pension schemes. This net income is then reduced by the grossed-up amount of the individual’s gift contributions and the grossed-up amount of the individual’s pension contributions which have received tax relief at source. The final step is to add back any relief for payments to trade unions or police organisations deducted in arriving at the individual’s net income. The result is the individual’s adjusted net income.

22.Paragraph 2 makes clear that a person is required to notify his liability to the income tax charge under section 7 Taxes Management Act 1970 in the same way as they are required to notify any other liability to income tax.

23.Paragraph 3 inserts after section 13 in Part 1 of the Social Security Administration Act 1992, a new section 13A. The new provisions provide that an individual or their partner, liable to a tax charge under new section 681B, may choose to elect not to receive the child benefit to which they are entitled if they or their partner do not wish to pay the new charge. It also provides HM Revenue and Customs (HMRC) the power to make directions setting out how an election should be made and when it may be revoked, for example, if either the individual or their partner are no longer liable to pay the charge.

24.Subsection (1) of the new 13A confirms that it is the person who is claiming child benefit who decides whether they wish to elect not to be paid for all the child benefit they are entitled.

25.Subsection (2) says that an election is limited to those who believe their or their partner’s income is at level which will incur the high income child benefit charge in the tax year.

26.Subsection (3) confirms that an election will lead to payments of child benefit ceasing at a date after the election has been made.

27.Subsection (4) Where an election is made at the same time as a claim for child benefit, it will also cover any backdating of the award up to a maximum of three months (in line with the child benefit backdating rules).

28.Subsections (5) & (6) confirm that a person can revoke a previous election and so restore payment of child benefit. The revocation of the election will cover payments of child benefit due after the date of revocation.

29.Subsection (7) This provides that where a person elected not to be paid child benefit on the wrong assumption that they, or their partner, would be liable to high income child benefit charge, the person who made the election has up two years from the end of the relevant tax year to revoke the election and be paid child benefit for that period.

30.Subsection (8) confirms that persons must follow the process set out in subsections (2) to (7) in accordance with HMRC administrative directions under subsection (9).

31.Subsection (9) (a) confirms that HMRC will issue directions as to how an election may be made and revoked and from when they have effect. Subsection (b) confirms that HMRC directions may set out situations in which an election or its revocation is not acted on where either the child benefit award is not being paid at the full rate or there are doubts as to which the person has entitlement.

32.Subsection (10) This confirms that:

33.Paragraph 4 inserts after section 11 in Part 1 of the Social Security Administration (Northern Ireland) Act 1992, a new section 11A. The new provisions provide that an individual or their partner, liable to a tax charge under new section 681B, may choose to elect not to receive the child benefit to which they are entitled if they or their partner do not wish to pay the new charge. It also provides HMRC the power to make directions setting out how an election should be made and when it may be revoked, for example, if either the individual or their partner are no longer liable to pay the charge.

34.Subsection (1) of the new 11A confirms that it is the person who is claiming child benefit who decides whether they wish to elect not to be paid for all the child benefit they are entitled.

35.Subsection (2) says that an election is limited to those who believe their or their partner’s income is at level which will incur the high child benefit charge in the tax year.

36.Subsection (3) confirms that an election will lead to payments of child benefit ceasing at a date after the election has been made.

37.Subsection (4) Where an election is made at the same time as a claim for child benefit, it will also cover any backdating of the award up to a maximum of three months (in line with the child benefit backdating rules).

38.Subsections (5) & (6) confirm that a person can revoke a previous election and so restore payment of child benefit. The revocation of the election will cover payments of child benefit due after the date of revocation.

39.Subsection (7) This provides that where a person elected not to be paid child benefit on the wrong assumption that they, or their partner, would be liable to high income child benefit charge, the person who made the election has up two years from the end of the relevant tax year to revoke the election and be paid child benefit for that period.

40.Subsection (8) confirms that persons must follow the process set out in subsections (2) to (7) in accordance with HMRC administrative directions under subsection (9).

41.Subsection (9) (a) confirms that HMRC will issue directions as to how an election may be made and revoked and from when they have effect. Subsection (b) confirms that HMRC directions may set out situations in which an election or its revocation is not acted on where either the child benefit award is not being paid at the full rate or there are doubts as to which the person has entitlement.

42.Subsection (10)  This confirms that:

43.Paragraph 5 makes amendments to ITEPA 2003. Paragraphs (5)(1) to (3), (5)(5) and (5)(7) are technical consequential amendments to ITEPA 2003.

44.Paragraph (5)(4) provides for the high income child benefit charge to be included in PAYE regulations so that it can be collected through PAYE unless the taxpayer objects. This means a person’s PAYE tax code can be amended so that it includes an adjustment that will collect the tax due for the year in which the deduction is made in the same way as for other PAYE liabilities. Existing provisions allow an adjustment for collecting tax due from an earlier year.

45.Paragraph (5)(6) is a technical amendment which ensures that the provisions in new section 681F (3) apply.

46.Paragraph 6 inserts amendments to ITA 2007. Paragraph (6)(2) inserts a reference to the new high income child benefit charge to the overview of tax acts that make provision for income tax in section 1 ITA 2007.  Paragraph (6) (3) provides for the new high income child benefit charge to form part of an individual’s liability to income tax for a tax year.   The new charge is added to the list of additional tax charges relating to an individual in section 30 ITA 2007 and will thus be included at step 7 of the calculation of liability to income tax in section 23 ITA 2007.

47.Paragraph (7) contains the commencement provisions. These make clear that the first tax year for which the high income child benefit charge applies is 2012/13. It does not apply to any child benefit entitlement that arises in that tax year before the week beginning 7 January 2013, which is the first Monday in 2013.

Background Note

48.The new high income child benefit charge is the way the Government is implementing its policy of reducing the amount of child benefit available to families that include someone who has income above £50,000. The reason for this is that it is very difficult to justify taxing people on lower incomes to pay for the child benefit of those with higher incomes.

49.The introduction of a tax charge means child benefit can continue to be paid to all claimants who establish their entitlement to the payment, regardless of whether there is any liability to the tax charge, without means testing at the point of payment. The design of the charge means that only 15 per cent of families with children are affected by the charge.

50.The introduction of a taper for those with incomes between £50,000 and £60,000 smoothes the effect of the charge for those with income nearer to the lower end of the taper.

51.The new charge is based on entitlement to child benefit, rather than to receipt of child benefit. This is consistent with the approach of taxing social security benefits. It also avoids any unintentional element of double taxation that could arise following payment of child benefit as the result of a revocation of an election made under the provisions of an election not to receive child benefit. The example below demonstrates how this could happen if the receipts basis were used.

52.A child benefit claimant elects not to receive child benefit for the tax year 2014/15 because they believe their income will be above £60,000 making them liable to the high income child benefit charge for 2014/15. In July 2015 the claimant realises their income was lower than expected for 2014/15, revokes the election and receives the amount of child benefit due for 2014/15 in August 2015.  This is during the tax year 2015/16 when the level of their income does attract the charge. If the receipts basis were used, the claimant would be liable to the charge on the amount received in 2015/16 for the amounts for 2015/16 and for 2014/15. The entitlement basis ensures the claimant is only liable for the amount to which they were entitled for 2015/16 and that the amount for 2014/15 correctly escapes the charge.

Section 9: Post-Cessation Trade Or Property Relief: Tax-Generated Payments Or Events

Summary

1.Section 9 provides for changes to the rules for “post-cessation trade relief” and “post-cessation property relief” which can be claimed by a person after a business has ceased. The changes are designed to prevent tax-generated costs being available for relief against the person’s other taxable income or capital gains. The changes apply to post-cessation trade relief with effect from 12 January 2012 and to post-cessation property relief with effect from 13 March 2012.

Details of the Section

2.Subsection (2) adds section 98A of the Income Tax Act 2007 (ITA) to the list of sections with which section 96 of ITA needs to be read.

3.Subsection (3) inserts new section 98A of ITA (Denial of relief for tax-generated payments or events).

4.New section 98A(1) provides that no post-cessation trade relief (including relief by way of claim under section 261D of the Taxation of Chargeable Gains Act 1992) is available to a person in respect of a payment or an event which is made or occurs in consequence of, or in connection with, relevant tax avoidance arrangements.

5.New section 98A(2) defines “relevant tax avoidance arrangements” for the purposes of new section 98A(1).

6.New section 98A(3) defines “arrangements” and “section 261D claim” for the purposes of new section 98A.

7.Subsection (4) adds section 98A of ITA to the list of sections which apply to post-cessation property relief in the same way as for post-cessation trade relief.

8.Subsections (5) and (6) provide commencement rules.

9.Subsection (7) defines “an unconditional obligation” for the purposes of subsections (5) and (6).

Background Note

10.The Government has become aware of avoidance activity that relies on creating contrived costs in order to claim post-cessation trade relief. This puts at risk substantial amounts of tax.

11.The Exchequer Secretary to the Treasury announced in a written statement on 12 January 2012 that legislation would be introduced with effect from that date to prevent post-cessation trade relief being available where the relief arises from arrangements and a main purpose of the arrangements is to obtain a tax reduction resulting from post-cessation trade relief. A further announcement was made on 13 March 2012 extending the restriction to post-cessation property relief with effect from that date.

Section 10: Property Loss Relief Against General Income: Tax-Generated Agricultural Expenses

Summary

1.Section 10 provides for changes to the rules for the losses that can be claimed by a person from a property business with a relevant agricultural connection. The changes are designed to prevent tax-generated agricultural expenses being available for relief against the person’s other taxable income. These changes were announced on 13 March 2012 and will apply on and after that date.

Details of the Section

2.Subsection (2) adds section 127B of the Income Tax Act 2007 (ITA) to sections restricting relief under Chapter 4 of ITA.

3.Subsection (4) inserts new section 127B of ITA (no relief for tax-generated agricultural expenses).

4.New section 127B(1) provides that this section applies if a person makes a loss in a tax year from carrying on a property business with a relevant agricultural connection, either in a sole capacity of as a partner, and that loss arises directly or indirectly in consequence of, or otherwise in connection with relevant tax avoidance arrangements.

5.New section 127B(2) provides that there is no property loss relief for the loss falling within section 127B(1).

6.New section 127B(4) defines “relevant tax avoidance arrangements” for the purposes of section 127B.

7.New section 127B(5) defines “arrangements” for the purposes of section 127B(4).

8.New section 127B(6) defines “the applicable amount of the loss” and “allowable agricultural expenses” for the purposes of section 127B

9.Subsections (5) and (6) provide commencement rules

10.Subsection (7) defines “an unconditional obligation” for the purposes of subsection (6).

Background Note

11.A person who makes a loss from a property business with a relevant agricultural connection may claim relief against their other income. This is known as “property loss relief”.

12.The Government has become aware of avoidance activity that relies on creating contrived costs in order to claim property loss relief. This puts at risk substantial amounts of tax.

13.The Exchequer Secretary to the Treasury announced in a written statement on 13 March 2012 that legislation would be introduced with effect from that date to prevent property loss relief being available where the relief arises from arrangements and a main purpose of the arrangements is to obtain a tax reduction resulting from property loss relief from a property business with a relevant agricultural connection.

Section 11: Gains from Contracts for Life Insurance Etc

Summary

1.This section affects the taxation of certain life insurance policies, life annuity contracts and capital redemption policies under the chargeable event gain regime. It addresses income tax avoidance by putting beyond doubt that gains liable to income tax are not reduced where there are certain untaxed gains earlier in the life of the policy or contract, or by the use of certain cluster policy arrangements. The measure has effect for relevant policies and contracts made on or after 21 March 2012 and for pre-existing policies where certain events arise on or after this date.

Details of the Section

2.Subsection (1) adds new section 473A to the special rules for life insurance policies, life annuity contracts and capital redemption policies, which are contained in Chapter 9 of Part 4 Income Tax (Trading and Other Income) Act 2005.

3.New section 473A treats connected policies and contracts as a single policy for the purposes of the chargeable event gain regime.

4.Subsections 2 and 3 of new section 473A provide that policies are treated as connected where a policy is issued by reference to another policy (a related policy) on terms that would not be expected in isolation. This will apply where the terms of either policy are significantly more or significantly less favourable than would be expected if the other policy were ignored, or if other related policies were ignored.

5.Subsection 4 of new section 473A provides that if an additional policy is connected to at least one but not all of a number of other policies that are themselves connected, all of these policies will be treated as connected.

6.Subsection (2) amends section 491(2) Income Tax (Trading and Other Income) Act 2005 to impose a restriction on the deduction for gains arising from certain earlier chargeable events (such as part withdrawals) in calculating the amount of gains that may subsequently arise when the same policy comes to an end or is assigned in full. The deduction will only apply to the extent that the earlier gains were attributable to one or more of the persons treated as chargeable to tax under the chargeable event gain regime, or were taken into account when calculating the income of a person under rules for the Transfer of Assets Abroad (Part 13, Chapter 2 of the Income Tax Act 2007).

7.Subsection (3) amends section 552 Income and Corporation Taxes Act 1988 so that reporting obligations for insurers will not be affected by the restriction on deductions for earlier gains.

8.Subsection (4) ensures that the new rules will apply to all policies and contracts made on or after 21 March 2012.

9.Subsections (5) and (6) ensure that the new rules will also apply to policies and contracts made before 21 March 2012:

Background Note

10.Gains from life insurance policies, life annuity contracts and capital redemption policies are taxed as income. They can arise on the happening of “chargeable events” such as the maturity of a policy, an assignment for money or money’s worth and surrenders of all or part of the rights under a policy.

11.These rules apply to each individual policy. However arrangements have been designed with the aim of deferring income tax that may arise when policies come to an end by ‘shifting’ into one policy investment profits attributable to premiums paid into a number of different policies. The arrangements ensure that these policies, with no investment gains as a result of the “shift” referred to above, are brought to an end first with no tax liability arising even though economic investment profits may arise from the premiums paid into these policies.

12.This measure removes any scope to defer income tax in this way by recognising the economic position and treating all such interdependent policies as a single policy for the purposes of the chargeable event gain regime. Standard industry arrangements which divide a sum invested across a number of identical but genuinely distinct and economically self-contained policies will not be affected.

13.The amount of gain when a policy comes to an end is calculated by deducting the total amount of premiums paid into the policy plus gains that have previously arisen under the policy (earlier gains); from the total value of any benefits received over the whole life of the policy. Tax may then be due where any gains resulting from the calculation are included in the income of one of the persons chargeable to tax under the special income tax rules for life insurance policies.

14.However, there was no requirement that the earlier gains need to have formed part of the income of one of these persons. A number of income tax avoidance schemes took advantage of the deduction for earlier gains to reduce the amount of gains liable to income tax when a policy comes to an end. These schemes used arrangements under which earlier gains arose when there was no person liable to tax on them (because, for example, the earlier gains were attributable to a person who was not UK resident) in order to reduce income tax otherwise due on investment profits from life insurance policies. This measure removes such opportunities.

Section 12: Settlements: Income Originating from Settlors Other Than Individuals

Summary

1.Section 12 provides for amendments to certain provisions of the settlements legislation (Part 5, Chapter 5 Income Tax (Trading and Other Income) Act 2005 (ITTOIA)) so that the rule in section 624(1) does not apply if a settlor is not an individual. The changes will confirm that income which arises under a settlement and originates from any settlor who is not an individual is not treated as that of the settlor.

2.The change will take effect from 21 March 2012.

Details of the Section

3.Paragraph 1 of the section provides for amendments to ITTOIA 2005.

4.Paragraph 2 inserts a new subsection (4) in section 627 of ITTOIA which gives exceptions from the rule in section 624(1) of ITTOIA for certain types of income. The rule in section 624(1) states that income which arises under a settlement is treated for income tax purposes as only that of the settlor if it arises during the settlor’s life and from property in which the settlor has an interest. The new sub section (4) provides that the rule in section 624(1) does not apply to income arising from a settlement, as defined in section 620(1), which originates from any settlor who was not an individual. The effect of the amendment is that income from a settlement in which the settlor has an interest is not treated as income of the settlor for tax purposes if the settlor was not an individual.

5.Paragraph 3 amends section 645(2) of ITTOIA so that it refers to section 627 as well as to section 644. Where there is more than one settlor, section 644 provides that the settlements legislation has effect as if each settlor were the only one. It then provides that property comprised in, and income arising under, a settlement should be taken to refer to property and income originating from that settlor. The amendment to section 645 ensures that ‘income originating from the settlor’ has the same meaning in section 627 as it does in section 644.

6.Paragraph 4 gives the commencement provisions. The amendments made by this section have effect on any income arising from the settlement on or after 21 March 2012.

Background Note

7.The settlements legislation (Part 5, Chapter 5 ITTOIA 2005) applies in situations including those where a settlor, within the meaning of the legislation, has retained an interest in property or income from it. The aim of the provisions is, broadly, to prevent an individual gaining a tax advantage by diverting their income to another person who is liable to income tax at a lower rate than the individual.

8.Where the settlements legislation applies, the income arising under the settlement is treated as income of the settlor. Income tax is charged on the income as if it had arisen directly to the settlor and as if it was the highest part of the settlor’s total income.

9.The purpose of the amendments to the settlements legislation is to confirm that income arising under a settlement is treated as that of the settlor only where the settlor is an individual. The proposed changes would close avoidance schemes that seek to exploit the settlements legislation by using corporate settlors of ‘interest in possession’ settlor-interested trusts to try to avoid income tax at higher or additional rates which would otherwise be due on dividends paid by a subsidiary of the corporate settlor. The amendments would ensure that the relevant provisions do not apply to settlors who are not individuals and hence that the income would not be treated as that of the settlor in those situations.

10.Where the settlements legislation does not apply to an interest in possession trust, the income arising under the settlement will be taxed on the income beneficiaries of the trust.

Section 13: Champions League Final 2013

Summary

1.Section 13 provides for an exemption from income tax for the non-resident players and officials of visiting teams who compete in the 2013 Champions League final, which is to be held in the UK.

Details of the Section

2.Paragraph (1) provides that no liability to income tax arises in respect of any income from the 2013 Champions League final. The exemption will apply to individuals who are employees or contractors of an overseas team who are not resident in the UK.

3.Paragraph (2) defines income from the 2013 Champions League final as meaning income which is related to duties or services performed by the person in the UK in connection with the final.

4.Paragraph (3) provides that the income to be exempt must relate to contracts that are in place before the final takes place. Income that is subject to tax avoidance arrangements is not exempt.

5.Paragraph (4) defines what is meant by tax avoidance arrangements.

6.Paragraph (5) provides that withholding obligations under section 966 of the Income Tax Act 2007 do not apply to any payment or transfer that gives rise to income benefitting from the exemption.

7.Paragraph (6) provides definitions of “the 2013 Champions League final”, a “contractor”, an “employee” and “employment”, “income” and “overseas team”.

Background Note

8.There will be an exemption from UK income tax for the non-resident players and officials of visiting football teams playing in the 2013 Champions League final, to be held in the UK. A similar exemption was provided for the 2011 Champions League final which was also held in the UK.

9.The employment income, self-employment income and any endorsement income of the players and the teams’ officials relating to the Champions League final in the UK will not be liable to UK income tax where the team is an overseas team and those players and officials are not resident in the UK. This exemption only applies where the income is in relation to the match and where the individual works for, or is contracted to, the team or its subsidiaries.

Section 14: Cars: Security Features Not to Be Regarded as Accessories

Summary

1.Section 14 ensures that individuals who are provided with security enhanced cars made available for their private use, and who can demonstrate that the nature of their employment creates a threat to their personal security, are not unfairly impacted by the abolition of the £80,000 cap on the cash equivalent of the benefit on company cars made available for private use.  It will take effect from 6 April 2011.

Details of the Section

2.Paragraph 2 introduces new section 125(3A) into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).  This provides that section 125(2) ITEPA (which deals with exclusions from treatment as accessories) must be read with new section 125A ITEPA.

3.Paragraph 3 introduces new section 125A.  New section 125A(1) provides that the section applies to company cars with a relevant security feature.  New section 125A(2) provides that the relevant security feature is not an accessory if it is provided as a result of a threat to the individual’s personal security arising from the nature of their employment.  New section 125A(3) sets out the types of relevant security features and includes any modification made to the car as a result of the enhancements (in order to make it roadworthy).  Finally, new section 125A(4) provides an order making power to introduce further relevant security features should these be required in future.

4.Paragraph 4 deals with a consequential amendment to Part 2 of Schedule 1 to ITEPA (index of defined expressions).

Background Note

5.The cash equivalent of the taxable benefit of a company car made available for private use is calculated on the basis of (list price + cost of accessories) x (the appropriate percentage (normally based on CO2 engine emissions)).

6.Because of the nature of their employment, a number of individuals in both the public and private sectors are provided with company cars that have been modified to accept security enhancements such as bullet proofed glass and armour plating.  These are currently regarded as accessories for tax purposes and the value of the enhancements falls within the computation of the cash equivalent of the benefit.  This may significantly add to the level of taxable benefit resulting in a disproportionate tax liability for some individuals.

7.Prior to 6 April 2011, there was an £80,000 limit on the list price and accessories calculation for the cash equivalent of the taxable benefit.  This covered most security enhanced cars.

Section 15: Termination Payments to Mps Ceasing to Hold Office.

Summary

1.Section 15 amends section 291(2)(a) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). The amendment ensures that the first £30,000 of a resettlement payment to an MP who ceases to be a member of the House of Commons is exempt from tax.

Details of the Section

2.Subsection (1) amends section 291 of ITEPA by substituting a new section 291(2)(a).

3.New section 291(2)(a) exempts from the charge to income tax  on earnings resettlement payments made under section 5(1) of the Parliamentary Standards Act 2009 (PSA 2009) in connection with a person’s ceasing to be a member of the House of Commons.

4.Subsection (2) provides that the amendment has retrospective effect and applies in relation to payments made on or after 1 April 2012.

Background Note

5.Prior to the enactment of the PSA 2009 and the establishment of IPSA, resettlement grants were  payable to any Member of the House of Commons who failed to be re-elected or who did not stand at a General Election in accordance with a resolution of the House of Commons.

6.From 1 April 2012 the Fourth Edition of the MPs’ Scheme of Business Costs and Expenses makes provision for a resettlement payment to be made to any MP who leaves office involuntarily following a General Election. As a consequence, tax legislation needs amending in order for existing tax exemptions to continue to apply to such payments made by IPSA.

7.Section 291(2)(a) of ITEPA exempts from the charge to income tax on earnings resettlement grants  made to MPs when they cease to be members of the House of Commons when parliament is dissolved, where the grants  are made in accordance with a resolution of the House of Commons.

8.As currently worded, the legislation does not apply to similar payments made by IPSA because they are not made under a resolution of the House of Commons.

9.The proposed amendment to section 291(2)(a) will allow the exemption to apply to payments made by IPSA to any MP who ceases to be a member of the House of Commons.

Section 16: Employment Income Exemptions: Armed Forces

Summary

1.Section 16 will exempt from income tax, payments of the Continuity of Education Allowance (CEA) by the Ministry of Defence (MoD) to or in respect of serving and deceased members of the Armed Forces.

2.The SECTION also makes consequential amendments to the existing exemptions for payments of the Operational Allowance and Council Tax Relief to members of the Armed Forces to align the specifications of the legal authority under which these payments are made.

Details of the Section

3.Subsection (1) introduces amendments to Chapter 8 of Part 4 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) (exemptions: special kinds of employees)

4.Subsection (2) amends section 297A of ITEPA (exemption for Operational Allowance) so that; “by the Secretary of State” is replaced with “under a Royal Warrant made under Section 333 of the Armed Forces Act 2006”.

5.Subsection (3) amends section 297B of ITEPA (exemption for Council Tax Relief) so that; “by the Secretary of State” is replaced with “under a Royal Warrant made under Section 333 of the Armed Forces Act 2006”.

6.Subsection (4) inserts new section 297C into ITEPA.

7.New section 297C(1) makes provision for payments of the CEA to or in respect of serving or deceased members of the Armed Forces to be exempt from income tax.  New section 297C(2) specifies the legal authority under which payments of the CEA are made.

8.Subsection (5) provides that the amendments made by the section have effect in relation to payments made on or after 6 April 2012.

Background Note

9.The CEA is paid to service personnel to provide a continuity of education for their children that would not otherwise be possible if they accompanied their parents on frequent assignments both at home and overseas.

10.The CEA is currently liable to tax but the tax is paid by the Ministry of Defence on behalf of CEA where paid to recipients based in the UK.

11.This new exemption aims to support the principles of the Armed Forces Covenant and in particular the principle that service personnel and their families should not be put at any disadvantage from entering into military life. It seeks to mitigate the financial impact of providing a secure and continuing education acknowledging the particular circumstances in which these men and women serve and the particular difficulties they face.

Section 17: Taxable Benefits: “the Appropriate Percentage” for Cars for 2014-15

Summary

1.Section 17 relates to taxable benefits on company cars.  With effect from 6 April 2014, it modifies the current appropriate percentage bands and carbon dioxide (CO2) emissions thresholds by revising the appropriate percentage of the relevant threshold up to 12 per cent from 11 per cent.

2.The section also increases the appropriate percentage for cars with emissions below the relevant threshold but greater than 75g CO2 per kilometre from 10 per cent to 11 per cent.

Details of the Section

3.Subsection (1) introduces changes to section 139 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) (as amended by section 51 of the Finance Act 2011 with effect from 6 April 2013).  It provides that subsection (2) is amended to increase the level of the appropriate percentage from 10 per cent to 11 per cent for cars with engine emissions below the relevant threshold, but greater than 75g CO2 per kilometre.  The subsection also amends subsection 139(3) ITEPA so that the appropriate percentage of the relevant threshold is increased from 11 per cent to 12 per cent.

4.Subsection (2) provides that this amendment has effect for 2014-15 and subsequent tax years.

Background Note

5.Section 139 of ITEPA sets out the basis for calculating the appropriate percentage for cars with CO2 emissions.  The appropriate percentage multiplied by the list price of the car (adjusted for any taxable accessories) provides the level of chargeable benefit for company car tax for employees and of Class 1A NICs for employers.

6.From 6 April 2012, the graduated table of company car tax bands will provide for a zero per cent band for zero emission cars, a 5 per cent band for ultra low emissions cars (1-75g CO2 per km emissions), a new 10 per cent band for other low emissions cars (76g-100g CO2 per km emissions) with a one per cent increase for each rise in emissions of 5g CO2 per km above 100g CO2 to a maximum of 35 per cent.

7.Section 51 of the Finance Act 2011 provided for a change to the 10 per cent band for low emissions cars to 76-95g CO2 per km from 6 April 2013.

8.This section has the effect of retaining the same emissions values, but instead increases the value of the appropriate percentage by one per cent to 11 per cent for cars with emissions below the relevant threshold, and 12 per cent for cars at the relevant threshold, respectively.  The appropriate percentage for cars with zero emissions and those emitting 75g CO2 or less will remain unchanged for 2014-15.

9.On average, the level of CO2 emissions produced by new cars fell by more than 5g in the last year.  These changes support the Government’s commitment to reducing the UK’s carbon footprint.

Section 18: Qualifying Time Deposits

Summary

1.Section 18 concerns the deduction of income tax from interest or similar amounts payable by building societies, banks and other deposit-takers on investments that are qualifying time deposits.  It removes the exclusion of these investments from arrangements under which financial institutions deduct sums representing income tax at the basic rate from interest they pay to account holders.

Details of the Section

2.Subsection (1) amends section 866(1) of the Income Tax Act 2007 (ITA 2007).  Section 866(1) provides that an investment which is a qualifying time deposit is not a ‘relevant investment’ for the purposes of Chapter 2, Part 15 of ITA 2007 (concerning deduction of sums representing income tax by deposit-takers and building societies from payments of interest on relevant investments).  Interest payments in respect of qualifying time deposits are therefore excluded from the tax-deduction requirements set out at Chapter 2, Part 15 of ITA 2007.

3.Subsection (1) restricts this exclusion, so it applies only to interest payments in respect of qualifying time deposits made before 6 April 2012.  A qualifying time deposit made on or after 6 April 2012 will by virtue of the amendment made by subsection (1) be a ‘relevant investment’ for the purposes of Chapter 2, Part 15 of ITA 2007.  Building societies, banks and other deposit-takers will therefore be required to deduct sums representing income tax at the basic rate from interest payments they make on these investments.

4.Subsection (2) provides that this section will be treated as having come into force on 6 April 2012.

Background Note

5.Income tax is usually due on interest that building societies, banks and other deposit-takers pay to savers and investors.  There are, however, circumstances in which income tax will not be due, for example where a saving or investment product is tax-advantaged (such as an Individual Savings Account).

6.Building societies, banks and other deposit-takers usually deduct sums representing income tax from interest payable on most of their savings or investment products.  These sums are deducted at the basic rate of income tax and paid to HM Revenue & Customs (HMRC) under the Tax Deduction Scheme for Interest.

7.However, any interest payable on investments that are qualifying time deposits is excluded from these tax-deduction arrangements.  This interest is paid gross to investors, and each investor is required to make separate arrangements to account for any tax due to HMRC.

8.The effect of this section is to remove this exclusion for qualifying time deposits made on or after 6 April 2012.  Building societies, banks and other deposit-takers will be required to deduct sums representing income tax at the basic rate from interest they pay on these qualifying time deposits.  However, where an investor is not liable to pay tax on interest, for example because their total taxable income is less than their tax-free personal allowance, they can register with their account provider to receive interest payments gross.

Section 19 Schedule 2: Profits Arising from the Exploitation of Patents Etc

Summary

1.Section 19 and Schedule introduce a new tax regime which will allow companies to elect to apply a 10 per cent corporation tax rate to profits attributable to patents and certain other qualifying intellectual property (IP) from 1 April 2013 (on a progressively incremental basis from 2013 to 2017).

Details of the Schedule

2.There are three parts to the Schedule.  Part 1 introduces amendments to Corporation Taxes Act (CTA) 2010, whereas part 2 provides for changes to other legislation.  Part 3 contains the commencement and transitional provisions.

Part 1: Amendments of CTA 2010

3.Paragraph 1 introduces a new part 8A to CTA 2010 concerning the new IP tax regime.  It also explains that there are 7 chapters in part 1 covering election to the new IP treatment, qualifying companies, 2 types of determination of IP profits/losses of a trade, provisions for setting off IP losses, anti-avoidance provisions, and supplementary provisions.

Chapter 1: Reduced Corporation Tax rate for profits from patents etc

4.New section 357A(1) outlines an elective regime to provide for a reduced rate of corporation tax for profits from patents and other specified intellectual property for qualifying companies.  Under new section 357G(4) the election applies to all of the company’s trades.

5.Where an election is made, new section 357A(2) gives effect to that election not by applying a reduced rate of tax to eligible profits directly, but by granting a deduction from trading profits of such an amount as has the same effect as reducing the main rate of corporation tax on eligible profits to the special IP rate.

6.New section 357A(3) provides the formula for calculating the amount of the deduction.

7.New section 357A(4) sets the special IP rate of corporation tax at 10 per cent.

Chapter 2: Qualifying companies

8.New sections 357B(1) to (3) outline the requirements for a company to be a qualifying company in any accounting period for the purposes of an election under new section S357A.  The company must either:

9.The second condition allows a company to apply the Patent Box rules to income received when it would not otherwise be a qualifying company.  An example is damages for infringement of patent rights where compensation is received after the expiry of a patent, but where the company had made a Patent Box election at the time of the infringement.

10.In addition, for a company that is a member of a group, new section 357B(5) requires it to also satisfy the active ownership condition of new section 357BE.

11.New section 357B(4) defines a qualifying IP right.   The right must be one of those listed in new section 357BB and the company must also meet the development condition of new section 357BC in respect of that IP right. New section 357GC sets out how the ownership conditions are modified where a company is party to a cost-sharing arrangement in relation to the creation and development of a qualifying IP right, or an exclusive licence.

12.New section 357BA defines the term exclusive licence.

13.New section 357BA(1) states that an exclusive licence is one granted by the proprietor, being someone who holds either the qualifying IP right or an exclusive licence over that right, which gives the person holding the licence exclusive rights over some of the IP rights held by the proprietor.

14.New section 357BA(2) specifies that the rights granted under an exclusive licence must at least:

15.A licence which grants more limited rights which, for example, do not extend to at least one whole country or territory, or where the licence holder can neither bring proceedings for infringement within its territory nor recover any damages, will not be a qualifying IP right.

16.New section 357BA(3) ensures that where certain rights required under new section 357BA(2) are not specifically granted by the licence, but are nonetheless granted by law to the licensee, for example under section 67 of the Patent Act 1977, these rights are treated as if they were granted by the licence.

17.New Section 357BA is subject to an anti-avoidance rule in new section 357F in chapter 6 to ensure that an exclusive licence does not include one where rights are conferred for a main purpose of securing that the licence qualifies for the regime. This is aimed at ensuring that the grant of commercially spurious exclusive rights does not constitute the grant of an exclusive licence for the purposes of this part.

18.A company can vest the rights it holds in an exclusive licence to another member of its group.  Where that happens then new section 357BA(4) and (5) ensure that the other company is treated as if it holds the exclusive licence, even if the company holding the exclusive rights retains the right to enforce, assign or grant further licences in respect of the licence.  This might be the case where, for example, the original licence holder is a group company whose primary role is the management of the group’s intellectual property portfolio, and any exploitation or development of the rights is carried out elsewhere in the group.

19.It is quite possible for the proprietor to grant exclusive licences to several persons for use in the same country or territory, provided that their use of the rights over the protected item is in substantially distinct fields of use so that there is no effective overlap of the exclusive rights granted.

20.New section 357BB specifies the rights to which part 8A applies. Rights specified here are the only types of right that can be qualifying IP in accordance with new section 357B(4).

21.New section 357BB(1) lists the rights currently specified.  These are:

22.New section 357BB(2) allows certain patent applications which are subject to a prohibition on publication on the grounds of national security or safety of the public to be treated as though they had been granted under that Act. This allows the invention which is the subject of such an application to be treated as protected by a right to which part 8A applies.

23.New sections 357BB(3) to (6) specify the circumstances in which a marketing authorisation granted in respect of medicinal, veterinary medicinal or plant protection products is to be regarded as a right to which part 8A applies. The marketing authorisation must benefit from marketing protection or data protection under the various EC regulations specified.

24.New section 357BB(7) gives the meaning of the terms European Patent Convention, specified and supplementary protection certificate used in new section 357BB(1), and rules used in new section 357BB(2).

25.New section 357BB(8) allows the Treasury, by order, to make further provisions in relation to marketing protection or to amend references to EU legislation in new section 357BB in consequence of EU legislation making amendments to or replacing that EU legislation.

26.New section 357BB(9) gives the Treasury power to make any additional changes that are necessary in connection with an order amending the rights to which part 8A applies.

27.New section 357BC sets out four ways (see conditions A to D below) that a company can meet the development condition in respect of an IP right it holds.  Where the development condition is met, and provided that the right concerned is also of a type specified by new section 357BB, the right will be a qualifying IP right for that company.

28.New sections 357BC(2) and (3) ensure that a company meets the development condition in respect of an IP right if it carried out qualifying development in respect of the right in question (see new sections 357BD(1) below).  Condition A applies where the company has not become or ceased to be a controlled member of a group since carrying out the qualifying development.  Where it has, condition B applies if it continues to carry on activities of the same nature as those that amounted to the qualifying development for 12 months after becoming or ceasing to be a controlled member of the group, provided that during those 12 months it does not cease to be a member of that group or become a controlled member of any other group.  These activities need not necessarily be in respect of the same protected item or right.  When a company is treated as becoming or ceasing to be a controlled  member of  a  group is  defined in new sections 357BC(6) and (7).

29.New section 357BC(4) provides for condition C which allows a company within a group that holds either a qualifying IP right or an exclusive licence in respect of such rights to meet the development condition under condition C by virtue of the qualifying development undertaken by another group company.  The company undertaking the qualifying development must have been a member of the relevant group when the qualifying development was carried out (even if the company that holds the right was not).  However it is not necessary that the company holding the rights was a member of the group at the time the development occurred; it is only necessary that it is currently a member of the group.

30.New section 357BC(5) stipulates condition D to deal with the situation where a company (T), holding IP rights in respect of which it meets the development condition (as in condition B), joins a new group and then transfers the IP rights to another company in the new group.  Condition D allows the company to which those rights have been transferred to satisfy the development condition where the transferee either:

taken together (T) and/or the transferee company continue to undertake activities of the same nature as those that amounted to the qualifying development for 12 months after (T) joined the group.

31.New section 357BC(6) sets out when a company is treated as becoming a controlled member of a group. This will happen where a company that was not previously associated with the company acquires control of the company or acquires a major interest in the company.

32.New sections 357BC(7) and (8) set out when a company is treated as ceasing to be a controlled member of a group.  This will happen where each company which previously controlled or held a major interest in a company ceases to do so, and the company is no longer associated with those companies.  Where a company ceases to be a controlled member of the group, any company that it controls, and any company in which it holds a major interest is also treated as ceasing to be a controlled member of the original group.

33.New sections 357BC(9) and (10) define ‘associated’, control and ‘major interest’ for the purposes of this section.

34.New section 357BC(11) ensures that where a group company meets the development condition under either condition B or D of new section 357BC, it is regarded as meeting that condition from the date that either it or the other company respectively joined the group, rather than on the expiry of the 12 month period.

35.New sections 357BD(1) and (2) define qualifying development of an IP right as the creation or development (including a significant contribution to these activities) of an invention.  Developing an invention includes developing ways to use or apply the item.  Invention is defined by new section 357GE to mean the item or process in respect of which the right is granted.

36.New section 357BD(3) confirms that for the purpose of new section 357BC, qualifying development undertaken before the IP right was acquired, whether by the company which holds the IP right or another member of the group, is taken into account in considering whether the development condition is satisfied.

37.New section 357BE sets out when a company is regarded as satisfying the active ownership condition.  Companies that are not part of a group do not need to meet the active ownership condition, by virtue of new section 357B(1).

38.New section 357BE(1) states that a company meets the active ownership condition if substantially all of its qualifying IP rights satisfy either of two conditions.

39.New sections 357BE(2) and (3) set out the first condition, which is met where the company performs significant management of its qualifying IP rights portfolio during the accounting period.  In this context management activity includes the formulation of plans and decision-making in relation to the development or exploitation of the IP rights.

40.New section 357BE(4) sets out the second condition, which is met where the company carries out development activity in relation to the particular IP rights during the accounting period, meeting either of the development conditions set out in new sections 357BC(2) or (3).  These require the development activity to be carried out by the company that has the IP rights rather than by any other member of the group.

Chapter 3: Relevant IP profits

41.New section 357C sets out the Steps necessary to determine the relevant IP profits of the trade.  The relevant IP profits of the trade are the profits that are used in the formula in new section 357A to calculate the appropriate amount of the deduction from the profits of the trade which gives effect to the lower rate of corporation tax.

42.New section 357C(1) outlines the six Steps involved in the computation of the relevant IP profits of a trade.

43.Step 1 specifies that the total gross income of a trade must be calculated.  Total gross income of the trade is defined in new section 357CA.

44.Step 2 determines the percentage of the company’s total gross income that is relevant IP income, denoted as X per cent.  Relevant IP income includes not only the income identified under the various Heads in new section 357CC, but also any notional royalty identified under new section 357CD.

45.Step 3 apportions the total profit or loss of the trade between that attributed to activities of the trade involving the exploitation of qualifying IP rights and other matters.  This is achieved by applying the percentage, X per cent, computed at Step 2 to the total profit or loss of the trade for corporation tax purposes adjusted as required by new section 357CG.

46.Step 4 determines any qualifying residual profit figure by deducting an amount representing a routine return, calculated under new section 357CI, from the result of Step 3.  Where this is a positive figure, this is the qualifying residual profit, which represents the additional profit over and above a routine return attributed to the exploitation of the all of the company’s intangible assets.  If the routine return figure is greater than X per cent of the total profit, then subject to Step 7, there will be a relevant IP loss for the period.  No further adjustment is necessary under Steps 5 and 6 where there is a loss at this stage in the calculation.

47.Companies with a qualifying residual profit now make a decision regarding how to calculate the amount of this qualifying residual profit that is attributed to the qualifying IP rights.  Step 5 sets out that where the company has not made an election for small claims treatment, it should proceed to Step 6; alternatively if the company has made such election, it should use the simplified procedure set out in new sections 357CL and 357CM.

48.Step 6 deducts from any qualifying residual profit an amount to be attributed to marketing assets.  Whilst it is possible that the result of deducting the marketing assets return figure from the qualifying residual profits creates a loss, in practice a company in that position will always be better off making a small claims election and using the alternative method set out in new sections 357CL and 357CM so long as they meet one of the conditions in new section 357CL(2) or (3).

49.Step 7 is the point at which a company includes in its relevant IP profits for the period any additional amount in respect of profits arising in the period where grant of a patent is pending when the patent is granted.  The way in which this amount is calculated is set out at new section 357CQ.

50.New sections 357C(2) and (3) specify that any positive sum determined from the Steps set out above is the relevant IP profit for the period, whilst any negative amount will be the relevant IP loss for the period.

51.New section 357CA sets out the calculation of the total gross income of the trade for Patent Box purposes.

52.New section 357CA(1) specifies that total gross income of the trade includes any amounts falling within 5 Heads each of which is further explained in new sections 357CA(3) to (8).

53.New section 357CA(2) specifies that total gross income of the trade excludes any finance income, as defined in new section 357CB.

54.New sections 357CA(3) to (4) define income within Head 1 which includes amounts that are both recognised as revenue in the company accounts, and brought into account in computing the profits of the trade for corporation tax purposes.  GAAP is the standard to be used for recognition of revenue items, even where accounts are not drawn up in accordance with that standard.

55.New section 357CA(5) defines income within Head 2 as including amounts received as damages, insurance receipts or other compensation, to the extent that these have not been recognised as revenue in the accounts (and therefore included under Head 1).

56.New section 357CA(6) ensures that any adjustments that are necessary on a change of a company’s accounting basis which are treated as receipts for tax purposes are included under Head 3, to the extent that these are not recognised as revenues in the accounts (and therefore included under Head 1).

57.Sections 357CA(7) and (8) set out amounts included in Heads 4 and 5 as any taxable credits from the realisation of intangible fixed assets, and any profits from the sale of pre-2002 patent rights, held for the purposes of the trade which arise during the accounting period.

58.New section 357CB defines finance income as credits arising from financial assets, any amounts treated as a receipt of the trade arising from loan relationships or derivative contracts by virtue of sections 297 and 573 of CTA 2009 respectively, and other amounts economically equivalent to interest which a company receives as a consequence of any arrangement to which it is a party.  Income from financial assets includes dividends and other income from shares that forms part of the income of a financial trader.

59.New section 357CC sets out the amounts included in the total gross income of the trade which are to be regarded as relevant IP income. The aggregate of these amounts, together with any notional royalty identified under new section 357CD, will form the relevant IP income used in Step 2 of new section 357C(1).  The measure of the income under the Heads of relevant IP income for any accounting period will be the amount that is brought into account for tax purposes in the period.  Thus where recognition of the income from a disposal is spread over several accounting periods, then only the part recognised in the current period is treated as relevant IP income.

60.Relevant IP income must fall under one of the Heads identified in new section 357CC(1).

61.Any income which falls within Heads 1 to 5 (see new sections 357CC(2) and (6) to (9) below) will nevertheless not be relevant IP income to the extent that it is excluded income by virtue of new section 357CE.

62.New section 357CC(2) outlines income falling within Head 1. This is not limited to income from the sale of qualifying items which are items protected by a qualifying IP right.  It also includes the income from the sale of items either incorporating the qualifying item, or wholly or mainly designed to be incorporated into it.  Thus income from sales of products incorporating a patented component and from the sale of spare parts for such a product will be included under Head 1.  Qualifying items are items in respect of which a qualifying IP right held by the company has been granted.

63.For these purposes an item is defined in new section 357GE in chapter 7 as including any substance.

64.New sections 357CC(3) and (4) deal with the distinction between a qualifying item and its packaging.  These are treated separately unless the packaging performs an essential function relating to the use of an item.  The requirement to treat packaging separately is subject to a de minimis exception in new section 357CF(6) and it should not be relevant for most companies.  Companies selling qualifying items will not generally be required to separately identify the value attributable to its packaging.  The principal exception, where separate treatment is necessary, is the sale of an item that is not a qualifying item but which is sold in patented packaging.  The effect of the rule in such a case is to prevent the income from the sale of the item being regarded as part of the company’s relevant IP income.

65.New section 357CC(5) extends the meaning of items incorporating one or more qualifying items in subsection 2(b) to include the situation where a qualifying item and an item designed to incorporate that item are sold together for a single price.

66.New section 357CC(6) provides that income falling within Head 2 is income consisting of any licence fee or royalty received by the company under an agreement which only grants to another person:

‘Qualifying process’ means a process in respect of which the company holds a qualifying IP right.

67.Licence fees or royalties that exclusively relate to the qualifying IP rights, qualifying items or processes are included in Head 2 income.  If a licence agreement provides for the receipt of royalties and / or fees for any other matter, then the rules for a mixed agreement in new section 357CF must be applied to determine the amount of relevant IP income.

68.New section 357CC(7) outlines income falling within Head 3. This is any income arising from the disposal of a qualifying IP right or an exclusive licence.

69.New section 357CC(8) outlines income falling within Head 4. This is any amount received by the company arising from infringement or alleged infringement of any qualifying IP right held by the company.  At the time of the infringement the company must have held the qualifying IP right.

70.New section 357CC(9) outlines income falling within Head 5. This covers other amounts of damages, insurance proceeds or compensation that do not fall within Head 4 (infringement of qualifying IP rights) but which nonetheless arise in respect of the sale of qualifying items or the loss of income which would have been relevant IP income.

71.Examples of amounts that would fall within Head 5 are:

72.New sections 357CC(10) and (11) stipulate that income cannot be treated as relevant IP income under new sections 357CC(8) or (9) unless, at the time of the event in respect of which the income is received the company was a qualifying company for which an election under new section 357A in chapter 1 had effect.  Where the damages etc. received for the infringement relate partly to periods when the company was a qualifying company and partly to periods when it was not, then a just and reasonable apportionment is to be made to determine the amount which is relevant IP income.

73.Income will be treated as relevant IP income within Heads 4 and 5 even where it is received at a time when the company no longer holds a qualifying IP right, provided that it relates to an infringement which occurred at a time when the company did hold the qualifying IP right and was a qualifying company to which an election under new section 357A had effect.  New section 357B(3)(b)

74.New section 357CC(12) specifies that any reference in new section 357CC to a qualifying right held by the company is taken to include a reference to any qualifying IP right in respect of which the company holds an exclusive licence.

75.New section 357CD provides a mechanism for determining the amount of a company’s total gross income of the trade which is not relevant IP income but which arises as a direct result of the company’s exploitation of a qualifying IP right under any of the heads of new section 357CC.  Such income is identified as IP-derived income.  An example of this might be the sale of non-patented goods that are produced using a patented process.  The aim of this section is to arrive at a further amount of the total gross income that will be treated as relevant IP income.  This is achieved by establishing a notional royalty that reflects what the company would pay out of the income generated by the exploitation of the IP in the accounting period to a third party for use of those qualifying IP rights.  This amount will be added to the relevant IP income of the trade for use in Step 2 of the calculation of relevant IP profits in new section 357C.

76.New sections 357CD(1) and (2) provide that relevant IP-derived income arises to a company if it holds any qualifying patent (or any exclusive licence in respect of such a patent) and the total gross income of the trade includes an amount arising from the company’s exploitation of those qualifying IP rights which is neither relevant IP income under new section 357CC nor excluded income under new section 357CE.

77.New section 357CD(3) allows a company to elect to treat a notional royalty in respect of its IP-derived income as if it were relevant IP income.  Where a company has negligible amounts of income that would fall within this section it may decide not to carry out a calculation of any national royalty.  Where the company wishes to calculate a notional royalty, no formal election procedure is set down, and the company may simply include the notional royalty election by way of a note to the computations in its corporation tax return (or an amended return) for the period.

78.New sections 357CD(4) and (5) set out how to determine the notional royalty. This is the appropriate amount of any IP-derived income for the accounting period that the company would pay to a third party for the right to exploit any qualifying IP rights used for that accounting period, assuming that the company were not otherwise able to exploit it.

79.New sections 357CD(6) and (7) set out the assumptions that are to be made in arriving at the appropriate percentage of the IP derived income for an accounting period. These are:

These assumptions ensure that the notional royalty relates to relevant IP-derived income generated during the accounting period.  The amount of the notional royalty cannot exceed the amount of the IP-derived income because it is calculated as a percentage of that income, and any amount in excess of 100 per cent would clearly not be a commercial arrangement.

80.Thus, where there is no significant change in the company’s circumstances, the actual percentage used in one accounting period should also be used in the following accounting period.  Only if there is a significant change in the company’s circumstances would a company need to reassess the appropriate amount in accordance with the above assumptions for a subsequent accounting period.

81.New section 357CD(8) requires that the amount of the royalty must be determined in accordance with article 9 of the OECD model and the transfer pricing guidelines.  Both these terms are defined in new section 357CD(9).

82.New section 357CE specifies that two types of income, which could otherwise fall within one of the Heads of relevant IP income outlined at new section 357CA, will not be relevant IP income under any circumstances.

83.New sections 357CE(1) to (3) specify that ring fence income, from UK Continental Shelf oil and gas trades as set out in part 8 of CTA 2010 (see sections 272 and 273), and income arising to a licensee that is attributable to any licence in respect of an item or process, but which is not an exclusive licence is excluded from being relevant IP income.

84.Where it is necessary to attribute an amount of income to a non-exclusive licence in respect of a qualifying IP right as set out in new section 357B(4), then this is to be done on a just and reasonable basis.

85.New section 357CE(4) ensures that where a company has been granted a mixture of exclusive and non-exclusive rights over the invention under a single licence, the licence is to be treated under Part 8A as comprising two separate licences; one an exclusive licence which confers only the exclusive right or related rights and the other a non-exclusive licence covering the non-exclusive rights.  Income in respect of the deemed non-exclusive licence is excluded income by virtue of new section 357CE(3).

86.New section 357CF requires a company to make a just and reasonable apportionment of income which includes elements of both relevant IP income and other income, for the purposes of determining the company’s relevant IP income.

87.New section 357CF(1) provides that the section will apply to mixed income, and income paid under a mixed agreement.

88.New section 357CF(2) defines mixed income.  This is income from the sale of qualifying items together with non-qualifying items as a single unit and for a single price.  A qualifying item is one whose sale would produce relevant IP income under new section 357CC(2).

89.New sections 357CF(3) and (4) define a mixed agreement.  This is any agreement that provides for any of:

and also

90.New section 357CF(5) requires the amount of relevant IP income to be determined using a just and reasonable apportionment of the mixed income or the income received under mixed agreement.  This is subject to a de minimis rule in new section 357CF(6).  A company may need to determine appropriate apportionments where none are provided within the agreement, or override the terms of an agreement for tax purposes where it is necessary to do so to arrive at a just and reasonable result.

91.For example, an agreement provides a single price for the sale of a single unit, where the sale includes 50 hairdryers with a patented motor (with the protected IP item (see new section 357CC) owned by the vendor), and 70 curling tongs where the vendor has no interest in any protected IP rights.  The vendor’s basic wholesale price of the hairdryer is £10 per unit, and the curling tongs £6 per unit.  Income from the sale which relates to the hairdryers falls within new section 357CC(2)(b), whereas that relating to the curling tongs does not fall within new section 357CC.  A just and reasonable amount of relevant IP income from the sale of the hairdryers could be calculated as:

92.New section 357CF(6) allows a company to disregard trivial amounts of income that can be attributed to the sale of non-qualifying items, the grant of other rights or the supply of services arising from a sale that generates mixed income, or under a mixed agreement, when calculating relevant IP income.  Where there are several non-qualifying amounts it is the aggregate amount which must be considered to determine whether the income is trivial.

93.New section 357CG sets out the adjustments that a company needs to make to its taxable profits from a trade in order to determine its relevant IP profits from that trade.

94.New sections 357CG(2) to (4) provide for the profits of the trade to be adjusted for two amounts, relating to research and development (R&D) tax relief, and financial income or expenses as follows.

95.Adding back any additional deduction for R&D expenditure obtained under part 13 of the CTA 2009 ensures that the company retains the full benefit of this tax relief even though its IP profits are taxed at a lower rate.

96.Removing any debits in respect of the trading loan relationships or derivative contracts, and any credits in respect of finance income ensures that the method of financing the company’s trade will not affect its relevant IP profits, and therefore the amount of tax relief it receives from the reduced rate of tax on those profits. Finance income is defined in new section 357CB.

97.New section 357CG(5) requires a company to use a greater amount of R&D expenditure in computing the profits of its trade in a relevant accounting period where there is a shortfall in R&D expenditure in relation to the trade of the company.  The provision operates in situations where a company’s R&D expenditure has predominantly been incurred in earlier periods while it was not within the Patent Box regime, and income from the results of that expenditure is mainly received in later periods at a time when it is within the regime, but its R&D expenditure has significantly reduced.  It only applies in the four years after a company makes an election under new section 357A.

98.Where there is a shortfall in R&D expenditure in relation to the trade of the company for a relevant accounting period, the provision requires a company to increase the amount of R&D expenditure taken into account in calculating relevant IP profits for that accounting period by the amount mentioned in new section 357CH(2).

99.New section 357CG(6) defines terms used in new section 357CG(5).

100.New section 357CH describes when and how the calculation of a company’s relevant IP profits for a relevant accounting period must take account of a greater amount of expenditure on R&D than that which has been incurred in the accounting period.  A relevant accounting period is defined in new section 357CG(5) and covers any accounting period beginning within four years of the date that an election into the Patent Box has effect for a qualifying company.

101.New section 357CH(1) specifies that there is a shortfall in R&D expenditure for a relevant accounting period where the actual R&D expenditure in the accounting period is less than 75 per cent of the average amount of R&D expenditure.  The actual R&D expenditure for an accounting period is defined in new section 357CH(3), although this is subject to any adjustment through a ‘smoothing’ procedure described in new sections 357CH(8) to (11).

102.New section 357CH(2) sets out the amount of the adjustment required when there is a shortfall in R&D expenditure for a relevant accounting period.  It is to be increased by the difference between 75 per cent of the average R&D expenditure in the relevant period before the company started to use the Patent Box and the actual R&D expenditure for that accounting period.

103.New section 357CH(3) defines the actual R&D expenditure, and specifies that R&D expenditure and relevant accounting period have the meanings given by new section 357CG(6).

104.New section 357CH(4) sets out how to calculate the average amount of R&D expenditure. This is the total amount of R&D expenditure incurred by the company for the relevant period (as defined in new section 357CH(4)) divided by the number of days in that period. This daily figure is then multiplied by 365 to give an annual amount.

105.New section 357CH(5) defines the relevant period for the purposes of new section 357CH.  This will generally be the four years prior to the accounting period in which an election under new section 357A by a qualifying company first had effect (or the time since the trade commenced if this is less than four years).

106.New section 357CH(6) directs that where a relevant accounting period is less than 12 months, the average amount of R&D expenditure used to compare with the actual expenditure is proportionately reduced.

107.New sections 357CH(7) to (11) address the circumstance where a company has fluctuating levels of R&D expenditure for different relevant accounting periods.  They allow a degree of ‘smoothing’ which will reduce the frequency and amount of any adjustments required under new section 357CH(2).

108.New section 357CH(8) provides that where, for any relevant accounting period, actual R&D expenditure is greater than the average calculated under new section 357CH(4) the excess can be added to the actual amount of R&D expenditure for the next relevant accounting period. That augmented amount of R&D expenditure is then compared with the average amount to determine whether there is a shortfall in R&D expenditure.

109.New sections 357CH(9) and (10) apply where it is the only additional amount of R&D expenditure included for an accounting period by virtue of new section 357CH(5) that causes there not to be a shortfall for that period.  In such a case, any remaining part of the additional amount over and above that which is necessary to increase the actual R&D expenditure for an accounting period to 75 per cent of the average R&D expenditure may be carried forward for use in the next period.

110.New section 357CH(11) specifies that where an additional amount of R&D expenditure is included for an accounting period by virtue of subsection (8), but it is needed to make up for a shortfall in R&D expenditure for that period then it may be carried forward to the next period, in addition to any excess of R&D expenditure over the average that arises in that period.

111.New section 357CI sets out how to compute a routine return figure for the purposes of Step 4 of the calculation of relevant IP profits.  Step 4 aims to exclude an amount of profit which represents a routine return.  A routine return is the return which could be expected from the business if the company was not able exploit its qualifying IP rights and other intangible assets.

112.New sections 357CI(1) outlines the three Steps for calculating the routine return figure.

113.Step 1 identifies the total of the routine deductions made by the company in computing the profits of the trade.  Routine deductions are those identified in new section 357CJ, and not excluded by new section 357CK.

114.Step 2 applies a mark-up of 10 per cent to the amount identified in Step 1.  A cost-plus methodology is a used to determine the arms-length return expected from a trader that does not use unique intangible assets in its trade. The 10 per cent rate reflects the fact that only a proportion of the actual expenses of the trade are used when estimating a routine return figure.

115.Step 3 determines how much of that routine return is to be attributed to profits from the company’s relevant IP income.  This is achieved on a pro-rata basis using the ratio of relevant IP income to the total gross income figure, as in Steps 1 and 2 of the computation under new section 357C, denoted as X per cent

116.New sections 357CI(2) and (3) ensure that the deductions taken into account for the purposes of determining a routine return also include any expenses incurred on a Patent Box company’s behalf by other members of the group, irrespective of whether or not these have been reimbursed, for example by way of a service fee or adjustment to intercompany balances.  Where necessary, a just and reasonable apportionment of expenses incurred by the other company should be made to determine the amount to be included in calculating the Patent Box company’s routine return.

117.New section 357CJ sets out the meaning of routine deductions for the purposes of new section 357CI.  These are the deductions to which a mark-up is applied to determine the routine return from the trade.  A number of costs related to financing and the development of IP rights are specifically excluded by virtue of new section 357CK.

118.New section 357CJ(1) sets out six general heads of expenditure, each of which is further explained in new sections 357CJ(2) to (7).

119.New section 357CJ(8) defines various terms used in the descriptions under the six Heads.

120.New section 357CJ(9) permits the Treasury to amend the list of items included in relevant deductions and their descriptions by way of an Order.

121.New sections 357CK(1) to (7) define deductions which are not to be marked up as routine deductions.  Any loan relationship or derivative contract amounts are excluded from the routine deductions, as well as certain costs associated with the development of the company’s qualifying IP rights.  The exclusion of any amounts that have qualified for R&D tax relief, including any additional deduction under part 13 of CTA 2009 at this stage ensures that there is no incentive for Patent Box companies to outsource their R&D activities to other group companies.  Capital allowances related to R&D expenditure and patent allowances are excluded, as are certain tax deductions for employee share schemes.

122.New section 357CK(8) permits the Treasury to amend the list of items excluded from being relevant deductions and their descriptions by way of an Order.

123.New sections 357CL and 357CM provide a simpler method for calculating the relevant IP profits of a company where its profits are small.  In this circumstance, the company may make an election under new section 357CL(1) and use a formulaic approach in the computation of their relevant IP profits instead of Step 6 as set out in new section 357C.  No formal election procedure is set down, and a company may simply include the election for small claims treatment by way of a note to the computations in its corporation tax return (or an amended return) for the period.  The rule is intended to relieve companies with smaller profits from the administrative burden of carrying out a full analysis of its marketing assets return as is required under Step 6.

124.New section 357CL(1) sets out that a company can elect for small claims treatment where either of conditions A or B are met.  Condition A is the basic rule which will apply to most companies including all those with small profits.  Condition B will apply to companies that have larger amounts of profits in some years, and is intended to ensure that such a company does not only use the small claims treatment for years when it provides a beneficial result compared to calculating a marketing assets return in accordance with Step 6 of Condition A is the basic rule which will apply to most companies including all those with small profits.  Condition B will apply to companies that have larger amounts of profits in some years, and is intended to ensure that such a company does not only use the small claims treatment for years when it provides a beneficial result compared to calculating a marketing assets return in accordance with Step 6 of Condition A is the basic rule which will apply to most companies including all those with small profits.  Condition B will apply to companies that have larger amounts of profits in some years, and is intended to ensure that such a company does not only use the small claims treatment for years when it provides a beneficial result compared to calculating a marketing assets return in accordance with Step 6 of

125.New section 357CL(2) specifies condition A. This is that the total amount of qualifying residual profit of all of the company’s trades taken together does not exceed £1,000,000. In determining this total amount any negative amount of QRP in respect of any of the company’s trades is disregarded by virtue of new section 357CL(7).

126.New section 357CL(3) specifies condition B. This is that the total amount of qualifying residual profit of all of the company’s trades taken together does not exceed the relevant maximum, and that the total company has not followed Step 6 of new section 357C(1) for the purpose of calculating RIPI (deducting a marketing assets return figure under new section 357CN) for any accounting period commencing within the previous 4 years.

127.New section 357CL(4) gives the relevant maximum amount for a company with no associated companies. This is £3,000,000.

128.New sections 357CL(5) and (6) specify that the relevant maximum is to reduced proportionately where a company has one or more associated companies in relation to which an election under new section 357A has effect and where its accounting period is less than 12 months long.

129.New section 357CL(8) specifies that when determining whether two companies are associated for the purposes of the small claims threshold the rules used for claims to the small profits rate of corporation tax are to be followed.

130.New section 357CM(2)(a) provides that where an election for small claims treatment is made by a company with just one trade, the amount of relevant IP profits is the lower of 75 per cent of the qualifying residual profit of the trade or the small claims threshold.  

131.Where a company has more than one trade, the qualifying residual profit of each of the trades is aggregated to determine whether the small claims limit has been exceeded.  Any negative amounts of qualifying residual profit in a trade are ignored, by virtue of new section 357CM(4).

132.Where the total does not exceed £1,333,333, the relevant IP profits are 75 per cent of the qualifying residual profit in each trade.  Otherwise the relevant IP profit figure is the small claims threshold – this is a total figure rather than an amount per trade.

133.New section 357CM(5) sets the small claims threshold for a company which has no associated companies that have made an election under new section 357A at £1 million for an accounting period of twelve months.

134.New sections 357CM(6) and (7) reduce the small claims threshold proportionately where a company has one or more associated companies that have made an election under new section 357A, or where the accounting period is less than twelve months respectively.

135.New section 357CM(8) specifies that when determining whether two companies are associated for the purposes of the small claims threshold the rules used for claims to the small profits rate of corporation tax are to be followed.

136.New section 357CN details the method that is to be used to arrive at the marketing assets return figure required for a deduction from qualifying residual profit at Step 6 of new section 357C(1).

137.New section 357CN(1) specifies that the marketing assets return figure is the difference between notional marketing royalty in respect of the trade (NMR) for the accounting period and the actual marketing royalty in respect of the trade (AMR) for the accounting period. The NMR and the AMR are defined by new sections 357CN and 357M.

138.New section 357CN(2) states that the marketing assets return figure is taken to be nil where:

139.New section 357CO outlines the principles to be used in determining the notional marketing royalty figure to be used in new section 357CN.

140.New sections 357CO(1) and (2) specify that the notional marketing royalty is to be determined as the amount of its relevant IP income for the accounting period that the company would pay to a third party for the right to exploit its relevant marketing assets, assuming that otherwise it would have no such right.  This is the appropriate amount of the relevant IP income.

141.New section 357CO(3) provides that relevant marketing assets are those marketing assets that are used to generate relevant IP income of the trade in the accounting period.

142.New section 357CO(4) details the assumptions used for deriving the amount of the notional marketing royalty. These are:

These assumptions ensure that the notional marketing royalty relates only to relevant IP income generated during the accounting period.  They will exclude the use of assumptions based on other market practices such as front- or rear-loaded payments, lump sums covering longer periods, etc.

143.New section 357CO(5) defines the relevant day for the purposes of the assumptions made about the appropriate amount.

144.New section 357CO(6) requires that the amount of the royalty must be determined in accordance with article 9 of the OECD model and the transfer pricing guidelines.

145.New section 357CO(7) defines the term marketing asset.

146.New section 357CP sets out how to determine the actual marketing royalty of a trade for an accounting period.

147.New section 357CP(1) states that the actual marketing royalty is X per cent of the total amount paid by the company for the acquisition of, or the right to exploit, any relevant  marketing assets, and which are debited in the calculation of the corporation tax profits of the company’s trade for the accounting period.

148.New section 357CP(2) provides that in new section 357CP(1) relevant marketing assets has the same meaning as that given in new section 357CO, and X per cent is the proportion of total gross income of the trade that is relevant IP income, as computed under Step 2 of new section 357C(1).

149.New section 357CQ provides that an amount of profits arising between the date of application to register a patent and the date of grant may be included in the calculation of relevant IP income in the period in which that right is granted. This provision does not apply to qualifying IP rights other than patents.  Registration of a patent may take a number of years; the intervening period is generally known as the patent pending period.  A maximum of six years’ additional profits may be brought in for the period when the right is granted.  New section 357BB defines relevant IP rights, and, other than in a case where the exception for patents that affect national security or public safety in new section 357BB(2) applies, requires the right to have been granted.  Without this section any income received from the innovation which is the subject of the application, prior to grant, would not be relevant IP income.

150.New section 357CQ (2) provides for a company to elect to include an additional amount in its calculation of the relevant IP profits of the accounting period in which a patent is granted.  No formal election procedure is set down, and a company may simply include the election by way of a note to the computations in its corporation tax return (or an amended return) for the period.

151.New section 357CQ(3) sets out how the additional amount is calculated.  It includes IP profits arising after the relevant day, in any relevant accounting period, that have not otherwise been included in relevant IP profits of the period. Relevant day and relevant period are defined in new sections 357CP(6) and (4) respectively.

152.New section 357CQ(4) ensures that any relevant IP profits that have been the subject of a set-off of relevant IP losses are disregarded for the purposes of calculating the additional amount.

153.New sections 357CQ(5) and (6) give the conditions which determine which accounting periods will be a relevant accounting periods. A relevant accounting period is any accounting period in which the right is granted, and any earlier accounting period, ending on or after the relevant day, for which the company is a qualifying company and has made an election under new section 357A.

154.New section 357CQ(7) defines the relevant day for the purposes of the section. This will be the later of:

155.New section 357CQ(8) allows a company to be treated as if it was a qualifying company for the purposes of new section 357CQ if the only reason it would not be a qualifying company is that the right had not yet been granted.

156.New section 357CQ(9) allows a company to be treated for the purposes of new section 357A as if it was a qualifying company for the accounting period in which the right is granted if the only reason that it would not qualify is that the company disposed of the right, or the licence to that right before it was granted.  This allows a deduction under new section 357A to be made by a company that would not otherwise be a qualifying company for that accounting period.

Chapter 4: Streaming

157.In certain circumstances apportioning the profits of a trade by using the overall ratio of relevant IP income to total gross income, as required at Step 3 of new section 357C, may give rise to a distorted result. This may occur where the relative proportions of income from the exploitation of IP rights and other income differs markedly from the relative proportions of profits derived from such income.

158.New section 357D therefore provides for a company to elect for the provisions of new section 357C to be set aside, and for the relevant IP profits of the trade to be ascertained using the streaming provisions of new section 357DA. It also provides that the provisions of new section 357DA will replace new section 357C where any of the mandatory streaming conditions of new section 357DC is met.

159.New section 357D(1) allows a company to elect to apply new section 357DA.  This is a streaming election.  No formal election procedure is set down, and a company may simply include the streaming election by way of a note to the computations in its corporation tax return (or an amended return) for the period.

160.New section 357D(2) ensures that where a streaming election is made, it can to be applied to any or all of the company’s trades.  This allows a company to pick and choose which of its trades would benefit from a streaming election.

161.New section 357D(3) states that a streaming election has effect for the accounting period in which it is made and each following period, unless the company ceases to use streaming where there has been a change of circumstances as set out in new section 357DB(3).

162.New section 357D(4) stipulates that where a company is required to use streaming because one or more of the conditions in new section 357DC is met, it must apply the provisions of new section 357DA to calculate its relevant IP profits rather than new section 357C.

163.New section 357DA(1) outlines the steps used to determine the relevant IP profits of the trade where either, the company has made a streaming election, or the company meets one or more of the mandatory streaming conditions.

164.Step 1 directs that any credits taken into account in computing the corporation tax profits of the trade other than finance income are to be split in to two streams; a relevant IP income stream (including any notional royalty computed under new section 357CD) and income that is not relevant IP income.  Finance income is defined in new section 357CB.

165.Step 2 requires that, having separated the income of the trade into separate streams, all of the amounts deducted in calculating the corporation tax profits of the trade, should now be allocated on a just and reasonable basis against one or other of the streams of income. There is an exception for amounts identified under new section 357CG(3), that is any additional deductions for expenditure on research and development under part 13 of CTA 2009, and any trading loan relationship or derivative contract debits.  The effect of not allocating these amounts is that they do not reduce relevant IP profits so that they attract relief at the full corporation tax rate.

166.Step 3 requires that the amounts allocated to the relevant IP income stream under Step 2 above are deducted from that income stream.

167.Step 4 determines any qualifying residual profit figure by deducting an amount representing a routine return, calculated under new section 357CI, from the result of Step 3.  Where this is a positive figure, this is the qualifying residual profit, which represents the additional profit over and above a routine return attributed to the exploitation of the all of the company’s intangible assets.  If the routine return figure is greater than the figure at Step 3, then subject to Step 7, there will be a relevant IP loss for the period.  No further adjustment is necessary under Steps 5 and 6 where there is a loss at this stage in the calculation.

168.Companies with a qualifying residual profit now make a decision regarding how to calculate the amount of this qualifying residual profit that is attributed to the qualifying IP rights.  Step 5 sets out that companies that cannot or have not made an election for small claims treatment proceed to Step 6; those that have made an election use the simplified procedure set out in new sections 357CL and 357CM.

169.Step 6 deducts from any qualifying residual profit an amount to be attributed to marketing assets.  Whilst it is possible that the result of deducting the marketing assets return figure from the qualifying residual profits creates a loss, in practice a company in that position will always be better off making a small claims election and using the alternative method set out in new sections 357CL and 357CM so long as they meet one of the conditions in new section 357CL(2) or (3).

170.Step 7 is the point at which a company includes in its relevant IP profits for the period any additional amount in respect of profits arising in period where grant of a patent is pending that are allowed under new section 357CQ.

171.New sections 357DA(2) and (3) specify that any positive sum determined from the Steps set out above is the relevant IP profit for the period, whilst any negative amount will be the relevant IP loss for the period.

172.New section 357DA(4) specifies that the routine return figure referred to in Step 4 is 10 per cent of the aggregate of routine deductions allocated against the relevant IP income stream at Step 2.  Routine deductions for this purpose are those identified in new section 357CJ and not excluded by virtue of new section 357CK.

173.New section 357DA(5) applies the rule at new section 357CI(2) and (3) where a routine return in computed in cases where there is a streaming election.  The effect of that rule is to ensure that the deductions taken into account also include any deductions incurred on a company’s behalf by other members of the group, irrespective of whether or not these have been reimbursed, for example by way of a service fee or adjustment to intercompany balances.  Where necessary, a just and reasonable apportionment of amounts incurred by the other company should be made to determine the amount relating to the company’s routine deductions.

174.New section 357DA(6) adapts the rule for calculating a marketing assets return figure at Step 6 where the streaming provisions apply.

175.New section 357DB requires that where a company has made a streaming election, the method it uses to allocate deductions between income streams, at Step 2 of new section 357DA, should not change from accounting period to accounting period, unless there is a change of circumstances.

176.New section 357DB(1) states that the phrase method of allocation refers to the method applied at Step 2 of new section 357DA.

177.New section 357DB(2) requires that where a company applies the streaming rules it must use the same method of allocation in each accounting period for which the streaming election has effect.  This applies irrespective of whether the rules are applied by election or are mandated.

178.However, new sections 357DB(3) and (4) provide that where there is a change of circumstances in respect of any of the company’s trades, which makes the method of allocation inappropriate for an accounting period, the company can choose a different method of allocation, or elect not to apply the streaming election, for that accounting period.  If the company chooses a different method then new section 357DB(2) will apply to require that that new method is applied for each subsequent accounting period.  No formal procedure is set down, and a company may simply include an election not to apply streaming for the accounting period by way of a note to the computations in its corporation tax return (or an amended return) for the period.

179.New section 357DB(5) provides that where a company elects not to apply streaming for an accounting period under new section 357DB(4)(b), this does not prevent it from making fresh streaming elections in subsequent accounting periods.

180.New section 357DC details the circumstances under which a company is required to apply the streaming provisions of new section 357DA in determining relevant IP profits rather than those of new section 357C, other than where is has made an election to do so.  Streaming is mandatory where any one or more of the conditions A to C is met in relation to a trade of the company for an accounting period.  If, exceptionally, a company operates more than one trade within the Patent Box, and a mandatory streaming condition is met in respect of only one of the trades, then the company is required to apply streaming only to that trade.  As with optional streaming elections, it may continue to apply the provisions of new section 357C to calculate relevant IP profits of the rest of its trades.

181.New section 357DC(1) sets out mandatory streaming condition A.  This is met for an accounting period where the accounts of the company for the period do not recognise a substantial amount of revenue from the trade that is taken into account in computing the profits of the period for corporation tax purposes.

182.This may happen when, for example there are accounting adjustments affecting prior years’ statements of income, or where additional income is recognised for tax purposes on the basis of a transfer pricing adjustment covering several periods.  The latter position is specifically catered for in new section 357DC(4).  In these circumstances the general presumption that there is an indirect link between the ratio of relevant IP income to other income and the relevant IP profits to other profits does not apply, so using the rules of apportionment in new section 357C is inappropriate.

183.New sections 357DC(2) and (3) specify that an amount is substantial if it exceeds the lower of £2 million or 20 per cent of the aggregate of the relevant IP income and such licensing income, subject to a de minimis figure of £50,000.

184.New section 357DC(5) sets out mandatory streaming condition B.  A company meets this condition for an accounting period if its total gross income from the trade includes relevant IP income, and a substantial amount of licensing income that is not relevant IP income.  Licensing income is defined in new section 357DC(6).

185.New sections 357DC(7) and (8) set out mandatory streaming condition C.  A company meets this condition for an accounting period if its total gross income from the trade includes income that is not relevant IP income, and a substantial amount of relevant IP income in the form of licence fees or royalties received under an agreement granting rights to another person over IP rights, where the company itself only holds an exclusive license in respect those IP rights.  The reason for this is that the licence income received and the royalties paid would result in very little profit.  An apportionment process to determine relevant IP profits would not be appropriate in these circumstances.

186.New section 257DC(9) requires a company to make an apportionment of relevant IP income from such licenses if not all of the company’s qualifying IP rights meet the conditions of relevant Head 2 income in new section 357DC(8).

Chapter 5: Companies with relevant IP losses: set-off amount

187.New section 357E identifies a set-off amount where a company has a relevant IP loss for an accounting period that is equal to those losses. This is subject to the transitional rules for the Financial Years 2013 to 2016 whereby the relevant IP profits or losses for the period are reduced to a specified proportion, as set out in paragraph 8(3) of the Schedule.

188.New sections 357EA to EE describe how this set-off amount is to be dealt with in the computations.  The principle underlying these rules is that the set-off amount should be matched with an amount of relevant IP profits either in another trade of the company, in other group members who have made an election under new section 357A, or in a later accounting period, to reduce an amount of relevant IP profits in respect of which new section 357A can apply to give a deduction from the corporation profits of the trade.

189.New section 357EA provides that the set-off amount is first allocated against any relevant IP profits arising in the same accounting period in respect of another trade of the company.

190.New section 357EB(1) sets out the rules for allocating a set-off amount where a company is a member of a group in which more than one company has made an election under new section 357A.  The effect of the allocation is to reduce both the set-off amount and the relevant IP profits of the other trade to which an election under new section 357A has effect by the lesser of those two amounts.

191.New sections 357EB(2) to (4) provide that where there is another company in the same group that has relevant IP profits for a relevant accounting period, any set-off  amount not allocated against another trade of the company is to be allocated against the relevant IP profits of that other company.  The effect of the allocation rule is to reduce both the set-off amount, and the relevant IP profits of the trade of other company to which new section 357A can apply, by the lesser of the remaining set-off amount and the relevant IP profits.

192.New section 357EB(5) allows the group companies to jointly determine in which order the set-off amount is to be applied to them where there is more than one company in the group with relevant IP profits against which the set-off amount can be allocated.

193.New section 357EB(6) sets out the order in which the allocation is to be made in the absence of any joint determination by companies in the group.  This is firstly to the trade of the company with the highest amount of relevant IP profits, then that with the next highest profits, and so on until the either all of the set-amount has been allocated or there are no relevant IP profits remaining against which to allocate the remainder.

194.New section 357EC sets out the rules for carrying forward a set-off amount.

195.New section 357EC(1) specifies that the rule applies where some of a set-off amount remains after any allocation has been made against relevant IP profits in other trades in the company, or other relevant group members.

196.New sections 357EC(2) and (3) provide that any set-off amount which remains unallocated from an earlier accounting period is first allocated against relevant IP profits of the company in which the set-off amount arose for the following accounting period.  New section 357A does not apply to a matching amount of relevant IP profits.

197.New section 357EC(4) sets out that where any of the set-off amount remains after any allocation has been made against relevant IP profits of the company in the following accounting period, it is treated as a set-off amount for this subsequent accounting period.  The allocation rules in the chapter, for instance the group rules in new section 357EB,  may then apply to that remaining amount.

198.New section 357EC(5) specifies that where a company has carried forward all or part of a set-off amount, this is to be added to any relevant IP losses in the later period, such that the set-off amount for that period is the sum of the two figures, and the allocation rules in the chapter may then apply to that amount.

199.New section 357ED ensures that where a company in a group ceases to carry on a trade, any set-off amount incurred in the trade which has not been reduced to nil by the operation of new sections 357EA or 357EB continues to be carried forward until such time as it has been fully allocated against relevant IP profits of other members of the group.

200.New sections 357ED (1) to (3) set out how any unallocated set-off amount is dealt with where a company in a group ceases to carry on a trade, no longer falls within the charge to corporation tax, or where an election under new section 357A otherwise ceases to have effect for any reason.

201.New section 357ED(3) specifies that new sections 357EA to 357EC will apply with some modifications to any set-off amount incurred in the company’s trade, or trades, which has yet to be allocated against relevant IP profits.

202.New section 357ED(4) modifies the wording of new section 357EB so that it applies in situations where a company ceases to trade, no longer falls within the corporation tax charge or an election under new section 375A ceases to have effect. The modifications act to transfer the unallocated set-off amount to a relevant group member.  In the absence of a joint determination to the contrary, this will be the relevant group member with the highest amount of relevant IP profits in that accounting period.  However if there are no relevant group members with relevant IP profits for the accounting period, the unallocated set-off amount is to be added to the set-off amount of the company with the largest set-off amount in that accounting period.

203.New sections 357ED(5) to (6) determine when any unallocated set-off amount will finally be extinguished.  Where a company is not a member of a group, the amount is extinguished only when the company ceases to carry on any trade.  Where a company is a member of a group, the set-off amount will remain to be allocated amongst other members of the group until such time as there is no company in the group that has made an election under new section 357A and is a qualifying company for the accounting period.

204.New section 357EE provides for the transfer of any unallocated set-off amount where the trade of a company is transferred to another group company.

205.New section 357EE(2) directs that in such cases the set-off amount is to become the unallocated set-off amount of the other group company for the accounting period in which it begins to carry on the transferred trade.  Where the group company which acquires the trade already has an unallocated set-off amount, the unallocated set-off amount of the transferor company is added to the set-off amount of the transferee company.

206.New section 357EF sets out the tax treatment of payments made between members of a group of companies as compensation for the transfer of relevant IP losses.  So long as the payment does not exceed the amount of the relevant IP losses transferred, it will be ignored for the purposes of calculating the corporation tax profits or losses of the company that makes or receives the payment, and neither will it fall to be treated as a distribution.

Chapter 6: Anti-avoidance

207.New sections 357F to 357FB are anti avoidance provisions.

208.New section 357F applies in situations where licences may be entered into for non commercial reasons.  This will be where the main purpose or one of the main purposes of conferring any right in respect of a protected item is to ensure that the licence meets the definition of exclusive licence for the purposes of the new regime.  Thus it may apply for example in cases where the exclusivity provided by the agreement was in respect of a spurious commercial right.  In such cases, even though the licence may confer the right to the exclusion of all other persons, it will not be regarded as an exclusive licence for the purposes of part 8A.

209.New section 357FA applies in situations where a qualifying item is incorporated into a larger item to ensure that income from the sale of that larger item will be relevant IP income. Where the main purpose or one of the main purposes of the inclusion of the item is to make income from the sale of the larger item relevant IP income, then such income will not be relevant IP income.

210.New section 357FB is a targeted anti-avoidance provision which limits or denies a Patent Box deduction to a company that is party to a scheme entered into in order to secure a tax advantage.

211.New section 357FB(1) applies the section where a company that is entitled to make a deduction under new section 357A is party to a scheme, one of the main purposes of which is to obtain a relevant tax advantage. A scheme is defined in new section 357FB(6).

212.New section 357FB(2) identifies a relevant tax advantage for the purposes of the section where there is an increase in the amount of any deduction due to the company, or another member of that company’s group, under new section 357A.  This increase must be attributable to:

213.New section 357FB(3) explains that a company will be regarded as having artificially inflated the amount of its relevant IP income where it is party to a scheme that does either of two things affecting the proportion of relevant IP income and other income used in calculating its relevant IP profits.  The first is to include matching amounts of additional income that would be relevant IP income and additional expenses that would be debited in the computation of profits.  The second is to include an additional amount of income that would be relevant IP income where there is a corresponding decrease in other income that is not relevant IP income.

214.New section 357FB(4) sets out when there is a mismatch between relevant IP income and expenditure for the purposes of the rule.  This will be where:

215.New section 357FB(5) provides that where the section applies, the deduction to be made by the company is to be limited an amount that ensures that no relevant tax advantage arises.

Chapter 7: Supplementary

216.New section 357G sets out the procedure for making an election under new section 357A.

217.New sections 357G(1) and (2) require a company to provide a notice of election that specifies the first accounting period for which the rules are to apply.

218.New section 357G(3) sets out the latest date by which an election can be made for any particular accounting period. This is the date by which an amended corporation tax return for that period must have been submitted in accordance with paragraph 15 of Schedule 18 to Finance Act 1998.

219.New section 357G(4) ensures that the election applies to all the trades carried on by the company, so that it is not possible to make an election in respect of only some of a company’s trades.

220.New subsection 357G(5) ensures that an election made under new section 357A need only be made once, and that the election will continue to have effect until it is revoked.

221.New section 357GA sets out the terms under which a company may revoke an election it has made under new section 357A.

222.New sections 357GA(1) and (2) require a company to give a notice revoking the election, which specifies the first accounting period for which the rules are to cease to apply.

223.New section 357GA(3) sets out the latest date by which an election can be revoked for any particular accounting period. This is the date by which an amended corporation tax return for that period must have been submitted in accordance with paragraph 15 of Schedule 18 to Finance Act 1998.

224.New section 357GA(4) specifies that the revoking of an election has effect for all future accounting periods of the company, until and unless the company makes a new valid election under new section 357A.

225.New section 357GA(5) specifies that a new election under new section 357A can only have effect after five years have elapsed since the company revoked a previous election.

226.New sections 357GB(1) and (2) introduce the amendments that are made to the rules in order for them to apply to a company that carries on a trade in partnership with other persons.  In brief, the provisions of the regime are to be applied to the firm as a whole in similar way as they apply to a single company carrying on a trade, subject to the modifications set out in new sections 357GB(3) to (9).  A partnership may include both corporate and non-corporate partners, and any deduction to be made in consequence of an election under new section 357A is made only for the purposes of determining the share of a member who is liable to corporation tax.

227.New section 357GB(3) sets out the procedure for a corporate partner to make or revoke an election for the Patent Box, and the effect of its doing so.  Any corporate partner in a firm may choose to make or revoke an election under new section 357A.  The effect of the election is that the partner’s share in the profits (or losses) of the firm is computed as if the election had been made or revoked by the firm.  An election made or revoked by one partner has no effect on the shares of any other partner.

228.New section 357GB(4) ensures that references to the time limits applying to the making or revoking of an election are those relevant to the corporate partner rather than the firm.

229.New section 357GB(5) applies the rules in section 1261 of the CTA 2009 for determining accounting periods of the firm where there is a corporate partner.

230.New section 357GB(6) ensures the firm must meet the active ownership condition, even though it is not a member of a group.

231.New sections 357GB(7) and (8) sets out that a firm meets the development condition in respect of an IP right where either the partnership itself, or a corporate partner with at least a 40 per cent share in the partnership has carried out qualifying development in relation to that right.

232.New section 357GB(9) applies the rules in new section 357BD that determine whether the development condition is met by a company that is at some time a member of a group to a firm.

233.New sections 357GB (10) amends condition B of the active ownership condition where it is to be applied to a corporate partner.

234.New section 357GB(11) modifies the provision for a small claims election, so that it is appropriate to claims made by a corporate partner.

235.New sections 357GB(12) & (13) ensure that any corporate partner who is party to an arrangement designed to secure a return from the firm that is economically equivalent to the receipt of interest is treated as if they had not made an election under new section 357A.

236.New section 357GC sets out how the Patent Box regime is to be applied to a company that is a member of a cost-sharing arrangement.

237.New section 357GC(1) defines a cost-sharing arrangement.  This is an arrangement between several parties where one party holds a qualifying IP right, or an exclusive licence over such a right. The arrangement leads to the creation or development of an invention to which each party makes a contribution in terms of funding or other activity.  All the parties are entitled to a share of the income attributable to that right proportionate to their participation in the arrangement, or have rights in respect of the invention.

238.New section 357GC(2) treats a company, which is party to the cost-sharing arrangement but which does not hold the qualifying IP rights created or developed under the arrangement, as if it did hold those qualifying IP rights.

239.However, new section 357GC(3) prevents this treatment where the income received by the company in respect of its contributions to the arrangement is economically equivalent to interest.

240.New section 357GC(4) ensures that cost-sharing arrangements which lead to the development of new ways to use or apply an invention are included in the same way as those which seek to develop the invention itself.

241.New section 357GD defines a group for the purposes of the Patent Box regime.  This is a company, A, and any other company that is associated with company A. For this purpose, a company (company B) is associated with company A at any time during an accounting period of company A if any one of following five conditions is met.

242.The first condition is that the financial results of company A and company B meet the consolidation condition. The consolidation condition is defined in new section 357GD(9).

243.The second condition is that company A and company B are connected. Sections 466 to 471 of CTA 2009 apply for the purposes of establishing connection.

244.The third condition is that company A has a major interest in company B or vice-versa. Major interest has the same meaning as in sections 473 and 474 of CTA 2009.

245.The fourth condition is that company A and a third company meet the consolidation condition and that third company has a major interest in company B.

246.The fifth condition is that company A and a third company are connected and that that third company has a major interest in company B.

247.New section 357GD(9) defines the consolidation condition in terms of the financial results of any two companies which :

248.New section 357GD(10) specifies that group accounts means accounts prepared under section 399 of the Companies Act 2006 or any corresponding provision of the law of a territory outside of the UK.

249.New section 357GE provides information on the interpretation of Part 8A.

250.New section 357GE(1) defines ‘invention’, ‘item’, ‘the OECD Model Tax Convention’, ‘the OECD Transfer Pricing Guidelines’ and ‘qualifying residual profit’.

251.New section 357GE(2) ensures that references to the calculations of the profits (or losses) of the trade for a company are to be read as calculations of profit or loss for corporation tax purposes.

252.New section 357GE(4) amends the index of defined expressions in Schedule 4 to the Corporation Tax Act 2010 to include expressions that are defined in part 8A.

Part 2: Amendments of TIOPA 2010

253.Paragraphs 2 to 6 make changes to the transfer pricing rules contained in the Taxation (International and Other Provisions) Act (TIOPA) 2010 including changes to the exemption from the requirement to calculate profits and losses of a potentially advantaged person in accordance with arm’s length principles where that person is a small or medium sized enterprise for a chargeable period.

254.Paragraph 4 inserts a new section 167A to TIOPA 2010.

255.New section 167A provides an exception to the general exemption from transfer pricing requirements for a company that is a small enterprise in the chargeable period.  This exception applies where the Commissioners for Her Majesty’s Revenue and Customs have issued a transfer pricing notice to the company.  Such a notice may relate only to provisions affecting the calculation of relevant IP profits under part 8A of CTA 2010.  A medium sized enterprise can already be required to use arm’s length principles in respect of any provision where a notice to that effect is issued under section 168 TIOPA.

Part 3: Commencement and transitional provisions

256.Paragraphs 7 and 8 set out the commencement and transitional provisions.

257.Paragraph 7 applies the changes made by the Schedule to income arising on or after 1 April 2013.  Where the first accounting period to which an election under new section 357A relates straddles the commencement date, only income and expenses arising after commencement is to be taken into account for the purposes of computing its relevant IP profits.  Where it is necessary to apportion income or expenses between pre- and post-commencement periods, then this may be done on any basis that provides a just and reasonable result.

258.Paragraph 8(1) provides for the benefits of an election under new section 357A to be progressively increased in relation to relevant IP profits arising in each of the Financial Years 2013 to 2017.  For 2013, relevant IP profits to be included in the calculation set out in new section 357A(3) are 60 percent of the amount otherwise calculated in accordance with the Schedule.  This rises by 10 percent in each succeeding Financial Year up to and including Financial Year 2017.

259.Paragraphs 8(2) to (4) set out how to determine the set-off amount in respect of an accounting period in the Financial Years affected by the phasing in rule in paragraph 8(1).  Where a set-off amount is carried forward to a later accounting period under new section 357EB or 357EC, the amount brought forward is reduced incrementally by 10 per cent per annum, the rate at which benefits are phased in under paragraph 8(1), to give the actual set-off amount.

260.Paragraph 8(5) provides for an apportionment to be made of the profits of an accounting period that falls within more than one Financial Year.

Background Note

261.The new Patent Box regime will allow companies to elect to apply a 10 per cent rate of corporation tax, starting from 1 April 2013 on a progressively incremental basis with the full rate applying from 1 April 2017, to all profits attributable to qualifying patents, and certain other IP rights.

262.The regime will also apply to other qualifying intellectual property rights such as regulatory data protection (also called data exclusivity), supplementary protection certificates and plant variety rights.

263.Other non-qualifying profits in these companies will continue to be taxed at the main rate of corporation tax.

264.The Patent Box regime will potentially benefit a wide range of companies which receive royalties in respect of qualifying IP rights, sell products, or use patented processes as part of their business.

265.Two consultation documents have been published:

266.A consultation response document was published in December 2011, along with a Technical Note and Guide to the Draft Legislation.  An updated Technical Note and Guide to the Legislation is being published in March 2012 which reflects the changes made to the draft legislation since December 2011.

Section 20 Schedule 3: Relief for Expenditure on R&D

Summary

1.Section 20 and Schedule 3 amend Part 13 of the Corporation Tax Act 2009 (CTA) to make a number of changes to research and development (R&D) relief for both small or medium (SME) and large companies.

Details of the Schedule

2.Paragraph 2 of the Schedule increases the rate of the additional deduction for R&D expenditure provided by section 1044 CTA 2009 from 100 per cent to 125 per cent for SME companies.

3.It also increases the relief for pre-trading expenditure claimed as a deemed trading loss by a corresponding amount and reduces the rate of payable tax credit for a SME to 11 per cent of the surrendered loss.

4.Paragraphs 3 to 8 remove, for both SMEs and large companies, the £10,000 per annum minimum R&D expenditure.

5.Paragraphs 9 to 14 clarify that a company in administration or liquidation is not a going concern for the purposes of SME R&D relief and Vaccine Research Relief.

6.Paragraph 15 removes the restriction, to the level of the company’s PAYE and NIC liabilities, of the amount of tax credit a SME company may claim.

7.Paragraphs 16 to 32 abolish Vaccines Research Relief (VRR) for SMEs.

8.Paragraph 33 extends both the definition of “externally provided worker” in section 1128 and the qualifying expenditure allowable on “externally provided workers” in section 1129 of CTA 2009. It removes the previous restriction where relief could only be claimed  in contractual arrangements involving three parties and applies in both connected party and unconnected situations

Background Note

9.Additional tax relief for expenditure on R&D was introduced in 2000 for SME companies and in 2002 for all other companies. Further relief - VRR - was introduced in 2003 for expenditure into vaccines and medicines for strains of TB, malaria and Aids/HIV prevalent in the developing world.

10.A consultation document "Corporate Tax reform:  delivering a more competitive system" was published on 29 November 2010 on the HM Treasury website and included consultation on the R&D tax relief.  A response document, "Research and Development Tax Credits:  response and further consultation" was published on 10 June 2011, and a further response on 6 December, both on the HM Treasury website.

11.Budget 2011 announced increases to the rate of SME R&D relief, together with abolition of the PAYE/ NIC limit and £10,000 pa minimum expenditure.

12.The SME R&D Relief currently gives an additional deduction equal to 100 per cent of the qualifying expenditure. This, combined with the normal deduction for such expenditure, gives a total of 200 per cent.

13.Losses arising from expenditure on R&D can be surrendered by a loss making company in return for a payment at a rate of 12.5 per cent. giving relief of 25 per cent on the original expenditure.

14.The rate of the additional deduction is to be increased to 125 per cent for expenditure incurred on or after 1 April 2012. The rate at which losses can be surrendered will be reduced to 11 per cent, giving relief overall worth 24.75 per cent of the R&D expenditure. The reduction is necessary to keep the value of the relief within the 25 per cent. threshold set  out in EU State aid rules.

Section 21 Schedule 4: Real Estate Investment Trusts

Summary

1.Section 21 and Schedule 4 amend Part 12 (Real Estate Investment Trusts) (REIT) of the Corporation Tax Act 2010 (CTA). The amendments relax the conditions of entry to the REIT regime and the requirements while in the regime.

Details of the Schedule

2.Paragraph 1 introduces amendments to Part 12 of CTA 2010. All references to amendments to legislation are to Part 12 CTA 2010.

3.Paragraph 2 amends section 525 which requires a company or group that gives a  notice to be a REIT to include in the notice a statement that it can meet the REIT regime conditions, including those in section 528 (the company conditions). The amendments change the form of the notice to be given to reflect the changes being made to section 528 as detailed at 4. and 12. below.

4.Paragraph 3 amends section 527 which sets out the conditions for being a REIT in an accounting period. Condition D in section 528, which states that a REIT cannot be a close company, will not apply for the first three years after a company joins the regime.

5.Paragraph 4 amends condition D in section 528, that a REIT cannot be a close company, so that the shareholding of an institutional investor will not, on its own, make a company close for REIT purposes. Paragraph 4 also introduces a new subsection 4A which defines what an institutional investor is for these purposes. In addition new subsection 4B grants a power to make regulations concerning the definition of who is or is not to be regarded as an ‘institutional investor’ for the purposes of this section.

6.Paragraphs 5-6 amend sections 558 and 559, which cover how the demerger of a REIT is dealt with, to accommodate the changes being made to the conditions to be met by a REIT in section 527.

7.Paragraphs 7-8 amend sections 561 and 562 which deal with breaching the REIT conditions in section 528, so that the REIT does not have to give notice that it has not met condition D in section 528 in the first three years after joining the regime as a consequence of the amendment to section 527.

8.Paragraph 9 introduces new section 562A which determines the circumstances when a breach of condition D in section 528 is either to be ignored or to result in the REIT leaving the regime.

9.Paragraphs 10-11 amend section 572 which deals with notices to leave the regime and introduce new section 573A, so that a notice to leave the regime can be issued in certain circumstances where condition D in section 528 is not met. New section 573A also sets out the time at which the REIT will be taken to have ceased being a REIT.

10.Paragraph 12 amends paragraph 577, which deals with multiple breaches of the conditions by which a company or a group qualifies as a REIT, to reflect the changes being introduced to condition D in section 528.

11.Paragraph 13 provides that the changes in paragraphs 2 – 12 will apply to those electing to become REITs with effect from on or after the date of Royal Assent to the Finance Act and for existing REITs for accounting periods beginning on or after Royal Assent to the Finance Act.

12.Paragraphs 14-20 amend section 528(3), the REIT company condition that requires that shares in the company are listed on a recognised stock exchange. The amendment provides that alternatively the condition is met if shares are admitted to trading on a recognised stock exchange. New section 528A is introduced which requires that shares admitted to trading on a recognised stock exchange are listed or traded. This requirement is relaxed in a new REIT’s first three accounting periods by section 528B. The introduction of new sections 562B and C deal with when a breach of new section 528A can be ignored and with the consequence, if the breach is not to be ignored, that the group or company ceases to be a REIT from the end of its second accounting period. Section 573B ensures that a REIT can only benefit from section 528B once.

13.Paragraph 21 provides that the changes in paragraphs 14-20 will apply to all REITs for accounting periods starting on or after the date of Royal Assent to the Finance Act except to the extent, that if they are an existing REIT, they are able to take advantage of the relaxation to section 528A provided by section 528B.

14.Paragraph 22 amends section 530 which requires that 90 per cent of the profits of the property rental business have to be distributed by the date at which the REIT’s tax return is filed. This is referred to as the ‘distribution requirement’. The amendment extends the date by which profits have to be distributed from three months after the filing date to six months after the filing date. This amendment only applies in particular circumstances where a stock dividend has been issued and a market value of the stock dividend has had to be used in accordance with section 530(6C)(b) and this has caused the distribution requirement not to  be met.

15.Paragraph 23 introduces new section 530A which deals with how the distribution requirement (see 14 above) is to be met in situations where profits of the property rental business are increased after the tax return has been submitted. This clarifies under what circumstances additional time is given to meet the distribution requirement and when a charge to tax for not meeting the distribution requirement can be made.

16.Paragraphs 24-26 amend sections 564 and 565, which charge tax on the amount by which the distribution requirement is not met. The amendments clarify when a charge to tax can be made when the distribution requirement is not met and include the circumstances where the time limit is extended under section 530 or new section 530A. The change in paragraph 22 will apply to distributions made on or after the date of Royal Assent to the Finance Act. The changes in paragraphs 23 – 25 will apply to accounting periods starting on or after Royal Assent to the Finance Act.

17.Paragraph 27 amends section 531 ‘conditions as to the balance of business’. This requires that at the beginning of an accounting period, the REITs profits and assets are primarily derived from and involved in its property rental business. Currently condition B in section 531 requires that at least 75 per cent of the assets of the group or company relate to the property rental business. Following amendment the requirement will be that cash and assets involved in the property rental business should be at least 75 per cent of the total assets of the business.

18.Paragraphs 28-32 deal with the consequential changes from paragraph 27 and provide that the changes in paragraphs 27, 28 and 31 will apply to accounting periods beginning on or after Royal Assent and the changes in paragraphs 29 and 30 for REITs joining the regime after Royal Assent.

19.Paragraphs 33-39 abolish the entry charge for companies entering the REIT regime. The abolition applies to those companies that enter the regime on or after the date of Royal Assent to the Finance Act.

20.Paragraphs 40- 42 amend sections 543 and 544 which limit the amount of property financing costs that a REIT can pay in connection with its tax exempt business. For accounting periods starting on or after the date of Royal Assent to the Finance Act, the limit will be based on interest and other payments for borrowing and will exclude the costs of arranging loan finance and other accounting costs will no longer be included. The amendments also limit the amount charged to corporation tax under section 543 (4) to an amount equal to 20 per cent of the property profits.

21.Paragraphs 43-44 amend section 556 which deals with the tax treatment of an asset of the property rental business that is disposed of by way of a trade (i.e. the disposal is taxed). The amendment ensures that section 556 does not apply to disposals made to another member of the REIT. The amendment takes effect where the disposal is on or after the date of Royal Assent to the Finance Act.

Background Note

22.REITs are a tax advantaged vehicle introduced to encourage investment in the property sector. REITs are exempted from corporation tax on the profits and gains arising from their property rental business. REITs have to distribute 90 per cent of the profits of the property rental business to shareholders in whose hands this income is treated as income from property. In this way taxation of income from property is moved from the corporate level to the investor level.

23.The REIT regime was introduced in Finance Act 2006. The legislation was subsequently rewritten to CTA 2010. To date, over 20 REITs have been created with particular focus on commercial property investment.

24.The Government indicated in its response to the 2010 Private Rental Sector consultation that it would look further at the barriers to entry to the REIT regime with the view to facilitating, in the longer term, the establishment of residential REITs. Subsequent further consultation with interested parties suggested that the best way to support the REITs industry in general (and the development of residential REITs in particular) was among other things, to reduce barriers to entry for new REITs and to ensure that the regime does not work so as to inhibit good business practice.

Section 22: Treatment of the Receipt of Manufactured Overseas Dividends

Summary

1.Section 22 clarifies the legislation on manufactured overseas dividends (MODs). That legislation provides that where a MOD is received under deduction of tax, some or all of that tax may be treated as overseas tax. The change makes it clear that where there is a difference between the tax deducted, and the tax treated as overseas tax, the difference is not treated as income tax. This section also makes a similar change for deemed manufactured payments under some stock lending arrangements. The amendments have effect in relation to overseas dividends paid on or after 15 September 2011.

Details of the Section

2.Subsection (1) introduces amendments to the provisions in Part 17 of the Corporation Tax Act 2010 (CTA 2010) which cover the treatment of companies receiving MODs.

3.Where a company receives a MOD, and tax has been deducted under section 922(2) of the Income Tax Act 2007 (ITA 2007), then sections 792 and 793 of CTA 2010 provide that some or all of the tax deducted may be treated as overseas tax.

4.Subsection (2) inserts a new subsection (8) into section 793 of CTA 2010.    The new subsection provides that if the amount mentioned in section 792(3)(b) (that is, the amount treated as withheld on account of overseas tax) is not the amount deducted under section 922(2) of ITA 2007, then nothing in the Tax Acts has the effect that the difference between the amounts is to be regarded as an amount on account of income tax.

5.Section 812 of CTA 2010 provides that where there is a stock lending arrangement, dividend or interest income is received by someone other than the lender of the security, and the arrangement does not provide for the lender to receive payments representing the dividend or interest, then the borrower is deemed to have paid a manufactured payment to the lender on the date when the real dividend or interest was paid. Sub-sections 812 (4) and (5) have the effect that tax withheld from these deemed manufactured payments is not treated as overseas tax.

6.Subsection (3) inserts new subsection (5A) into section 812 which provides that any amount, that would otherwise have been treated as an amount withheld on account of overseas tax from the dividends arising in the circumstances covered by section 812, is not an amount on account of income tax.

7.Subsection (4) provides  that the amendments made  by this section  have effect  in relation to overseas dividends  paid  on or after 15 September 2011.

Background Note

8.Financial traders and other participants in the financial markets commonly transfer shares on a temporary basis from one party to another as a form of secured loan or to gain access to specific securities. Payments known as MODs are often made by the temporary holder of shares to the original owner as compensation for the dividends arising on the shares which are received by the temporary holder.

9.Where a MOD is paid, the payer must deduct a sum representing income tax equal to the relevant withholding tax on the MOD.  A company receiving a MOD from which tax has been deducted is treated as if it had received an overseas dividend paid after withholding a certain amount of overseas tax.  The amount of overseas tax treated as withheld can vary between nil and a maximum of the amount deducted.

10.Where the amount treated as overseas tax is less than the amount deducted, it has been suggested that the difference between the two amounts should be treated as income tax, available for set-off or repayment. HM Revenue and Customs does not agree that this is the effect of the legislation but subsection (2) of the amendment introduced by this section puts it beyond doubt that it is not treated as income tax.

11.Subsection (3) applies to certain deemed manufactured overseas dividends under stocklending arrangements, and has a similar effect to subsection (2), clarifying that withheld tax is not to be treated as income tax.

Section 23: Loan Relationships: Debts Becoming Held by Connected Company

Summary

1.Section 23 modifies the corporation tax rules on loan relationships that apply when the parties to a loan relationship become connected. The section changes the circumstances in which companies that become connected with pre-existing debt bring in a deemed release in respect of that debt,  and the calculation of the amount of  that deemed release. It inserts a new anti-avoidance rule to ensure that the existing rules relating to deemed releases cannot be circumvented. It also inserts a retrospective provision in relation to particular arrangements circumventing  the  existing  rules  where  a  company  becomes  creditor to a loan relationship on or after 1 December 2011 and before 27 February 2012.

Details of the Section

2.Subsection (1) provides for the loan relationships rules in Chapter 6 of Part 5 of the Corporation Tax Act 2009 (CTA) to be amended. The amendments are to section 362 of CTA under which, a debtor company brings in a deemed release when the debtor and creditor companies become connected and the debt is impaired, and the insertion of a new section 363A.

3.Subsection (2)(a) amends section 362 of CTA so that it applies to all cases where previously unconnected parties to a loan relationship, as debtor (D) and creditor (C) respectively, become connected. Previously section 362 applied where the creditor’s rights under the loan relationship were subject to an impairment adjustment.

4.Subsection (2)(b) substitutes new sections 362(3) and 362(4).

5.New section 362(3) changes the calculation of the amount treated as released to the amount by which the pre-connection carrying value (PCCV) of the debt in D’s accounts exceeds the PCCV of the debt in C’s accounts.

6.New subsection 362(4) defines the PCCV for D and C.

7.Subsection (2)(d) amends the title of section 362 of CTA as the new section no longer only applies to debts where the creditor’s rights are subject to an impairment adjustment.

8.Subsection (3) inserts a new section 363A in CTA which will apply to nullify the effect of arrangements that are entered into where the main purpose, or one of the main purposes, of any party entering into the arrangements is to avoid or reduce an amount treated as released under section 361 or 362. ‘Arrangements’ are defined in new section 363A(3).

9.Subsections (4) to (7) set out the commencement provisions. The amendments made to section 362 of CTA have effect where companies become connected on or after 27 February 2012. However, where the companies become connected on or after 27 February 2012 and before 1 April 2012 different subsections (3) and (4) are substituted. Subsection (3) changes the calculation of the amount treated as released to the greater of two amounts. The first amount is similar to that which currently arises under section 362(1)(c) of CTA. The second is the amount by which the pre-connection carrying value (PCCV) of the debt in D’s accounts exceeds the PCCV of the debt in C’s accounts. Subsection (4) defines the PCCV for C and D. New section 363A of CTA will have effect where arrangements are entered into on or after 27 February 2012 or, where the arrangements are entered into before that date, in relation to deemed releases arising on or after that date.

10.Subsections (8) to (12) sets out provisions applying where arrangements are entered into which lead directly or indirectly to, or in consequence of which, company “C” becomes party to a loan relationship as creditor on or after 1 December and before 27 February 2012 and C becomes connected to the debtor before 27 February 2012. ‘Arrangements’ are defined in subsection (9). Where this rule applies the conditions at sections 361(1)(a) to (c) of CTA will be deemed to be met. Thus section 361 of CTA will apply to C at the point it becomes party to the loan relationship.

11.Subsection 10 ensures, in particular, that the normal loan relationship rules apply for partnerships involving companies.

12.Subsection 11 prevents anything done after 27 February 2012, for example a change or a decision to change partnership profit shares or accounting dates, affecting the application of section 361 in accordance with subsection (8) of this section.

13.Subsection 12 prevents double taxation. If section 361 of CTA applies to a case as a result of subsections (8) to (10) of this section, then section 362 of  CTA will not  also apply at the point that C becomes connected to D.

Background Note

14.The rules that apply to loan relationships work on the principle that amounts taxed and relieved as credits and debits under those rules are  the profits and losses arising in accounts drawn up in accordance with generally accepted accounting practice. When a debt is impaired or written off by a creditor company its expense will normally be allowable as a loan relationship debit. When a debtor company is released from a debt it owes, its profit will be taxable as a loan relationship credit.

15.Where a debt exists between connected companies, such credits and debits are not normally brought into account for tax purposes. Specific rules prevent exploitation of this exception when debt is acquired by a new creditor connected to the debtor or when previously unconnected creditors and debtors become connected. This is achieved by imposing a deemed release on the debtor if the debt has been purchased at a discount by a connected creditor or the debt is impaired when the creditor and debtor become connected.

16.HM Revenue & Customs have become aware of arrangements that have been entered into to avoid the tax charge that would normally arise in these circumstances. The changes to the rules both prevent these and similar arrangements achieving this effect from 27 February 2012 and in relation to the particular arrangements retrospectively to 1 December 2011.

17.The calculation of the amount of a deemed release where unconnected parties to a loan relationship become connected was amended in response to comments on the draft legislation published on 27 February 2012. This change has effect from 1 April 2012.

Section 24: Companies Carrying on Businesses of Leasing Plant Or Machinery

Summary

1.Section 24 makes changes to the provisions dealing with the sale of a lessor company in the Corporation Tax Act (CTA) 2010 to ensure that the legislation continues to protect the Exchequer from risks that tax could be lost following a sale of a lessor company. The changes made by this section will have effect from 21 March 2012 to prevent a risk of forestalling.

Details of the Section

2.Subsection (1) introduces the amendments to CTA 2010.

3.Subsection (2) substitutes new sections 385(2) and (3) into section 385 and makes a consequential amendment to the title of that section.

4.New section 385(2) prevents a loss, carried back under section 37(3)(b) CTA 2010 (relief for trade losses against total profits of earlier accounting periods), from being deducted from profits that are derived from the income amount calculated under the sale of lessors provisions.

5.New section 385(3) identifies that part of the profit derived from the income by treating it as the final amount to be added.

6.Subsection (3) makes a consequential amendment as a result of the insertion of new section 394ZA.

7.Subsection (4) inserts new section 394ZA.

8.New section 394ZA provides that there is a relevant change in the relationship between a lessor company (A) and a principal company on the day that A becomes a member of a tonnage tax group for the purposes of Schedule 22 to the Finance Act (FA) 2000 (tonnage tax) without entering tonnage tax, or, on the day before that day if A both joins the tonnage tax group and enters the tonnage tax regime.

9.Subsection (5) makes changes to section 394A to add a further subsection. New section 394A(2) ensures that if there is a qualifying change in the ownership of a company as a result of section 394ZA then the change of ownership is treated solely as occurring as a consequence of new section 394ZA regardless of whether there have simultaneously been other qualifying changes in the ownership of the company.

10.Subsection (6) makes changes to provisions dealing with the carry back of losses in the context of a leasing business carried on by a company in partnership. It makes changes to section 427 of CTA 2010 to substitute new sections 427(2) and (3) into section 472 and substitutes a new title to the section.

11.New section 427(2) prevents a loss, carried back under section 37(3)(b) of CTA 2010 (relief for trade losses against total profits of earlier accounting periods) in the notional trade carried on by the partner company, from being deducted from profits that are derived from the income amount calculated under the sale of lessors provisions.

12.New section 427(3) identifies that part of the profit derived from the income by treating it as the final amount to be added.

13.Subsection (7) makes consequential changes to section 950 of CTA 2010 (transfers of trade without change of ownership) to ensure that the qualifying change in ownership of a lessor company brought about by section 394ZA is reflected in section 950.

14.New section 950(3A) prevents the tax neutral treatment of a transfer of plant or machinery into a lessor company that has moved into tonnage tax. It does this by treating the principal company or companies of the predecessor and successor companies as different if they would otherwise have been the same. The subsection applies if the lessor company is the successor and there is a relevant change in its relationship with a principal company as a consequence of section 394ZA at any time on or before the day of the transfer. The section makes clear that this treatment applies even when the change in the relationship took place before 21 March 2012.

15.Subsection (8) inserts new paragraph 79A into Schedule 22 to the Finance Act 2000. The new paragraph prevents a possible double charge to tax on profits deferred on entry into tonnage tax. It does this by preserving access to any unrelieved amounts derived from the sale of lessors expense to reduce certain balancing charges.

16.New sub-paragraph 79A(1) identifies a balancing charge calculated on the disposal of an asset that has been taken into account in calculating an income amount under the sale of lessors provisions.

17.New sub-paragraph 79A(2) identifies a part of the sales of lessors expense, defined in new sub-paragraph 79A(3), that has not been utilised in any way and provides that this reduces the balancing charge.

18.New sub-paragraph 79A(4) deals with the situation where the sale of lessors expense is incurred when the company is in tonnage tax and allocates the expense on a just and reasonable basis in line with the approach in paragraph 56 (1)(a) or (b).

19.New sub-paragraph (5) deals with the case where the sale of lessors expense is incurred when the company is not in tonnage tax. In these circumstances any amount of the sales of lessors expense that has not been utilised will form part of a loss to which paragraph 56 applies. The amount allocated to the tonnage tax activity is then further apportioned to identify an amount derived from the sale of lessors expense.

20.New sub-paragraph 79A(6) explains the meaning of “apportioned loss” in subparagraph 79A(5).

21.Subsections (9) to (11) deal with commencement.

22.Subsection (9) deals with the effect of the change in the availability of losses to carry back against total profits. The new rules, in subsections (2) and (6), have effect in cases where income arises

23.Subsection (10) deals with the effect of new section 394ZA and new paragraph 79A of Schedule 22 to the Finance Act 2000. These provisions have effect where there is a relevant change in the relationship between a company and its principal company where the company becomes a member of the tonnage tax group on or after 21 March 2012 and enters tonnage tax at the same time and on or after 23 April 2012 when it becomes a member of the tonnage tax group without entering tonnage tax at the same time.

24.Subsection (11) provides that new section 950(3A) has effect where the transfer day is on or after 21 March 2012 and where the change in the relationship has come about as a result of the company becoming a member of the tonnage tax group and entering tonnage tax at the same time. Where the change in the relationship has come about as a result of the company becoming a member of the tonnage tax group and not entering tonnage tax at the same time the transfer is affected where the transfer day is on or after 23 April 2012.

Background Note

25.The sales of lessors provisions were introduced in FA 2006 to counter a risk that tax would not be paid on the profits of a leasing business following a sale of the company. Typically this risk arose as a consequence of a sale to a loss making group. There is a similar risk that tax would not be paid if a lessor company becomes subject to the tonnage tax rules. This is because on becoming subject to the tonnage tax rules the lessor company’s profits cease to be calculated by reference to the normal corporation tax rules.

26.A company can become subject to the tonnage tax rules by becoming a member of a tonnage tax group. Where this is achieved without triggering the effect of the sale of lessors provisions tax would be lost.

27.The changes made by this section will ensure that the effect of the sale of lessors provisions is triggered when a company joins a tonnage tax group so that tax can be collected on the deferred profits of the company.

28.The sale of lessors provisions are designed to collect tax on the deferred profits of the company through an income amount added to the profits in the accounting period when the company changes hands. A matching expense is delivered in the following accounting period and rules prevent this expense from being carried back against the earlier profits and thereby cancelling the effect of the income amount.

29.The changes made by this section refocus these restrictions so that any loss from an accounting period after a change of ownership cannot be carried back against the profits of the company that are derived from the income amount. This restriction prevents groups from arranging their affairs so that losses are available in the lessor company after the change of ownership which can be used to cancel the effect of the income amount.

Section 25: Corporate Members of Lloyd’s: Stop-Loss Insurance and Quota Share Contracts

Summary

1.Section 25 introduces new rules for the taxation of premiums payable by corporate members of Lloyd’s under stop-loss insurance. It also includes an anti-avoidance provision in respect of quota share contracts.

Details of the Section

2.Subsection (1) inserts new subsections (3C) to (3G) into section 225 of Finance Act 1994 (FA).

3.New section 225(3C) provides that the tax treatment described in new section 225(3D) shall apply to any premium payable by a corporate member of Lloyd’s in respect of that member’s underwriting business which is not already taxed under the rules in section 220(2)(a) of FA 1994.

4.New section 225(3D) sets out the tax treatment for a premium which meets the description in new section 225(3C).  The premium will be treated as if it were an amount that had arisen directly as a consequence of that member’s membership of the syndicate or syndicates in respect of which the stop-loss insurance was taken out.  In addition, it will be treated as if it were payable in the underwriting year in which the profits or losses of those activities are declared.

5.New section 225(3E) provides for the situation where a stop-loss insurance premium is payable in respect of two or more underwriting years.  The premium payable in respect of each of those years for the purposes of new section 225(3D) must be determined on a just and reasonable basis.

6.New section 225(3F) sets out the tax treatment where a corporate member of Lloyd’s enters into a quota share contract and the main purpose, or one of the main purposes, for entering into that contract was to avoid the tax treatment set out in new section 225(3G).  In such a case, the contract will be treated as if it were a stop-loss insurance and any amounts payable under the contract will be treated as premiums. The deemed premiums will be taxed in accordance with new section 225(3D).

7.New section 225(3G) describes the tax treatment referred to in new section 225(3F), the attempted avoidance of which triggers the operation of new section 225(3F). The relevant tax treatment is that amounts are treated as payable in the underwriting year in which the profits or losses arising to a corporate member directly from its membership of one or more syndicates are declared.

8.Subsection (2) provides that the amendment made by this section applies to stop-loss insurance (as defined by section 230(1) of FA 1994) and quota share contracts (as defined by section 225(4) of FA 1994) taken out or entered into on or after 6 December 2011.

9.Subsection (3) provides for the situation where a corporate member enters into a multi-year contract before 6 December 2011.  Insurance is deemed to be taken out on the anniversary date of the contract falling on or after the date this Act is passed.   Premiums payable under the contract for an underwriting year beginning on or after the day this Act is passed are premiums to be dealt with in accordance with the amendments made to section 225 of FA 1994 by this section.

10.Subsection (4) defines the terms “multi-year contract” and “the anniversary date of the contract”.

11.Subsection (5) provides for the situation where a corporate member enters into a contract for insurance in respect of an underwriting year before 6 December 2011 and that contract is renewed on or after 6 December 2011 for a further underwriting year.   Insurance is regarded as taken out on the date of renewal.

Background Note

12.Following the Budget 2011 announcement, the Government has been consulting with Lloyd’s and interested parties on proposals to amend the timing of the tax deduction for Lloyd’s member-level stop-loss premiums.

13.Taking into account these discussions, the Government has decided to amend the timing of the tax deduction for all premiums payable by corporate members of Lloyd’s in respect of member-level stop-loss insurance taken out on or after 6 December 2011. The legislation will align the timing of the tax deduction for the premiums with the recognition of the profits to which they relate.

14.Following consultation on the draft legislation published on 6 December, the Government decided to make further provisions to deal with multi-year contracts and renewals of contracts taken out before 6 December 2011.

Section 26: Abolition of Relief for Equalisation Reserves: General Insurers

Summary

1.Section 26 repeals sections 444BA to 444BD of the Income and Corporation Taxes Act 1988 (ICTA) that provide for tax relief for equalisation reserves maintained by general insurance companies. It also sets out transitional provisions following on from the repeal

Details of the Section

2.Subsection (1) repeals sections 444BA to 444BD of ICTA.

3.Subsection (2) sets out consequential repeals arising from the repeal of sections 444BA to 444BD of ICTA.

4.Subsection (3) provides that the amendments made by this section shall have effect in relation to accounting periods ending on or after a date to be specified in a Treasury order.   Different days may be specified for different cases.

5.Subsection (4) provides that one sixth of an insurance company’s existing equalisation or equivalent reserve is to be treated as a receipt of the company’s business in each of the six calendar years beginning with the calendar year in which the date specified in an order made by the Treasury falls.

6.Subsection (5) provides that if there are different accounting periods falling in a calendar year, the receipt is to be apportioned between those periods by reference to the number of days of the calendar year falling in those periods.

7.Subsection (6) provides that if a company ceases to carry on the business in a calendar year before the expiry of the six year period referred to in subsection (4) any remaining balance of the existing equalisation or equivalent reserve is to be treated as a receipt of the company’s business in the accounting period in which the company ceased to carry it on.

8.Subsection (7) defines the terms “equalisation reserve”, “equivalent reserve”, “existing equalisation or equivalent reserve” and “the company’s business”.

9.Subsection (8) sets out the tax treatment where an insurance company has made an election under section 444BA(4) of ICTA for an accounting period ending before the date specified in a Treasury order and such a sum would have been carried forward as a deductible amount.   The amount shall be deducted from the amount of the equalisation or equivalent reserve as it stood immediately before the accounting period to which it would have been carried forward.

10.Subsection (9) provides that references to section 444BA of ICTA include that section as modified by sections 444BB or 444BC of that Act.

Background Note

11.There is currently a regulatory requirement for general insurance companies (but not members of Lloyd’s) to maintain equalisation reserves in respect of certain lines of business.  From 1996, amounts transferred into equalisation reserves were made tax deductible and transfers out were treated as taxable receipts of the company’s business.

12.The relief currently available is dependent on the regulatory requirement for general insurance companies to maintain equalisation reserves.  As a result of the European Union Solvency II Directive that requirement will be withdrawn.

13.An informal consultation took place between April and August 2011 with an industry working group.   Both the Association of British Insurers and Lloyd’s, representing general insurance companies and corporate and partnership members at Lloyd’s, have been included in the consultation process.

14.Taking into account these discussions, the Government has decided to repeal the legislation that allows tax relief for equalisation reserves. The Government has also decided to introduce a transitional period for the release of built-up reserves that involves spreading that release in equal instalments over a 6 year period commencing from the date that the Solvency II capital requirements come into force.  Insurers may also elect to have the full remaining balance of the built-up reserve released to tax in any calendar year during the transitional period.

Section 27: Election to Accelerate Receipts under s.26(4)

Summary

1.Section 27 provides rules to allow an insurance company to make an election to accelerate receipts arising to it under the rules applying in respect of the abolition of relief for equalisation reserves.

Details of the Section

2.Subsection (1) provides that an insurance company may make an election to treat as receipts of the business for a calendar year all of the receipts which would otherwise be treated as receipts of later calendar years.

3.Subsection (2) requires the election to be made in writing to an officer of Revenue and Customs within two years of the end of the calendar year for which it is made.  Any such election is irrevocable.

4.Subsection (3) provides that if a company makes an election under section 29 for a calendar year concerning a transfer of business the company may not make an election under this section for the same calendar year.

Background Note

5.There is currently a regulatory requirement for general insurance companies (but not members of Lloyd’s) to maintain equalisation reserves in respect of certain lines of business.  From 1996, amounts transferred into equalisation reserves were made tax deductible and transfers out were treated as taxable receipts of the company’s business.

6.The relief currently available is dependent on the regulatory requirement for general insurance companies to maintain equalisation reserves.  As a result of the European Union Solvency II Directive that requirement will be withdrawn.

7.An informal consultation took place between April and August 2011 with an industry working group.   Both the Association of British Insurers and Lloyd’s, representing general insurance companies and corporate and partnership members at Lloyd’s, have been included in the consultation process.

8.Taking into account these discussions, the Government has decided to repeal the legislation that allows tax relief for equalisation reserves. The Government has also decided to introduce a transitional period for the release of built-up reserves that involves spreading that release in equal instalments over a six year period commencing from the date that the Solvency II capital requirements come into force. Insurers may also elect to have the full remaining balance of the built-up reserve released to tax in any calendar year during the transitional period.

Section 28: Deemed Receipts under s.26(4): Double Taxation Relief

Summary

1.Section 28 provides rules for the amount to be brought into account in the calculation of double taxation relief where a receipt arises to it under the rules applying in respect of the abolition of relief for equalisation reserves.

Details of the Section

2.Subsection (1) sets out three conditions for this section to apply. Firstly, a receipt must arise to a company as a result of section 26(4) and, secondly, that the company must carry on business through a permanent establishment (PE) outside the United Kingdom for which double taxation relief is due in respect of any income or gain.  A third condition relates to the PE concerned and provides that the PE must be one to which double taxation relief regulations applied in respect of apportionment of transfers into an equalisation reserve.

3.Subsection (2) provides that only the appropriate proportion (if any) of the receipt is to be taken into account in calculating the profits or losses on which double taxation relief is calculated.

4.Subsection (3) defines the appropriate proportion of the receipt as being equal to the mean of each proportion found for the relevant period or any other proportion determined on a just and reasonable basis.

5.Subsection (4) defines, other than in cases where a just and reasonable basis has been determined by the company, a proportion for a relevant period as the proportion of the company’s premium income constituted by the PE’s premium income for the same period.

6.Subsection (5) provides definitions of “the company’s premium income”, “the PE’s premium income” and a “relevant period”.

7.Subsection (6) defines “net premiums written” and provides that references to section 444BA of the Income and Corporation Taxes Act of 1988 include that section as modified by regulations made under that Act.

Background Note

8.There is currently a regulatory requirement for general insurance companies (but not members of Lloyd’s) to maintain equalisation reserves in respect of certain lines of business.  From 1996, amounts transferred into equalisation reserves were made tax deductible and transfers out were treated as taxable receipts of the company’s business.

9.The relief currently available is dependent on the regulatory requirement for general insurance companies to maintain equalisation reserves.  As a result of the European Union Solvency II Directive that requirement will be withdrawn.

10.An informal consultation took place between April and August 2011 with an industry working group.   Both the Association of British Insurers and Lloyd’s, representing general insurance companies and corporate and partnership members at Lloyd’s, have been included in the consultation process.

11.Taking into account these discussions, the Government has decided to repeal the legislation that allows tax relief for equalisation reserves. The Government has also decided to introduce a transitional period for the release of built-up reserves that involves spreading that release in equal instalments over a six year period commencing from the date that the Solvency II capital requirements come into force. Insurers may also elect to have the full remaining balance of the built-up reserve released to tax in any calendar year during the transitional period.

Section 29: Transfer of Whole Or Part of the Business

Summary

1.Section 29 provides rules to deal with the transfer of the whole or part of an insurance business where the transferor has receipts arising to it under the rules applying in respect of the abolition of relief for equalisation reserves.

Details of the Section

2.Subsection (1) provides that a transferor and transferee may jointly elect for receipts arising under section 26(4) to be treated in accordance with this section where an insurance company transfers the whole or part of the business to another insurance company under an insurance business transfer scheme.

3.Subsection (2) provides that if the transfer is of the whole of the business or substantially the whole of the business, section 26(6) will not apply.   Instead, the receipt which would have arisen in the transfer year under section 26(4) had there been no transfer is apportioned between the transferor and transferee.  Any future receipts which would have arisen under section 26(4) are treated as receipts of the transferee and not the transferor.  Section 26(6) will apply to any subsequent cessation of business by the transferee.

4.Subsection (3) provides for a transfer of a part of a business which does not amount to substantially the whole of the business. The receipt arising under section 26(4) in the transfer year is apportioned between the transferor and transferee.   Also, future receipts arising under section 26(4) are apportioned between the transferor and the transferee.  Section 26(6) will apply to any subsequent cessation of business by the transferee.

5.Subsection (4) provides that the appropriate portion of the receipt for the purposes of subsection (3) shall be determined on a just and reasonable basis.

6.Subsection (5) provides that an apportionment under subsection (2)(b) or (3)(a) is to be made by reference to the number of days in the calendar year falling before and after the transfer date.

7.Subsection (6) provides that a receipt arising under section 26(4) which is treated as a receipt of the transferee is treated as a receipt of the transferee’s business which consists of or includes the transferred business.

8.Subsection (7) requires that an election under this section be made in writing to an officer of Revenue and Customs within 28 days from the end of the day on which the transfer of business takes place.  Any such election is irrevocable.   The election must be accompanied by an explanation of any determinations of issues made for the purposes of this section.

9.Subsection (8) defines “the transferred business” and the “transfer year”.

10.Subsection (9) provides that this section will apply to the transferee in the capacity of transferor in respect of subsequent transfers of business by the transferee

Background Note

11.There is currently a regulatory requirement for general insurance companies (but not members of Lloyd’s) to maintain equalisation reserves in respect of certain lines of business.  From 1996, amounts transferred into equalisation reserves were made tax deductible and transfers out were treated as taxable receipts of the company’s business.

12.The relief currently available is dependent on the regulatory requirement for general insurance companies to maintain equalisation reserves.  As a result of the European Union Solvency II Directive that requirement will be withdrawn.

13.An informal consultation took place between April and August 2011 with an industry working group.   Both the Association of British Insurers and Lloyd’s, representing general insurance companies and corporate and partnership members at Lloyd’s, have been included in the consultation process.

14.Taking into account these discussions, the Government has decided to repeal the legislation that allows tax relief for equalisation reserves. The Government has also decided to introduce a transitional period for the release of built-up reserves that involves spreading that release in equal instalments over a six year period commencing from the date that the Solvency II capital requirements come into force.  Insurers may also elect to have the full remaining balance of the built-up reserve released to tax in any calendar year during the transitional period.

Section 30: Abolition of Relief for Equalisation Reserves: Lloyd’s Corporate Members Etc.

Summary

1.Section 30 repeals section 47 of the Finance Act 2009 (FA) 2009.  The repeal is not effective in relation to transitional provisions being made under this section which are capable of having effect after the date of the repeal.

Details of the Section

2.Subsection (1) provides that regulations made by the Treasury under section 47 of FA 2009 that revoke previous regulations made under that section may include provisions corresponding to the provisions made by section 26(4) to (8) and 27 subject to any modifications specified in the regulations.

3.Subsection (2) repeals section 47 of FA 2009.

4.Subsection (3) provides that the repeal shall have effect for accounting periods ending on or after a date specified in a Treasury order.  Different days may be specified for different cases.

5.Subsection (4) provides that the repeal of section 47 of FA 2009 shall not affect any transitional or savings provisions made under section 47 in so far as those transitional or savings provisions are capable of having effect after the date specified in a Treasury order.

Background Note

6.There is currently a regulatory requirement for general insurance companies (but not members of Lloyd’s) to maintain equalisation reserves in respect of certain lines of business.  From 1996, amounts transferred into equalisation reserves were made tax deductible and transfers out were treated as taxable receipts of the company’s business.

7.Section 47 FA 2009 provided a power to apply similar treatment to Lloyd’s corporate and partnership members.  The power was used in 2009 to make regulations (The Lloyd’s Underwriters (Equalisation Reserves) (Tax) Regulations 2009 (SI 2009/2039)) to allow Lloyd’s corporate and partnership members to calculate and hold an equivalent reserve for tax purposes only.  Therefore, as with general insurance companies, amounts transferred into an equivalent reserve were made tax deductible and transfers out were treated as taxable receipts of the member’s business.

8.The relief currently available to general insurance companies is dependent on the regulatory requirement for those companies to maintain equalisation reserves.  As a result of the European Union Solvency II Directive that requirement will be withdrawn.

9.An informal consultation took place between April and August 2011 with an industry working group.  Both the Association of British Insurers and Lloyd’s, representing general insurance companies and corporate and partnership members at Lloyd’s, have been included in the consultation process.

10.Taking into account these discussions, the Government has decided to repeal the legislation that allows tax relief for equalisation reserves. The Government has also decided to introduce a transitional period for the release of built-up reserves that involves spreading that release in equal instalments over a six year period commencing from the date that the Solvency II capital requirements come into force.  Insurers may also elect to have the full remaining balance of the built-up reserve released to tax in any calendar year during the transitional period.

Section 31 Schedule 5: Tax Treatment of Financing Costs and Income

Summary

1.Section 31 and Schedule 5 amend the taxation of financing expenses and financing income – commonly called the debt cap.

Details of the Section and Schedule

2.The section introduces the Schedule amending the tax treatment of financing costs and income.

3.Paragraph 1 of the Schedule introduces the amendments to the provisions of Part 7 of the Taxation (International and other Provisions) Act 2010 (TIOPA) which sets out the debt cap rules.

4.Paragraph 2 makes a minor change to the definition of dormant company for the purposes of section 262.

5.Paragraph 3 amends section 276 by inserting new section 276(2A). Section 276 describes how an authorised company should be appointed to allocate the disallowance of deductions.  New section 276(2A) ensures that relevant group companies that are dormant companies throughout the relevant period of account do not need to sign the appointment of an authorised company.  Paragraph 5 introduces a similar rule for the appointment of an authorised company for the exemption of financing income through new section 288(2A).

6.Paragraphs 4 and 6 add an additional requirement to the existing requirements in sections 280 and 292 for statements of allocated disallowances and exemptions.  The additional requirement in new section 280(5A) is that a disallowance cannot be allocated against a relevant group company’s financing expense if at the time that the financing expense accrued the company was not a relevant group company of the worldwide group. There is a similar provision in new section 292(5A) for the exemption of financing income for a UK group company.  Both of these new sections ensure that financing expenses are disallowed or financing income exempted only if they accrue when the company is a member of the worldwide group.

7.Paragraph 7 inserts new section 296(2A) to amend the computation in section 296 for the failure of a group to submit a statement of allocated exemptions.  This excludes from the computation the financing income that accrued to the company when it was not a UK group company.

8.Paragraph 8 introduces new section 305A which is anti-avoidance legislation.  New section 305A applies if a large group attempts to remove itself from the application of the debt cap rules by ensuring that the group does not have any relevant group companies in the period of account.  If a group does not have any relevant group companies then it is not a worldwide group for the purposes of the debt cap.  The legislation has two conditions that have to be met before Part 7 can apply to the large group.  The conditions are in subsections (3) and (4) of the new section 305A.  The first condition is that during a period of account the group entered into a scheme and the main purpose or one of the main purposes for entering into the scheme or being a party to the scheme is to secure that the group does not contain any relevant group companies.  The second condition is that the scheme is not an excluded scheme.

9.Paragraph 9 makes a minor change to the computation of financing expense amounts under section 313.  It amends section 313(6) to allow adjustments to be made to financing expenses on a just and reasonable basis where part of the accounting period of the company falls outside the period of account of the worldwide group.  It also introduces new section 313(6A) which allows for the amount of financing expenses to be reduced to nil. Paragraph 10 similarly amends section 314(6) and introduces new section 314(6A) for financing income.

10.Paragraph 11 removes section 316(4) which provided that if there was more than one group treasury company in a worldwide group then each of the group treasury companies had to make an election under section 316 for their financing expenses and financing income to be disregarded for the debt cap.

11.Paragraphs 12 and 13 amend sections 329(3) and 330(3) by removing the reference to a transaction and inserts “accrues” so it is clear that amounts that might not be thought of as transactions, such as interest, are included in any apportionment necessary because the company was not a relevant group or UK group company. They also insert new sections 329(6) and 330(6)

12.Paragraph 14 inserts new section 331ZA into Part 7.  This section enables worldwide groups to elect out of the “small amounts” rule for net financing deductions and net financing income of group companies.  The election is made by the reporting body of the worldwide group and will apply to both net financing deductions and net financing income.  The election requires the reporting body to provide certain information when making the election such as the first period of account to which it applies, details of the UK group companies at the time the election is made and of any UK group companies that have left the group between the beginning of the first period of account subject to the election and the date that the election is made.

13.New sections 331ZA(3) – (5) specify that the election has effect until it is withdrawn or replaced by a further election.  The withdrawal of the election must be made by the reporting body of the worldwide group and must specify from when the election is withdrawn. If the reporting body of the worldwide group is the UK group companies acting jointly then dormant companies are not included in the reporting body.

14.New section 331ZA(6) requires that an election or withdrawal must be made in writing and be received by HMRC within 12 months of the end of the first period of account to which the election applies or for which the election is withdrawn.  New section 331ZA(7) requires that the notice of election or withdrawal should be signed by the appropriate person.  New section 331ZA(8) provides the definitions of “appropriate person”, “relevant time” and “specified period of account”.

15.Paragraph 15 inserts new section 337(2) into the definition of worldwide group.  This is to ensure that the definitions of relevant group company in section 345 and worldwide group in sections 337 are not self-referential.

16.Paragraph 16 clarifies the definition of ultimate parent in section 339 to prevent foreign entities that would be partnerships if they were formed under UK law from being the ultimate parent of a worldwide group.

17.Paragraph 17 amends section 348 by inserting new section 348(6) which applies new section 348(7) if a group becomes or ceases to be a worldwide group in a period of account.  In which case new section 348(7) requires that financial statements prepared for that period of account are ignored and section 348 applies as if the part of the period of account for which the worldwide group is in existence is the relevant period for section 348.

18.Paragraph 18 introduces new section 348A which deals with how the debt cap rules apply to a worldwide group before and after a business combination or demerger.  New section 348A(1) has three conditions.  The first is that a worldwide group is a party to a business combination or demerger, the relevant event.  The second is that as a result of the relevant event there is a change in the ultimate parent of the worldwide group or any other group that is party to the relevant event.  “Party to the relevant event” has a wide meaning and includes any groups that are involved in or are the subject of the relevant event.  The final condition is that financial statements of the worldwide group are drawn up (or would be treated as drawn up under section 348 but for section 348A) for a period of account during which the relevant event occurs – the straddling period.

19.If these three conditions are met then new section 348A(2) applies Part 7 as if no financial statements had been drawn up by the worldwide group for the straddling period and section 348 does not apply to require the worldwide group to draw up financial statements for that period. Instead Part 7 applies as if financial statements had been drawn up in respect of a period of account beginning at the same time as the straddling period and ending the day before the relevant event and a second period of account beginning on the day of the relevant event and ending at the same time as the straddling period. In effect any worldwide group involved in the relevant event is required to finalise its debt cap computation for the period before the relevant event and begin a new debt cap computation from the date of that event.

20.New section 348A(3) defines “demerger” and applies the section 348(5) definition of IAS financial statements to new section 348A.

21.Paragraph 19 includes “business combination” in the list of expressions taking their meaning from international accounting standards in section 351.

22.Paragraph 20 includes “dormant company” in the list of other expressions in section 353. A dormant company is a company that is dormant by virtue of section 1169 of the Companies Act 2006 and which is not subject to transfer pricing adjustments arising under section 147.  The definition also includes non-resident companies that are dormant under legislation equivalent to section 1169 of the Companies Act 2006.

23.Paragraph 21 introduces a power to make regulations where a change in accounting standards effects how the ultimate parent of a group presents or discloses amounts in its consolidated financial statements.  The power is to enable regulations to be made particularly in response to expected changes to International Financial Reporting Standards 10, 11 and 12.

24.New section 353AA allows the regulations to amend Part 7 if there is a relevant accounting change.  A relevant accounting change is a change in the way that a company is required or permitted to present or disclose amounts in its consolidated accounts. A change in accounting standards includes the issue, revocation, amendment, recognition or withdrawal of recognition of accounting standards by an accounting body.  The regulations may include an election.  New section 353AA(5) allows the regulations to apply to a pre-commencement period which is defined as an accounting period or part of an accounting period that begins before the regulations are made.  This will enable the regulations to apply to early adopters of the changes in accounting standards if necessary. The regulations will be made under the draft affirmative procedure or negative procedure depending on whether or not they have the effect of increasing any person’s tax liability. New section 353AA(9) contains definitions of “accounting body”, “accounting standard” and “pre-commencement period”.

25.Paragraph 22 gives the commencement dates for the amendments.  The power to make regulations where accounting standards change has effect for any change of accounting standards on or after the date of Royal Assent.  All other amendments apply to periods of account of the worldwide group ending on or after the date of Royal Assent.

Background Note

26.Finance Act 2009 (FA) 2009 introduced a package of changes to the taxation of companies on their foreign profits.  This package included the introduction of a measure to restrict the interest and other finance expenses that can be deducted in computing the corporation tax payable by UK members of a worldwide group of companies.

27.The debt cap rules introduced as Schedule 15 to FA 2009 have now been rewritten as Part 7 of TIOPA 2010.  They broadly operate by requiring UK groups to compare their UK financing costs, as calculated under the Schedule, with the finance costs of their worldwide group.  If the UK costs exceed the worldwide costs then the UK companies do not get any relief for the excess.

28.Discussions with industry have identified that some amendments to the debt cap rules would be needed.  A number of changes were made in Finance (No.3) Act 2010 but further issues have since arisen.

29.The current Schedule incorporates a small number of changes that arose from consultation with groups and their representatives.

Section 32: Group Relief: Meaning of “Normal Commercial Loan”

Summary

1.Section 32 extends the definition of “normal commercial loan” to include loans that carry a right to conversion into shares or securities in quoted companies that are not connected to the company that issues the loan. This means that the holders of such loans are not considered to hold equity in the issuing company, and so ensures that the group status of the company will not be affected if it issues this type of loan.

Details of the Section

2.Subsection (1) provides that these changes will be made to the Corporation Tax Act (CTA) 2010.

3.Subsection (2) amends section 162(2)(c) of CTA 2010. Section 162(2) contains condition A which must be met in order for the loan to be a normal commercial loan. The amendment provides that condition A is satisfied if the loan carries a right to conversion into shares or securities in a quoted unconnected company (this is defined in subsection (4) of this section).

4.Subsection (3) amends of section 164(2)(c) so that condition A in section 162(2) is also satisfied where the loan carries a right to conversion into securities that themselves carry a right to conversion into shares or securities in a quoted unconnected company.

5.Subsection (4) inserts a new subsection into section 162(2).  New section 162(2A) provides that for the purposes of sections 162 and 164 a company is a quoted unconnected company where it is not connected to the company in which the relevant loan is held and its ordinary shares are listed on a recognised stock exchange.

Background Note

6.Members of a group or consortium are determined by reference not only to ordinary share capital held, but also to beneficial entitlement to profits available for distribution to equity holders and assets available for distribution to equity holders in a winding up.

7.For these purposes, an equity holder includes ordinary shareholders and loan creditors in relation to loans other than normal commercial loans.

8.Prior to these amendments, loans that carried a right to conversion into the shares or securities of a wholly unconnected listed company would not have fallen within the definition of normal commercial loans; holders of such loans would be treated as equity holders. The amendments will ensure that such loans will be within the definition of normal commercial loans and the holders of the loans will not be treated as equity holders.

Section 33: Company Distributions

Summary

1.Section 33 provides that certain transactions involving transfers of assets or liabilities between UK resident companies are not excluded from being treated as distributions for the purposes of corporation tax, removing an anomaly left over from the repeal of Advance Corporation Tax by Finance Act (FA) 1998.

2.This section also removes an overlap between different parts of the legislation which define what a distribution is.

Details of the Section

3.Subsection (2) repeals section 1002 of the Corporation Tax Act (CTA) 2010. Section 1002 CTA excludes from the definition of distribution in section 1000(1) of CTA 2010, paragraph B  (“paragraph B distribution”), transfers of assets or liabilities between:

Such transfers will now be paragraph B distributions if all other conditions are satisfied.

4.Subsection (3) inserts new subsection (2A) into section 1020 of CTA 2010. New subsection (2A) prevents a transfer of assets or liabilities being treated as a distribution under section 1000(1) of CTA 2010, paragraph G (“paragraph G distribution”), where the transfer is also a distribution under paragraph B, or would be if the exclusion of repayment of capital on the shares within paragraph B did not apply.

5.Subsection (4) repeals section 1021 of CTA 2010. Section 1021 of CTA 2010 provides for exception from treatment as a distribution under paragraph G transfers of assets or liabilities between:

Such transfers will now be paragraph G distributions if all other conditions of are satisfied.

6.Subsection (5) makes consequential amendments.

7.Subsection (6) provides that the amendments apply to distributions made on or after the day on which the Finance Bill receives the Royal Assent.

Background Note

8.Part 23 CTA 2010 covers the meaning of distribution for the purposes of corporation tax.  This includes:

Previously, a transfer of assets or liabilities between a company and its members could fall within both paragraph B and paragraph G if all other conditions of those sections were satisfied.

9.This section will ensure that where the transfer is a paragraph B distribution, or would be if not for the exception for repayment of capital on the shares, it will not be treated as a paragraph G distribution.

10.Sections 1002 and 1021 CTA 2010 excluded from the definition of distribution in paragraph B and paragraph G respectively transfers of assets and liabilities between:

11.The predecessor legislation to sections 1002 and 1021 CTA 2010 was introduced to relieve companies from the obligation to account for income tax or (after the imputation system was introduced by FA 1972) Advance Corporation Tax (ACT) on making a distribution in the form of a transfer of an asset or liability to another UK company. Since the abolition of ACT by FA 1998, the legislation is no longer required and is now producing anomalies, with tax treatment depending on the residence of the companies involved.

12.This legislation will align the tax treatment of transfers between UK resident companies with transfers between UK and non-UK resident companies, by allowing transfers between UK companies to be treated as distributions for the purposes of CTA 2010.

Section 34: Annual Exempt Amount

Summary

1.Section 34 sets the capital gains tax annual exempt amount (AEA) at its current level of £10,600 for 2012-13 and requires that it rises in line with the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI) from 2013-14 onwards. Automatic indexation of the AEA using the CPI remains subject to override if Parliament determines a different amount should apply.

Details of the Section

2.Subsection (2) provides the AEA to be used in section 3(2) of the Taxation of Chargeable Gains Act (TCGA) 1992.

3.Subsection (3) replaces references to “RPI” and “retail prices index” in section 3 with “CPI” and “consumer prices index”.

4.Subsection (4) inserts a definition of “consumer prices index” in section 288 of the TCGA 1992.

5.Subsection (5) states that the figure inserted by subsection (2) of this section is the AEA for tax year 2012-13 and the base figure to be indexed in future tax years.

6.Subsection (6) disapplies automatic indexation for tax year 2012-13 in order that the AEA for that year is instead the figure inserted by subsection (2).

7.Subsection (7) provides that subsections (3) & (4) have effect for the tax year 2013-14 onwards.

Background Note

8.Currently, where the RPI for the month of September is higher than the figure for the previous September, the level of the AEA for the following tax year increases in line with the percentage increase in the RPI, unless Parliament sets a different level.

9.At the Autumn Statement 2011, the Chancellor announced that the AEA for the tax year 2012-13 will be frozen at its current level of £10,600 and the planned switch from RPI to CPI, announced at Budget 2011, will take place from 2013/14.

Section 35: Foreign Currency Bank Accounts

Summary

1.Section 35 exempts individuals, trustees of settled property, and personal representatives of deceased persons from capital gains tax on gains made on withdrawals of money from bank accounts denominated in a foreign currency. The section takes effect from 6 April 2012.

Details of the Section

2.Subsection (4) of the section makes the main change. It replaces the existing section 252 of the Taxation of Chargeable Gains Act 1992 (TCGA) with a new provision.

New section 252 TCGA

3.Section 252(1) restricts the scope of section 251 TCGA. Section 251 exempts gains on certain debts, including credit balances on bank accounts, from tax on chargeable gains. Where the debt is a “foreign currency debt”, section 252(1) limits this exemption to gains accruing to individuals, trustees of settled property and personal representatives of deceased persons.

4.Section 252(2) defines “foreign currency debt” as a credit balance on a bank account in a currency other than sterling.

5.Subsections (2), (3) and (5) of the section make other changes to the TCGA as a consequence of the main change in subsection (4).

6.Subsection (2) removes a redundant rule concerning the attribution of gains to members of non-resident companies in section 13(5)(c) that referred to the original version of section 252 TCGA.

7.Subsection (3) inserts a new section 251(5A) TCGA to make clear that relevant references in section 251 to debt include references to an interest in debts that a person holds, for example, as a joint owner of the account.  It aligns section 251 with new section 252.

8.Subsection (5) repeals the rules in section 252A and Schedule 8A TCGA for calculating chargeable gains and allowable losses where individuals withdraw money from foreign currency bank accounts. The new section 252 prevents chargeable gains or allowable losses from arising to individuals on any such withdrawals, rendering these rules redundant.

9.Subsection (6) provides for the changes to the TCGA to apply from 6 April 2012.

Background Note

10.Under the TCGA, for capital gains tax purposes, gains and losses can arise on foreign currency bank accounts because the calculation must be made in sterling. If the exchange rate between sterling and the foreign currency in question changes between the time when the money was put into the account and the time when it is taken out, a gain or loss will arise.

11.At Budget 2011 the Government announced that it would reform the taxation of non-domiciled individuals, including measures to simplify aspects of the current remittance basis rules to remove undue administrative burdens. "Reform of the taxation of non-domiciled individuals: a consultation", issued on 17 June 2011, included a proposal to remove gains and losses on individuals’ foreign currency bank accounts from the scope of capital gains tax  (CGT).

12.This section implements the simplification, and extends the exemption from CGT to trustees and personal representatives.

13.The original section 252 TCGA limits the exemption from CGT for foreign currency bank accounts to cases where individuals withdraw money that they have put into their account for personal expenditure abroad. The new section 252 replaces this with a broader exemption.

Section 36: Collective Investment Schemes: Chargeable Gains

Summary

1.Section 36 amends the Taxation of Chargeable Gains Act 1992 (TCGA) to provide a power for the HM Treasury to make regulations about the tax treatment of gains in the holdings of UK investors in assets subject to collective investment schemes and provides powers for HM Treasury to define in regulations the types of schemes affected.

Details of the Section

2.New section 103C provides a power to make regulations about the treatment of investors in collective investment schemes for the purposes of tax on chargeable gains.

3.Regulations made under this section will cease to have effect unless approved by the House of Commons within 40 days.

4.The background note below provides details of the intended use of the power provided.

Background Note

5.The Government has announced its intention to legislate to enable the UK regulator to authorise, under the UCITS IV directive(1), tax transparent collective investment schemes, to be constituted by contractual arrangements. The purpose of this section is to provide powers for the appropriate tax treatment of gains made by UK investors on assets held in specified new types of collective investment scheme.

6.As the legislation to enable authorisation of specific types of tax-transparent collective investment scheme is yet to be enacted, this section provides a power to specify the tax treatment of participants in collective investment schemes. It is anticipated that the power will be used on the enactment of legislation to authorise new schemes.

7.Specific anticipated uses of the power will be to:

a.

provide that, for the purposes of tax on chargeable gains, assets held by the investors within certain tax transparent collective investment schemes will not be chargeable assets and that, instead, the investor’s interest in the scheme will be treated as if it were a chargeable asset,

b.

provide that, for assets held within a transparent scheme where interests in the scheme  are treated as being the assets held by the investor then section 212 TCGA will apply to interests within the long term fund of an insurance company,

c.

provide a relief for insurance companies which transfer assets to such transparent schemes that will ensure that no chargeable gain arises at the point of transfer, together with a provision to prevent abuse of that relief,

d.

enable the provisions in TCGA to be adapted for use with the merger and reconstruction of new and existing types of collective investment scheme so that the provisions will work when applied to interests in tax-transparent schemes and be simplified in application to existing schemes and changes may be made to what constitutes a disposal.

Section 37: Roll-Over Relief

Summary

1.Section 37 preserves the availability of capital gains roll-over relief in relation to farmers’ payment entitlements under the European Union (EU) Single Payment Scheme following changes to the Scheme in 2009.

2.The section also allows for future changes to the relevant classes of assets in roll-over relief to be made by secondary legislation.

Details of the Section

3.Subsection (1) amends class of assets 7A (payment entitlements under the single payment scheme) in section 155 of the Taxation of Chargeable Gains Act 1992 (TCGA) to reflect a change in the EU Regulations governing the scheme.

4.Subsection (2) replaces section 86(2) of Finance Act (FA) 1993 and inserts subsections 2A and 2B. The new subsection (2) allows the Treasury to amend section 155 of TCGA 1992 by statutory instrument so as to add classes of assets or amend existing classes. New subsection (2A) prevents any order being made under the power in subsection (2) which limits classes of assets qualifying for roll-over relief. New subsection (2B) allows for reasonable consequential amendments to be made to section 156ZB (interaction with corporation tax roll-over relief in cases of realisation and reinvestment) of, or Schedule 7AB (roll-over of degrouping charge on business assets) to, TCGA 1992 in line with those changes made through new subsection (2).

5.Subsection (3) repeals an earlier amendment to section 86(2) of FA 1993, which is superseded by subsection (2) above.

6.Subsection (4) applies the change in subsection (1) retrospectively to the time of the change in the EU Regulations in 2009 providing for a continuous availability of capital gains tax roll-over relief for single payment scheme payment entitlements.

Background Note

7.Roll-over relief (as the reliefs at sections 152-159 of TCGA 1992 are commonly referred to) permits the deferral of some or all of a chargeable gain on the disposal of a qualifying business asset where the consideration received for that business asset is wholly or partly applied in acquiring replacement qualifying business assets.

8.Qualifying business assets are listed in section 155 TCGA 1992. Class 7A refers to the single payment scheme and, more specifically, the EU Regulation under which payments were previously made (Regulation (EC) 1782/2003 of 29 September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers).

9.Regulation (EC) 1782/2003 was withdrawn from 1 January 2009 and replaced by Regulation (EC) 73/2009. This meant that without an amendment to class 7A, as listed in section 155 of TCGA 1992, payments made through the single payment scheme would no longer qualify for roll-over relief.

10.Subsection 86(2) of FA 1993 provides a power for new classes of assets to be added to the list of those qualifying for roll-over relief by Treasury Order; an amendment to an existing asset requires primary legislation through the Finance Act.

Section 38 Schedule 6: Seed Enterprise Investment Scheme

Summary

1.Section 38 and Schedule 6 set out the new Seed Enterprise Investment Scheme (SEIS), which is designed to incentivise investment in small, early stage companies.

Details of the Schedule

Part 1 of the Schedule

2.Paragraph 1 of the Schedule introduces a new Part 5A to Income Tax Act 2007 (ITA), containing the rules for the new scheme.

Chapter 1 of New Part 5A of ITA

3.New section 257A defines SEIS income tax relief and provides that it will apply to shares issued on or after 6 April 2012 and before 6 April 2017. The new scheme is therefore of fixed length, but can be extended by a Treasury order.

4.New section 257AA provides that an investor is eligible for relief in respect of shares issued to him or her where particular requirements are met. There are requirements which apply to the investor, general requirements, and requirements that apply to the issuing company. These requirements are in Chapters 2 – 4 of new Part 5A.

5.New section 257AB provides that the relief is a reduction of income tax calculated as 50 per cent of the amount the investor subscribes for shares, subject to an overall limit of 50 per cent of £100,000 on the amount of relief that can be received in any one year.

6.New section 257AB(5) allows an investment or part of an investment made in one year to be treated as though made in the previous year (but not in the first year that the new scheme operates), subject to the overall limit for a year.

7.New section 257AC defines two periods of time with respect to which many of the SEIS conditions operate. Period A runs from the company’s incorporation to the third anniversary of the share issue (defined at new section 257AC(4) as the “termination date”). Period B runs from the issue of the shares to the termination date.

8.New section 257AD is an overview of chapters 5 – 8 of new Part 5A, which deal with the making of claims, withdrawal of relief, and supplementary matters.

9.New section 257AE(1) mentions new Section 150E of the Taxation of Chargeable Gains Act 1992 (TCGA), which provides a relief from capital gains tax (CGT) on gains on shares which qualify for SEIS relief (see paragraphs 93 below).

10.New section 257AE(2) mentions new Schedule 5BB TCGA, which provides relief from CGT on the disposal of assets where the proceeds are reinvested under SEIS (see paragraphs 97 to 108 below).

Chapter 2

11.New section 257B is an overview of chapter 2 which contains the conditions which apply to the SEIS investor.

12.New section 257BA provides that neither SEIS investors nor their associates may be employees of the company or any qualifying subsidiary in period B (unless also a director).

13.New section 257BB provides that SEIS investors must not during Period A have a “substantial interest” in the company, defined at new section 257BF as having more than a 30 per cent stake in the company through ordinary or issued share capital, voting power or rights on winding up, or as having control of the company.

14.New section 257BC provides that SEIS investors must not subscribe for the shares as part of a wider arrangement which includes somebody else subscribing for shares in a company in which the investor – or anyone else party to the arrangement – has a substantial interest.

15.New section 257BD provides that during Period A there must be no loans to the investor or their associates which are linked to their subscription for shares.

16.New section 257BE requires the subscription for shares to be for genuine commercial reasons, and not as part of a tax avoidance arrangement.

17.New Section 257 BF defines when a person has a “substantial interest” in a company.

Chapter 3

18.New section 257C is an overview of chapter 3 which contains the general requirements under SEIS.

19.New section 257CA sets out the types of shares for which investors can subscribe under the scheme, allowing for shares carrying certain preferential rights to dividends. Shares are still excluded if: they carry preferential rights to assets on winding up; they have any right to be redeemed; the amount and timing of the dividends depend on a decision of the company or any other person; or if they are cumulative. This new definition is the same as that also being introduced for the Enterprise Investment Scheme (EIS).

20.New section 257CA(4) provides that shares must be subscribed for wholly in cash and be fully paid up at the time they are issued.

21.New section 257CB requires that the shares be issued to raise money for a qualifying business activity carried on or to be carried on by the company or by a qualifying 90 per cent subsidiary. Qualifying business activity is as defined at new section 257HG.

22.New section 257CC requires that the money raised from the share issue must be spent by the end of period B, for the purpose of the qualifying business activity for which it was raised.

23.Section 257CC(2) provides that spending money on the acquisition of shares or stock in a company does not of itself amount to spending the money for the purposes of a qualifying business activity.

24.New section 257CD prevents “pre-arranged exits”, which are any arrangements in place (at the time the shares are issued) for the disposal of shares or securities in the company or its assets, or for its activities to cease, or for the investment to be protected from normal commercial risks.

25.New section 257CE requires the issue of shares to be for genuine commercial reasons, and not as part of a tax avoidance arrangement.

26.New section 257CF is the “no disqualifying arrangements” requirement. Arrangements are “disqualifying” if they are entered into with the purpose of ensuring that any of the venture capital scheme tax reliefs are available in respect of the relevant company’s business, and either: all or most of the monies raised under the scheme are paid to or for the benefit of a party to the arrangements; or in the absence of the arrangements, it would be reasonable to expect that the business would be carried on as part of another business by a person who is a party to the arrangements, or a person connected with such a party. This is the same requirement that is being introduced for the EIS and VCT schemes.

Chapter 4

27.New section 257D is an overview of chapter 4 which contains the conditions that apply to the company.

28.New section 257DA is the “trading requirement”, requiring that the company’s main purpose throughout period B must be to carry on a new qualifying trade or trades. Alternatively if it is the parent company of a group, the business of the group must not consist wholly or as to a substantial part in carrying on non-qualifying activities.

29.Section 257DA(3) provides that if a company intends in the future to have qualifying subsidiaries which will carry on new qualifying trades, then it is treated as a parent company for the purposes of the trading requirement.

30.Sections 257DA(4) and (5) describe how “the business of the group” is to be defined: the activities of the group are to be looked at together as though carried on as one business.

31.Section 257DA(6) provides that certain intra-group transactions are to be ignored in considering what the business of the group involves.

32.New section 257DB provides that the purpose of existence test is not breached due to anything that happens because of the company or a subsidiary being in administration or receivership, or being dissolved or wound up, provided that this is done for genuine commercial reasons and not as part of a tax avoidance arrangement.

33.New section 257DC provides that throughout Period B, the new qualifying trade and any preparation work or research and development leading to it, must be carried on by the issuing company itself or by a qualifying 90 per cent subsidiary.

34.New sections 257DC(4) to (6) provide that this requirement is not breached due to the new qualifying trade being taken over by an unconnected person because of the company or a qualifying 90 per cent subsidiary being in administration or receivership, or being dissolved or wound up, provided that this is done for genuine commercial reasons and not as part of a tax avoidance arrangement.

35.New section 257DD requires the company to have a permanent establishment in the UK throughout period B.

36.New section 257DE requires the company not to be “in difficulty” at the beginning of period B. This means it must not be a “firm in difficulty” under European Commission guidelines.

37.New section 257DF requires the company to be “unquoted” at the beginning of period B and provides that there must be no arrangements at that time for it to cease to be unquoted.

38.A company is “unquoted” if its securities are not marketed to the general public – defined in new section 257DF(3) as being listed on a recognised stock exchange, listed on a designated exchange outside the UK, or dealt with, outside the UK, by any such means as may be designated.

39.New sections 257DF(4) and (5) provide for the Commissioners of HMRC to make the designations referred to in new section 257DF(3).

40.New section 257DG contains the control and independence requirement:

41.New section 257DH requires that neither the company nor any qualifying 90 per cent subsidiary may be a member of either a partnership or a limited liability partnership (or any foreign equivalent) at any time in period A.

42.New section 257DI is the gross assets requirement. Immediately before the shares are issued, the total value of the company’s assets (or of the group assets where the company is a parent company), must not exceed £200,000.

43.New section 257DJ is the number of employees requirement. At the time the shares are issued, the company together with any subsidiaries must have fewer than 25 full time equivalent employees.

44.New section 257DK provides that neither the company nor any qualifying subsidiary may have previously raised money under either the EIS or VCT schemes.

45.New section 257DL ensures that any investment under SEIS is kept within the limits which allow SEIS to be regarded under EU regulations as providing de minimis and therefore non-notifiable State aid.

46.New section 257DL(1) provides that the amount of all SEIS investment, together with any other de minimis State aid received by the company in the 3 years to the date of the latest SEIS investment, must not exceed £150,000.

47.New sections 257DL(4) to 6) apply so that where a share issue takes above £150,000 the total aid received by the company in the 3 years to the date of investment, the investment in the share issue is apportioned so that relief is given only on the proportion of the investment which doesn’t exceed the £150,000 limit.

Chapter 5

48.New section 257E contains rules setting out how relief given to an individual is to be attributed to shares for which the individual has subscribed.

49.New section 257EA provides that SEIS relief can not be claimed more than five years after the SA filing deadline for the year in which the shares are issued.

50.New section 257EB provides that the investor can only claim relief if he or she has a compliance certificate from the company for the shares.

51.New section 257EC defines a compliance certificate. This is a certificate issued by the company stating that the shares meet the requirements for SEIS relief (excluding those requirements that are dependent on the investor).

52.New section 257EC(2) provides that a certificate cannot be issued until the company has supplied a compliance statement to HM Revenues & Customs (HMRC) and new section 257EC(3) that it must have authority from HMRC to issue a certificate.

53.New section 257ED defines a compliance statement. This is a statement to the effect that at the time the statement is made, the requirements for SEIS are met or have been met (excluding those requirements that are dependent on the investor).

54.New section 257ED(3) provides that the company may not make a compliance statement until either it has traded for at least four months, or at least 70 per cent of the money raised by the share issue has been spent for the purposes of the qualifying business activity for which it was raised.

55.New section 257EE provides for an appeal against a decision by HMRC not to authorise a compliance certificate.

56.New section 257EF prescribes a maximum penalty of up to £3,000 where a company negligently or fraudulently issues a certificate or statement or issues one in breach of the conditions in new section 257EC.

57.New section 257EG allows the Treasury, by order, to amend new sections 257EC and 257ED. This is intended to allow changes in the administrative processes without the need for primary legislation.

Chapter 6

58.New section 257F is an overview of chapter 6 which contains provisions dealing with the withdrawal of relief given for SEIS shares (“relevant shares”). Many of the provisions in chapter 6 are counterparts to conditions contained in the preceding chapters, setting out what happens when those conditions are breached.

59.New section 257FA withdraws relief where, before the end of period B, the investor disposes of shares for which SEIS relief has been given. In particular, it contains computational rules setting out how much relief is to be withdrawn.

60.New section 257FA(6) ensures that the death of an investor does not trigger the withdrawal of any relief given.

61.New section 257FB supplements those rules for cases where full relief was not obtained.

62.New sections 257FC and 257FD withdraw relief where the investor holds a call or put option in relation to the relevant shares.

63.New section 257FE withdraws relief where during period A the investor receives any value from the company relating to the relevant shares.

64.New section 257FF provides that relief is not withdrawn where the value received is insignificant (defined in new section 257FG).

65.New section 257FG defines insignificant as an amount that does not exceed £1,000, or if it does exceed that amount is insignificant compared to the amount subscribed for the shares.

66.New section 257FH defines a number of different circumstances in which value is received. These cover various ways in which the company might make payments to the investor. A number of circumstances are excluded – for example where the investor is a director of the company and is reimbursed expenses incurred in performance of his or her duties.

67.New section 257FI defines the amount of value received in the various cases described by new section 257FH.

68.New sections 257FJ – 257FO contain supplementary provisions concerning the receipt of value in particular circumstances.

69.New section 257FP withdraws relief where, during period A, the company or any qualifying subsidiary takes over the trade or assets previously used by another person in their trade, and the investor either had or has more than a half share in the trade, or controls or has controlled the issuing company and controls or has controlled the company which previously carried on the trade.

70.New section 257FQ withdraws relief if the company acquires all the issued share capital of another company in period A, and the investor is a person or one of a group of persons, who control(s) both companies.

71.New section 257FR withdraws relief given where, at some later date, it is found not to have been due.

Chapter 7

72.New section 257G provides for relief to be withdrawn or reduced by making an assessment.

73.New section 257GB sets a time limit for any such assessment, which must be made within six years of the end of whichever is the later of the tax year in which period B ends, or the tax year in which the event causing the withdrawal or reduction occurs.

74.New section 257GC sets out cases where no such assessment may be made.

75.New section 257GD provides that when an assessment is made under new section 257G to withdraw relief as prescribed by particular provisions of chapters 2, 4 and 5, interest is to be charged from 31 January following the tax year in which the assessment is made.

76.New section 257GE requires the investor to notify HMRC if he or she ceases to be a qualifying investor, or if relief should be withdrawn for one of a number of specified reasons and new section 257 DF places a similar requirement on the company.

77.New section 257GG gives HMRC power to require information where either new section 257GE or new section 257GF applies or could have applied.

78.New section 257GH gives HMRC a power to require information in other cases, specifying from whom information may be required in various different circumstances.

79.New section 257GI allows HMRC to disclose to a company that SEIS relief has been obtained in respect of its shares.

Chapter 8

80.New section 257H allows for transfers of shares between spouses or civil partners not to be treated as a disposal. The SEIS relief remains attributable to the shares until a disposal or other relevant event by the spouse or civil partner to whom they were transferred.

81.New section 257HA sets out rules determining which shares are treated as having been disposed of under either new section 257FA or 257H.

82.New section 257HB provides for the continuity of SEIS relief where a new holding company is inserted above a company which has issued shares to which SEIS relief is attributable, resulting in shareholders exchanging their original shares for shares in the new holding company.

83.Providing that certain conditions as specified by section 257HB(2) are met, new section 257HB(3) provides that the original shares are not treated as disposed of, and that the relief which was attributed to them is instead attributed to the shares in the new holding company.

84.New sections 257HC and 257HD ensure that in other respects, the SEIS legislation applies in respect of the new shares as it would have done in respect of the old shares.

85.New section 257HE contains provisions applying to nominees and bare trustees.

86.New section 257HF defines a “new qualifying trade” as being one which has not been carried on by either the company or by any other person for longer than two years at the date of issue of the shares; and neither the company nor any qualifying subsidiary had carried on any other trade before the company in question began to carry on the new trade.

87.New section 257HG defines “qualifying business activity” as either carrying on, or preparing to carry on, a new qualifying trade, or carrying on research and development from which a new qualifying trade will be developed (or which will benefit a new qualifying trade). For a business activity to be “qualifying” it must be carried on by either the issuing company or by a qualifying 90 per cent subsidiary.

88.New sections 257HH and 257HI define the terms “disposal of shares” and “issue of shares”.

89.New section 257HJ contains a number of definitions of terms used elsewhere in part 5A.

Part 2 of the Schedule

90.Part 2 provides for relief for capital gains.

91.Paragraph 2 provides for the Taxation of Chargeable Gains Act 1992 (TCGA) to be amended.

92.Paragraph 3 inserts new sections 150E and 150F into the TCGA.

93.New section 150E mirrors existing section 150A TCGA that applies to EIS shares. Section 150E reduces the consideration taken into account for capital gains tax on a disposal of shares by the amount of the SEIS relief attributable to those shares. It reduces or eliminates any chargeable gain on a disposal of shares to which SEIS relief is attributable and provides rules that permit those shares to be identified.

94.New section 150F mirrors existing section 150B TCGA that applies to EIS shares. It modifies the effect of new section 150E to limit the reduction in any chargeable gain on the disposal of shares to which SEIS relief is attributable to the extent that value is received and the SEIS relief reduced in consequence.

95.Paragraph 4 of the Schedule inserts a new section 150G into the TCGA. Section 150G introduces Schedule 5BB to the TCGA, which provides the SEIS re-investment relief.

96.Paragraph 5 inserts new Schedule 5BB into the TCGA – see paragraphs 97 to 108 below.

New Schedule 5BB TCGA

97.Paragraph 1 of Schedule 5BB sets out the conditions for relief and the amount of relief available.

98.Paragraph 1(2) to (4) sets out three conditions for relief:

a.

An individual must realise a gain on a disposal of an asset in the tax year 2012-13.

b.

The individual must make an investment that qualifies for SEIS relief from income tax, and claim that relief.

c.

The individual must claim SEIS re-investment relief in respect of the amount on which the SEIS relief is claimed.

99.Paragraphs 1(5) to (7) sets out the amount of SEIS re-investment relief. Paragraph 1(5) sets the amount on which SEIS relief is claimed (“the SEIS expenditure”) against the gain on the disposal of the asset. Paragraph 1(6) provides that the amount of the gain that has the SEIS expenditure set against it is not liable to CGT. Paragraph 1(7)(a) restricts the SEIS expenditure on which relief may be claimed to the extent it has already been used to claim to other SEIS reinvestment relief or to EIS deferral relief. Paragraph 1(7)(b) ensures SEIS re-investment relief is not given against any part of the gain that has already been covered by other SEIS re-investment relief or by EIS deferral relief

100.Paragraph 2 of Schedule 5BB restricts the amount of SEIS re-investment relief that is given under paragraph 1 in two circumstances.

101.Paragraph 2(1) and (2) applies where the amount invested under SEIS exceeds the maximum amount of £100,000 on which an individual can obtain income tax relief in any one tax year. In this circumstance the SEIS re-investment relief is capped at the amount on which SEIS relief is due, applying the formula in sub-paragraph (2).

102.Paragraph 2(3) and (4) applies where SEIS relief is restricted before the claim to SEIS re-investment relief is made. In this case the maximum amount on which SEIS re-investment relief can be claimed is restricted by a similar amount, under the formula in sub-paragraph (4).

103.Paragraph 2(5) gives the order in which the two restrictions in paragraph 2 are to be applied in cases where they both apply.

104.Paragraph 3 of Schedule 5BB sets the time limit for claiming SEIS re-investment relief as the same as the limit that applies for claims to SEIS relief. The paragraph also makes clear that claims to SEIS re-investment relief may be made before effect is given to the claim for SEIS relief on which the SEIS re-investment relief claim depends.

105.Paragraph 4 of Schedule 5BB treats the amount on which SEIS re-investment relief is given as spread (‘attributed’) equally across all the shares in respect of which the claim to relief is made. This is required in order to be able to recover the correct amount of relief, should this become necessary, under paragraph 5 or 6 of Schedule 5BB (see below).

106.Paragraph 5 of Schedule 5BB applies where the SEIS relief attributed to shares is withdrawn or reduced so that the SEIS re-investment relief attributed is also withdrawn or reduced in the same proportion. For example, if the SEIS relief were reduced by 60 per cent the SEIS re-investment relief will also be reduced by 60 per cent. Where this happens paragraph 5(2) makes the individual who made the investment liable to CGT for the tax year 2012-13 on a chargeable gain of the appropriate amount. Where paragraph 5 applies to reduce the amount of SEIS re-investment relief attributable to the shares in question, sub-paragraphs (4) and (5) reduce the amount of SEIS re-investment relief remaining attributable to the shares by a corresponding amount.

107.Paragraph 6 of Schedule 5BB modifies the effect of paragraph 5 in cases where the investor in shares to which SEIS re-investment relief is attributable transfers some or all of the shares to their husband or wife or civil partner, and that transfer does not itself lead to relief being withdrawn. Where SEIS re-investment relief is withdrawn or reduced after the transfer, a gain is charged to CGT on the transferee spouse or civil partner in respect of the shares which they hold, and the amount of the gain charged on the original investor is based on only the shares they still hold.

108.Paragraphs 7 and 8 of Schedule 5BB make supplementary provision. Paragraph 7(1) permits all necessary adjustments to be made to give effect to claims or charges under the Schedule, notwithstanding the normal time limits for amending or making assessments to CGT. Paragraph 7(2) provides that when an assessment under paragraphs 5 or 6 to withdraw re-investment relief, interest is to be charged from 31 January following the tax year in which the assessment is made. Paragraph 8 defines various terms in Schedule 5BB.

Part 3 of the Schedule

109.Part 3 makes consequential amendments to ITA (and in particular to the existing EIS and VCT rules in Parts 5 and 6 of that Act) and to the TCGA 1992.

110.Paragraph 7 of the schedule amends the overview of ITA, adding a reference to the new Part 5A.

111.Paragraphs 8 and 9 amend sections 26 and 27, which form part of the computational rules for income tax liability, to add SEIS relief.

112.Paragraph 10 amends section 169, which deals with the EIS rules on directors and the circumstances in which they may qualify for relief in respect of an investment in shares. The rules are amended to allow a paid director to qualify for EIS relief where the relevant investment was made before the end of the qualifying holding period for a holding of SEIS shares which attracted relief.

113.Paragraph 12 amends the EIS rules so that any SEIS investment received by a company in the 12 months to the date of issue of EIS shares, is taken into account in determining the maximum amount of investment which will attract tax relief in that 12 month period.

114.Paragraphs 11 and 13 amend the EIS rules to add a new requirement, that before a company can issue shares qualifying under EIS it must have spent at least 70 per cent of any money raised under SEIS.

115.Paragraph 14 amends the EIS rule determining identification of shares on a disposal, to include those which have attracted SEIS relief.

116.Paragraph 16 amends the VCT rules so that any SEIS investment received by a company in the 12 months to the date of any investment by a VCT, is taken into account in determining whether a holding will form part of a VCT’s qualifying holdings.

117.Paragraphs 15 and 17 amend the VCT rules to add a new requirement, that before a company may receive a VCT investment it must have spent at least 70 per cent of any money raised under SEIS.

118.Paragraph 18 introduces amendments to the TCGA.

119.Paragraphs 19 and 20 make amendments to the rules which determine how any gain or loss on disposal of shares which have attracted EIS relief, is to be calculated. These amendments arise as a consequence of other changes in the Schedule and do not materially alter the rules.

120.Paragraph 21 amends Schedule 5B TCGA. Schedule 5B allows individuals to defer the time at which gains on disposals of assets become liable to CGT where they invest in shares under the terms of the main EIS. The amendments made by paragraph 21 ensure that both EIS deferral and SEIS re-investment relief cannot be claimed in respect of the same expenditure.

121.Paragraph 22 amends section 98 of the Taxes Management Act (TMA) 1970 to include the information obligations provided for by sections 257GE, 257GF, 257GG and 257GH. Section 98 lists those information obligations which may carry a penalty if not complied with.

Background Note

122.The Chancellor announced at Budget 2011 that the Government would bring forward proposals for support for investment in small, early stage companies, in addition to that provided by the EIS and Venture Capital Trusts (VCT) scheme.

123.A consultation document, "Tax-advantaged venture capital schemes: a consultation" was published on the Treasury website on 6 July 2011 setting out proposals and seeking views on a number of design issues.

124.Views expressed in response to the consultation have been taken into account in developing the new SEIS relief. The Government’s response to the consultation was published on 6 December 2011 and is available on the HMT website.

125.The Government announced the proposal to introduce SEIS re-investment relief in the autumn statement 2011. HMRC issued a Technical Note outlining the scope of the relief on 6 December 2011 and draft legislation was published on 31 January 2012.

Section 39 Schedule 7: Enterprise Investment Scheme

Summary

1.Section 39 and Schedule 7 make a range of changes to the Enterprise Investment Scheme (EIS), in respect of shares issued on or after 6 April 2012. This increases the annual amount an investor may invest under the EIS, and provides for three simplifications to the EIS rules. A trade which consists substantially in the receipt of feed-in tariffs (with certain exceptions) will become a non-qualifying activity. Monies used to acquire shares or stock in a company will no longer be regarded as employed for the purposes of a qualifying business activity. A “no disqualifying arrangements” test is introduced. The Schedule also raises the thresholds for eligible companies under the scheme, subject to a Treasury appointed day order. The increases in these thresholds are subject to State aid approval.

Details of Schedule

Part 1

2.Paragraph 1 introduces the changes to be made to Part 5 of the Income Tax Act 2007, dealing with EIS income tax relief.

3.Paragraph 2 removes the requirement for an investor to have subscribed a minimum of £500 in a company in order to qualify for relief.

4.Paragraph 3 of the Schedule increases from £500,000 to £1million the annual amount that an investor may invest under the EIS.

5.Paragraph 4 amends the EIS “connected person” rules so that any loan capital that the investor has in the company is not taken into account when computing whether they are excluded from EIS income tax relief through having a 30 per cent interest in the company.

6.Paragraph 6 widens the definition, for EIS, of the sorts of shares for which investors can subscribe under the scheme to include shares carrying certain preferential rights to dividends. Shares are still excluded if: a) they carry preferential right to assets on winding up; or b) if the amount and timing of the dividends depend on a decision of the company or any other person; or c) if the rights to dividends are cumulative (that is, the right to receive a dividend rolls forward to future periods if the company has insufficient profits to pay the dividend).

7.Paragraph 7(2) increases, for EIS, the annual amount of investment that a company may raise under the VC schemes from £2million to £5million. The increase is subject to State aid approval and will come into effect in respect of shares issued on or after 6 April 2012, subject to a Treasury appointed day order bringing the legislation into effect.

8.Paragraph 7(3) provides that where a company has received any other risk capital investment which constitutes a State aid, that investment is also taken into account in calculating whether the £5million limit has been reached.

9.Paragraph 8 amends the rules on how the monies raised by the share issued are to be employed, so that monies used to buy shares or stock in a company will no longer be regarded as having been employed for the purposes of a qualifying business activity.

10.Paragraph 9 introduces a “no disqualifying arrangements” requirement. Arrangements are “disqualifying” if they are entered into with the purpose of ensuring that any of the venture capital schemes tax reliefs are available in respect of the relevant company’s business, and either: all or most of the monies raised under the scheme are paid to or for the benefit of a party to the arrangements; or in the absence of the arrangements, it would be reasonable to expect that the business would be carried on as part of another business by a person who is a party to the arrangements or a person connected with such a party.

11.Paragraph 11 increases the gross assets limit for EIS from £7million before the EIS investment and £8million afterwards to £15million and £16million respectively. The increases are subject to State aid approval and will come into effect in respect of shares issued on or after 6 April 2012, subject to a Treasury appointed day order bringing the legislation into effect..

12.Paragraph 12 increases the limit on the number of employees that a qualifying company may have from fewer than 50 to fewer than 250. The increase is subject to State aid approval and will come into effect in respect of shares issued on or after 6 April 2012, subject to a Treasury appointed day order bringing the legislation into effect..

13.Paragraphs 13 and 14 exclude as qualifying trades, any which consist substantially in the generation or export of electricity in respect of which the company receives a feed-in tariff under a UK government scheme or a similar overseas scheme. This applies generally where the relevant shares are acquired on or after 6 April 2012. For shares issued on or after 23 March 2011 and before 6 April 2012, a holding will still qualify providing the subsidised generation or export begins before 6 April 2012. Trades where the electricity is generated by anaerobic digestion or hydroelectric power are not excluded by the legislation. Irrespective of the means by which electricity is produced, trades carried on by community interest companies, co-operative societies, community benefit societies or Northern Irish industrial and provident societies are not affected by the legislation.

14.Paragraph 17 brings the legislation in line with that on the new Seed Enterprise Investment Scheme, by making clear that the death of an investor within the qualifying period for the shares will not trigger the reduction or withdrawal of relief.

15.Paragraph 19 amends the information powers at section 243 of the Income Tax Act 2007, to allow HM Revenue & Customs (HMRC) to seek information in relation to the “disqualifying arrangements” requirement from relevant parties.

16.Paragraph 21 amends the existing definition of “arrangements” to make it clear that “arrangements” includes a single transaction or a series of transactions.

Part 2: Enterprise Investment Scheme: Chargeable gains

17.Paragraph 26 introduces the changes to be made to the Taxation of Chargeable Gains Act 1992 (TCGA), dealing with EIS disposal relief and EIS deferral relief.

18.Paragraph 27 makes an amendment to section 150A of TCGA to ensure that the calculation of any capital gain on the disposal of shares to which EIS relief has been attributable takes account of EIS relief at the appropriate rate.

19.Paragraph 29 increases, for reinvestment relief under Schedule 5B to TCGA, the annual amount of investment that a company may raise under the VC schemes from £2million to £5million. The increase is subject to State aid approval and will come into effect in respect of shares issued on or after 6 April 2012, subject to a Treasury appointed day order bringing the legislation into effect..

20.Paragraph 30 introduces a “no disqualifying arrangements” requirement. Arrangements are “disqualifying” if they are entered into with the purpose of ensuring that any of the venture capital schemes tax reliefs are available in respect of the relevant company’s business, and either: all or most of the monies raised under the scheme are paid to or for the benefit of a party to the arrangements; or in the absence of the arrangements, it would be reasonable to expect that the business would be carried on as part of another business.

21.Paragraph 31 amends the information powers at Paragraph 11 of Schedule 5B, to allow HMRC to seek information in relation to the “disqualifying arrangements” requirement from relevant parties.

22.Paragraph 32 amends the existing definition of “arrangements” to make it clear that “arrangements” includes a single transaction or a series of transactions.

Background Note

23.The EIS and Venture Capital Trusts (VCT) scheme encourage investment in small, higher risk trading companies by offering tax incentives to investors in qualifying companies.

24.Following consideration of responses to a consultation document "Financing a Private Sector Recovery", published on 26 July 2010 and to a further consultation, “The path to strong, sustainable and balanced growth" (the “Growth Review”), published on 29 November 2010, the Chancellor announced in his Budget on 23 March 2011 that subject to State aid approval, limits on the size of companies which can benefit under the schemes would be increased.

25.A further consultation document, "Tax-advantaged venture capital schemes: a consultation" was published on the Treasury website on 6 July 2011 seeking views on ways in which the EIS and VCT might be improved.

Section 40 Schedule 8: Venture Capital Schemes

Summary

1.Section 40 and Schedule 8 make a range of changes to the Venture Capital Trust (VCT) scheme. A trade which consists substantially in the receipt of feed-in tariffs (with certain exceptions) will become a non-qualifying activity. Monies used to acquire shares or stock in a company will no longer be regarded as employed for the purposes of a qualifying business activity. A “no disqualifying arrangements” test is introduced, and there is a relaxation to the restriction on the amount of money a VCT may invest in a company. The Schedule also raises the thresholds for eligible companies under the scheme. The increases in these thresholds are subject to State aid approval.

Details of Schedule

2.Paragraph 1 introduces the changes to be made to Part 6 of the Income Tax Act 2007, dealing with the VCT scheme.

3.Paragraphs 2 and 3 amend the conditions which a VCT must meet in order to obtain VCT approval, to prevent a VCT from making an investment in any company in excess of the maximum amount permitted in a 12-month period by State aid rules applying to risk capital investment. This applies in respect of any investment made by the VCT on or after the date on which Finance Act 2012 is passed.

4.Paragraph 3(4) describes which previous investments in a company are to be taken into account and includes not only previous VCT, Enterprise Investment Scheme (EIS) investment or Seed Enterprise Investment Scheme (SEIS) investment but also any other any other risk capital investment which constitutes a State aid.

5.Paragraph 5 removes the restriction that prevents a VCT investing more than £1million per annum in any single company. The restriction continues to apply where the company is a member of a partnership or joint venture that carries on the qualifying trade. This takes effect in respect of shares or securities issued on or after 6 April 2012.

6.Paragraph 6(2) increases the annual amount of investment that a company may raise under the VCT schemes from £2million to £5million. The increase is subject to State aid approval and will take effect in respect of shares or securities issued on or after 6 April 2012, subject to a Treasury appointed day order,

7.Paragraph 6(3) provides that where a company has received any other risk capital investment which constitutes a State aid, that investment is also taken into account in calculating whether the £5million limit has been reached.

8.Paragraph 7 amends the rules on how the investee company may use the VCT investment, so that monies used by it to buy shares or stock in another company will no longer be regarded as having been employed for the purposes of a qualifying business activity.

9.Paragraph 8 increases the gross assets limit for VCT investee companies from £7million before the VCT investment and £8million afterwards to £15million and £16million respectively. The increases are subject to State aid approval and will come into effect in respect of shares or securities issued on or after 6 April 2012, subject to a Treasury appointed day order,

10.Paragraph 9 increases the limit on the number of employees that a qualifying company may have from fewer than 50 to fewer than 250. The increase is subject to State aid approval and will come into effect in respect of shares or securities issued on or after 6 April 2012, subject to a Treasury appointed day order,

11.Paragraph 10 introduces a “no disqualifying arrangements” requirement. Arrangements are “disqualifying” if they are entered into with the purpose of ensuring that any of the venture capital schemes tax reliefs are available in respect of the relevant company’s business, and either: all or most of the monies raised under the scheme are paid to or for the benefit of a party to the arrangements; or in the absence of the arrangements, it would be reasonable to expect that the business would be carried on as part of another business. The legislation includes a definition of “arrangements” which applies for the purpose of this test. This takes effect in respect of shares or securities issued on or after 6 April 2012.

12.Paragraphs 11 and 12 exclude as qualifying trades any which consist substantially in the generation or export of electricity in respect of which the company receives a feed-in tariff under a UK government scheme or a similar overseas scheme. This applies generally where the VCT acquires the relevant holding on or after 6 April 2012. For holdings acquired on or after 23 March 2011 and before 6 April 2012, a holding will still qualify providing the subsidised generation or export begins before 6 April 2012. Trades where the electricity is generated by anaerobic digestion or hydroelectric power are not excluded by the legislation. Irrespective of the means by which electricity is produced, trades carried on by community interest companies, co-operative societies, community benefit societies or Northern Irish industrial and provident societies, are not affected by the legislation.

13.Paragraph 15 introduces an information power to allow HM Revenue & Customs (HMRC) to seek information from those it believes are parties to “disqualifying arrangements”.

14.Paragraph 17 adds the new information power to the list already at section 98 of the Taxes Management Act 1970. Section 98 allows HMRC to seek a penalty for failure to comply with an information notice, or for fraudulently or negligently providing incorrect information in response to an information notice.

Background Note

15.The EIS and VCT scheme encourage investment into small, higher risk trading companies by offering tax incentives to investors in qualifying companies.

16.Following consideration of responses to a consultation document "Financing a Private Sector Recovery", published on 26 July 2010 and to a further consultation, “The path to strong, sustainable and balanced growth" (the “Growth Review”), published on 29 November 2010, the Chancellor announced in his Budget on 23 March 2011 that subject to State aid approval, limits on the size of companies which can benefit under the schemes would be increased.

17.A further consultation document, "Tax-advantaged venture capital schemes: a consultation" was published on the Treasury website on 6 July 2011 seeking views on ways in which the EIS and VCT might be improved.

Section 41 Schedule 9: Capital Allowances: Restricting the Exception for Manufacturers and Suppliers

Summary

1.Section 41 and Schedule 9 removes an exception from the capital allowances anti-avoidance rules that exists for certain transactions where unused plant or machinery is bought or hire purchased from the manufacturer or supplier, but only where the transaction has an avoidance purpose. This is a change from the 12 August 2011 announcement, which announced the outright repeal of this exception (that is, without the current proviso) in relation to expenditure incurred on or after 12 August 2011.  The change now effected by this Section provides that the exception from the anti-avoidance rules will continue for expenditure incurred on or after 12 August 2011, but before the relevant April start date, but only as long as it is not incurred as a result of a relevant transaction with an avoidance purpose, or as a result of a scheme or arrangement that has an avoidance purpose.  (The position in relation to expenditure incurred on or after the relevant April start date is dealt with separately in paragraph 7 of Schedule 9.)

Details of the Section

2.Subsection (1) amends section 230 of the Capital Allowances Act 2001 (CAA) so that transactions with manufacturers or suppliers are no longer exempted from any restriction on the buyer’s allowances made by section 217 of CAA (which denies annual investment allowance or first-year allowances).

3.Subsection (2) provides that the change applies to expenditure incurred on or after 12 August 2011.

4.Subsection (3) provides that, in relation to expenditure incurred between 11 August 2011 and ‘the next amendment date’ (later defined as 1 April 2012, for corporation tax purposes, or 6 April 2012, for income tax purposes) first-year allowances are not denied provided the condition in subsection (4) is met.

5.Subsection (4) sets out the condition, providing that if the amendments made by paragraphs 1 to 7 of Schedule 9 had been in force between 12 August 2011 and the relevant April 2012 start date,  the transaction would not have been caught by the anti-avoidance rule in the revised section 215 and first-year allowances will not be denied.

6.Subsection (5) defines ‘the next amendment date’ and explains that it means the date defined in paragraph 9 of Schedule 9, that is, 1 April 2012 for corporation tax purposes, or 6 April 2012 for income tax purposes.

Background Note

7.Chapter 17 of CAA contains anti-avoidance rules that restrict the capital allowances that may be claimed where person B buys, or acquires under a hire-purchase (or similar) contract, plant or machinery from person S.

8.Allowances may be restricted where B and S are connected, where there is a sale and leaseback between B and S or where the capital allowances were the sole or main benefit which might have been expected to accrue from the transaction between B and S. In these circumstances B’s allowances may be restricted in two ways. Firstly, B will be prevented from claiming annual investment allowance (AIA) or first-year allowance (FYA) (by section 217 CAA). Secondly, B’s qualifying expenditure (the amount on which capital allowances may be claimed) will be restricted (by section 218 CAA).

9.However, where B buys, or hire-purchases, unused plant or machinery from S and S’s business is the manufacture or supply of such plant or machinery then section 230 CAA provides an exception from the anti-avoidance rules. For expenditure incurred before 12 August 2011, the exception was from both section 217 and section 218 so that B was able to claim AIA and FYA and there was no restriction of B’s qualifying expenditure.

10.However, in light of evidence that the manufacturers and suppliers exception was being used to facilitate avoidance, on 12 August 2011 the Government announced that legislation would be introduced in the 2012 Finance Act to repeal the exception from section 217 for expenditure incurred on or after 12 August 2011.

11.As a result, although the amount of B’s qualifying expenditure is not restricted, the anti-avoidance rules can prevent B claiming AIA or FYA in respect of expenditure incurred on or after 12 August 2011 even where the plant or machinery is acquired from the manufacturer or supplier.

12.However in the light or representations made during the consultation period and following the publication of the draft legislation on 6 December 2011 the Government decided that it was not necessary to wholly repeal section 230 from 12 August 2011.  The repeal now applies only to transactions that have an avoidance purpose and normal commercial manufacturer supplier transactions, involving connected parties or sale and leaseback arrangements are not affected...  In summary, for expenditure incurred on or after 12 August 2011 section 230 will continue to provide an exception from the restrictions in both section 217 and section 218 unless the transaction has an avoidance purpose.

Section 42 Schedule 9: Capital Allowances for Plant and Machinery: Anti-Avoidance

Summary

1.Section 42 and Schedule 9 amends the legislation that counters abuse of the rules for plant and machinery allowances, to make it more effective at preventing Exchequer loss. The changes will apply to expenditure incurred on or after 1 April 2012 (for businesses within the charge to corporation tax) and on or after 6 April 2012 (for businesses within the charge to income tax).

2.The legislation is also amended to confirm the meaning of the word ‘assigns’ for the purposes of the Capital Allowances Act (CAA)2001.

Details of the Schedule

3.Paragraph (1) replaces section 215 of the CAA 2001: Transactions to obtain allowances, with new section 215 of CAA: Transactions to obtain tax advantages.

4.Subsection (1) of new section 215 provides that plant and machinery allowances will be restricted if a relevant transaction between B and S has an avoidance purpose, is part of a scheme or arrangement that has an avoidance purpose or occurs as a result of a scheme or arrangement with an avoidance purpose.

5.New subsection (2) provides that a relevant transaction can be treated as part of, or occurring as a result of, a scheme or arrangement regardless of when the scheme or arrangement is entered into or whether it is legally enforceable.

6.New subsection (3) defines an ‘avoidance purpose’: if the main purpose, or one of the main purposes, of a party in entering into a transaction, scheme or arrangement is to enable any person to obtain a tax advantage that would not otherwise have been obtained then that transaction, scheme or arrangement has an avoidance purpose.

7.New subsection (4) provides that a ‘tax advantage that would not otherwise have been obtained’ in subsection (3) includes an allowance that is in any way more favourable to any person – for example an allowance at a higher rate, claimed sooner or on a greater amount of qualifying expenditure – than the one that would otherwise have been obtained.

8.New subsections (5) and (6) provide that allowances may be restricted in different ways depending on the kind of tax advantage.  Section 217 of CAA denies annual investment allowance or first-year allowance where the transaction has an avoidance purpose. The way in which writing down allowances may be restricted by new section 218ZA is determined by the nature of the tax advantage.

9.New subsection (7) describes two particular kinds of tax advantage: (a) the allowance is calculated using a higher rate than the one that would otherwise be used, or (b) the allowance in respect of an amount of expenditure is available sooner than it would otherwise be.  These particular kinds of tax advantage are specified to enable allowances to be restricted in an appropriate way, by new section 218ZA (5).

10.New subsection (8) provides that if a transaction, scheme or arrangement involves more than one tax advantage (for example, allowances at a higher rate on a greater amount of expenditure) then allowances may be restricted in more than one way.

11.Paragraph (2) amends section 57 (3) of CAA to ensure that expenditure excluded by new section 218ZA is not included in the amount of a person’s available qualifying expenditure.

12.Paragraphs (3) and (4) amend sections 214 and 216 respectively to reflect the introduction of new section 218ZA. Allowances may be restricted under section 218 where there is a transaction between connected persons (within section 214) or where there is a sale and leaseback transaction (within section 216). If a connected person transaction or a sale and leaseback also has an avoidance purpose, or is part of a scheme or arrangement with an avoidance purpose, then allowances may be further restricted under new section 218ZA(3).

13.Paragraph (5) makes various amendments to section 218 so that section 218 will no longer restrict allowances where there is a transaction to obtain tax advantages within section 215, unless the transaction falls within section 215 and section 214 (connected persons transactions) or section 215 and section 216 (sale and leasebacks).

14.Paragraph (6) inserts new section 218ZA of CAA which determines how writing-down allowances are to be restricted where there is a transaction to which section 215 applies. New section 218ZA applies even if the transaction also falls within section 214 (because it is a connected person transaction) or within section 216 (sale and leasebacks). New section 218ZA operates by restricting the allowances that B can claim following the transaction (B is the person who has incurred, or is treated as having incurred capital expenditure on the provision of plant and machinery). Allowances can be restricted by reducing the amount of expenditure on which B can claim allowances, by reducing the rate at which allowances are given or by reversing any timing advantage sought (or any combination of restrictions).

15.New section 218ZA subsection (1) provides that where there is an avoidance purpose the amount of expenditure on which B can claim capital allowances is restricted. The restriction of allowances is made under this subsection unless the tax advantage is within section 215(7), that is, either that B’s allowances are calculated at a higher rate or B is entitled to an allowance sooner than it would otherwise be.

16.New subsection (2) explains that, if new subsection (1) applies, B’s qualifying expenditure is restricted by the amount that would in effect cancel out the tax advantage whether or not the tax advantage arises to B. However, the restriction can never be more than B’s expenditure under the relevant transaction.

17.New subsections (3) and (4) provide that if B’s writing-down allowances could be restricted both under subsection (1) (because there is an avoidance purpose) and also under section 218 or section 228, then B’s allowances are restricted by the amount that is the larger of the two restrictions.

18.New subsection (5) provides that if the tax advantage is within section 215(7) – where B’s allowances have been calculated at a higher rate or claimed sooner than they would otherwise have been - then the restriction is that B’s writing-down allowances are calculated using the rate that would have been used or the entitlement is delayed to when it would have been available without the tax advantage.

19.New subsection (6) provides that a restriction calculated under subsection (5), by reference to the rate or timing of B’s allowances, can be made in addition to a restriction under section 218 or section 228.

20.Paragraph (7) provides that section 230 of CAA, as amended by section 686a, is further amended.

21.Subparagraph (2) amends subsection (1) of section 230 so that the ‘exception for manufacturers and suppliers’ from the restrictions in sections 218 and 217 will not apply if there is a transaction with an avoidance purpose, or which is part of or occurs as a result of a scheme or arrangement with an avoidance purpose, within section 215.

22.Paragraph (8) inserts new section 268E of CAA which confirms the definition of the terms ‘assigns’ and ‘assignments’ which apply for Part 2 of CAA.

23.Paragraph (9) provides that the amendments made by this section will apply from 1 April 2012 (for corporation tax purposes) and 6 April 2012 (for income tax purposes).

Background Note

24.Depreciation of fixed assets charged in the commercial accounts of a business is not allowed as a deduction in computing the taxable profits. Instead capital allowances may be given at prescribed rates on certain assets, including plant and machinery. The Annual Investment Allowance (AIA) provides an annual 100 per cent allowance for the first £25,000 (this is the maximum annual allowance from April 2012) of investment in plant and machinery to all businesses. There are also 100 per cent first-year allowances (FYA) available for expenditure on certain types of plant or machinery. Otherwise expenditure on plant and machinery attracts writing down allowance (WDA) at the main rate of 18 per cent per annum or the special rate of 8 per cent per annum (these are the rates that apply from April 2012).

25.Chapter 17 CAA contains anti-avoidance rules that restrict the plant and machinery allowances that may be claimed following certain relevant transactions. A relevant transaction is one in which: • S sells plant or machinery to B, or

26.Allowances may be restricted where the relevant transaction is  • between connected persons (defined in section 214), or

27.The anti-avoidance rules are being amended to make them more effective.

28.The ‘sole or main benefit’ test currently in section 215 is being replaced by a new ‘purpose’ test that will apply where the main, or one of the main, purposes of a party in entering into a transaction (or a scheme or arrangement of which the relevant transaction is part) is to enable any person to obtain a tax advantage that would not otherwise have been obtained. The tax advantage may arise to a party to the transaction or any other person.

29.A ‘tax advantage’ is defined in section 577(4) of CAA. The term includes allowances that are ‘greater’ or more favourable because the amount of qualifying expenditure has been artificially increased, because the allowances have been a claimed at a rate that is too high or because they have been claimed sooner than they should have been.

30.Where a transaction, scheme or arrangement has an avoidance purpose then B’s allowances are restricted to, in effect, cancel the tax advantage. To this end, the restriction may be to reduce the rate at which B’s allowances are calculated (if the tax advantage B would otherwise obtain is allowances at a rate that is too high) or to reverse any timing advantage sought by B so that B is, in both cases, in the position that B would have been in without the tax advantage. In other situations B’s qualifying expenditure is restricted to an amount that has the effect of negating the tax advantage. If appropriate more than one restriction may be made to B’s allowances.

31.It is possible that a transaction with an avoidance purpose is also a connected person transaction or a sale and leaseback, in which case the application of the existing rules in section 218 or section 228 must also be considered and the largest applicable restriction made.

32.The ‘purpose’ test and the consequences of entering into a transaction, scheme or arrangement with an avoidance purpose are consistent with the approach used in other purpose tests elsewhere in the Taxes Acts.

Section 43 Schedule 10 Plant and Machinery Allowances: Fixtures

Summary

1.Section 43 and Schedule 10 make the availability of capital allowances to a purchaser of fixtures conditional on: (i) previous business expenditure on qualifying fixtures being pooled before a subsequent transfer on to another person, (ii) the value of fixtures being fixed formally within two years of a transfer.  However, in relation to the rule at (ii), there is an alternative method of fixing the value that applies only in some (narrowly defined) cases where an intermediate owner or lessee, who was not entitled to claim an allowance, had failed to determine a fixtures apportionment with the past owner. In addition, the new provisions make a technical adjustment in respect of the Business Premises Renovation Allowances (BPRA) scheme, to enable a new owner to claim plant and machinery capital allowances on any fixtures expenditure not already relieved by BPRA.

Details of the Schedule

2.Paragraph 1 is introductory and explains that the Capital Allowances Act 2001 (CAA) is to be amended.

3.Paragraph 2 introduces new sections 187A and 187B into CAA.

New Section 187A Effect of changes in ownership of a fixture

4.New subsection (1) of section 187A sets out the circumstances in which the section applies.  It applies if :

The new section does not apply if the previous owner was only entitled to relief by virtue of the contributions legislation in section 538, CAA.

5.New subsection (2) explains what is meant by:

6.New subsection (3) provides that the qualifying expenditure incurred by the new owner is to be treated as nil if -

in relation to the past owner.  So, in all cases to which this new section applies, the pooling requirement must be satisfied.  In addition, one or other of the “value” requirements will apply and must be satisfied in every case to which this new section applies.  (In practice, the “fixed value requirement” will apply in the vast majority of cases and the “disposal value statement requirement” is likely only to apply very infrequently.)

7.New subsection (4) explains “the pooling requirement”. It provides that the historic expenditure must have been allocated to a pool in a chargeable period beginning on or before the day on which the past owner ceased to own the fixture, or the past owner claimed a first-year allowance on the expenditure (or any part of it).

8.New subsection (5) explains when “the fixed value” requirement applies.  It only applies where the past owner is or has been required to bring the disposal value of the plant or machinery into account in accordance with one of three particular disposal events described in the Table in section 196, CAA. (The relevant disposal events are items 1, 5 or 9 in that Table.   Item 1 covers the case of a market value sale; item 5 covers the case of an incoming lessee paying a capital sum for the lease, which sum falls to be treated in whole or part as expenditure on the provision of the fixture; and item 9 covers the case of a past owner, who permanently discontinues his business, followed by a sale of the qualifying interest in the property, including its fixtures.  This last case should be distinguished from the example given in relation to items 1, 5 or 9 in that Table.   Item 1 covers the case of a market value sale; item 5 covers the case of an incoming lessee paying a capital sum for the lease, which sum falls to be treated in whole or part as expenditure on the provision of the fixture; and item 9 covers the case of a past owner, who permanently discontinues his business, followed by a sale of the qualifying interest in the property, including its fixtures.  This last case should be distinguished from the example given in relation to items 1, 5 or 9 in that Table.   Item 1 covers the case of a market value sale; item 5 covers the case of an incoming lessee paying a capital sum for the lease, which sum falls to be treated in whole or part as expenditure on the provision of the fixture; and item 9 covers the case of a past owner, who permanently discontinues his business, followed by a sale of the qualifying interest in the property, including its fixtures.  This last case should be distinguished from the example given in relation to

9.New subsection (6) explains that the fixed value requirement is met when one of two outcomes occurs.  That is, either:

(a)

‘a relevant apportionment of the apportionable sum has been made’ (see new subsection (7); or

(b)

the current owner has obtained certain statements where the property is acquired from someone other than “the past owner”, as defined in subsection (2) (see new subsection (8))

The overwhelming majority of commercial property transactions involving second-hand fixtures will fall within  new subsection 6(a) (see new subsection (7) below for more information),

New subsection (6) (b) is a change from the draft legislation published for consultation on 6 December 2011 (see new subsection (8) below for more information).

10.New subsection (7) explains that a relevant apportionment is made if –

(a)

the Tribunal has determined the part of the sale price that constitutes the disposal value of the fixtures, on an application made by one of the affected parties within two years of the purchaser’s acquisition; or

(b)

there has been a joint election, under either section 198 or section 199 of CAA, as appropriate, between the past owner and the purchaser within two years of the acquisition (or, if an application to the tribunal is made within two years, and not determined or withdrawn, before the end of that period before that application is determined or withdrawn).

11.The overwhelming majority of commercial property transactions involving second-hand fixtures will involve a relevant apportionment, so that there will be the requirement for a reference to the tribunal, or for a joint election to be made, within two years of a sale.  In fact, it is to be expected that a joint election (option (b) above), under section 198 or 199 of CAA, will be the preferred course in the vast majority of cases.  This is because it will clearly not be in the interests of either side to incur the trouble and any cost of going to a tribunal unnecessarily, in any case where it would have been possible to agree an apportioned value voluntarily.

12.New subsection (8) introduces a relaxation to the draft legislation published for consultation on 6 December 2011 to help ensure that it applies fairly.  Under the consultation draft of the legislation, an immediate purchaser, who was not entitled to claim an allowance (for example, a charity) should have ensured that the “fixed value requirement” was satisfied (either by entering into a joint section 198 or 199 of CAA election with the past owner, or by applying to the tribunal to determine the apportionment) if that purchaser wanted to be able to pass on an entitlement to claim allowances on those fixtures to a new owner in the future.

13.Persons who are not entitled to claim an allowance (such as charities that are not chargeable to tax) buying property from ‘past owners’ are entitled to make a section 198 or 199 of CAA election, or to apply to the tribunal for a determination of the fixtures value, if they wish to do so.  They may wish to do so, in order to enable a future business purchaser to claim in respect of those fixtures, thereby potentially enhancing or protecting the value of their property investment.  If they duly elect or apply to the tribunal, they will then be able to provide the election notice or tribunal determination to a new owner, on a later sale, thereby establishing the new owner’s entitlement to allowances on those fixtures.

14.However, it is possible that non-taxpayers, such as charities, may have scant knowledge or awareness of the capital allowances legislation and may therefore inadvertently omit to follow either of the election or tribunal procedures for making a fixtures' apportionment.  Of course, it may be that the non-taxpayer had informally agreed with the seller that the seller could return a nil disposal value for the fixtures, precisely because the non-taxpayer was uninterested in the capital allowances.  Indeed, it could even be that the non-taxpayer obtained the property for a somewhat lower price in consequence of allowing this.  In such a situation, the expenditure on the fixtures would have been written off in full in the hands of the seller and it would be in accordance with the underlying policy for those fixtures to have a nil value in the hands the current owner, purchasing the property from the non-taxpayer.  However, in a case where it can be formally demonstrated by the past owner that he returned a specific disposal value for those fixtures, and that it is too late for the non-business purchaser to fix an apportionment with him, a narrowly defined exception from the normal rule appears to be justified.

15.New subsection (8) therefore provides that, in these circumstances, if the current owner obtains a written statement made by the ‘purchaser from the past owner’ (in our example, say, a charity) that new subsection (6) (a) has not been met and is no longer capable of being met, and also a written statement made by the past owner of the actual amount of the disposal value that the past owner, in fact, brought into account, then the “fixed value requirement” would be regarded as met in that way.  The expression ‘purchaser from the past owner’ in subsection (6)(b) means, in effect, an intermediate owner or lessee who was not entitled to claim an allowance, and who acquired an interest in the fixtures from a “past owner”, who was so entitled to claim.

16.New subsection (9) defines various expression used in new subsections (6) to (8), and gives the statutory meaning of “election” for the three affected disposal events.  That is, if the disposal event falls within item 1 or 9 of the Table in section 196, the election will be under section 198 of CAA, whereas if the disposal event falls within item 5 of that Table, the election will be under section 199 of CAA.

17.New subsection (10) explains when “the disposal value statement requirement” applies. This provision is designed to cater for a very small subset of disposal events that may have occurred, other than by virtue of an immediate sale of, or grant of a lease of, the fixtures by a person carrying on a qualifying activity.  The requirement would apply if, for example, a past owner had previously permanently ceased his business activity, finalising his cessation accounts and tax return, in which he would have been required to bring the market value of the fixtures, at that time, into account, in accordance with item 7 of the Table in section 61 of CAA.  If, some years later, he then decided to sell his former business premises with its fixtures to a purchaser, “the disposal value statement requirement” would apply.

18.New subsection (11) explains how “the disposal value statement requirement” is satisfied.  This is done by the past owner making a written statement of the amount of the disposal value of the fixtures that he is, or has been, required to bring into account, within two years of the date when he ceased to own them.  The current owner must obtain this statement, or a copy of it, either directly or indirectly from the past owner.

Thus if, for example, the immediate purchaser is not a business, but a later purchaser is a business, the later purchaser may obtain the required statement either directly from the past owner, or indirectly from the intermediate owner, who sold the property to the current owner.  As with the “fixed value requirement”, an intermediate purchaser, who is not a business should ensure that he obtains this written statement from the past owner, if he wants to make sure that he is able to pass on an entitlement to claim on those fixtures to a future owner.  However, the later owner is free to try to obtain the statement, or a copy of it, directly from the past owner, if the past owner is still contactable and willing to oblige.

New Section 187B Supplementary provision

19.New subsection (1) of section 187B provides that it is for the current owner seeking to claim allowances to demonstrate whether:

and, for this purpose, to provide a copy of any relevant tribunal decision, election or statement, satisfying the relevant requirement, to HM Revenue and Customs (HMRC) on request.  (Although it is considered that it is for the taxpayer to substantiate a claim to capital allowances, so that, from this perspective, and to this extent, this new subsection could be viewed as somewhat superfluous, one of the main policy purposes of the new provisions is to increase the operational clarity and certainty of the fixtures regime. This new subsection is, therefore, intended to put beyond doubt what a current owner will need to obtain and retain  in order substantiate a fixtures claim under the new provisions.)

As previously indicated, if a non-business purchases fixtures from a past owner who was entitled to claim allowances on those fixtures, the non-business –

or, exceptionally, it may be possible to retrieve the situation if -

In general, current owners will require to hold on to the appropriate paperwork to demonstrate their entitlement to claim in respect of historic expenditure on fixtures.

20.New subsection (2) provides that amounts stated in either the disposal value statement or a statement provided by a past owner (where a relevant apportionment should have been made, but a non-business owner acquiring the fixtures from a past owner, omitted to do this) have effect in place of any apportionment that could have been made under sections 562, 563 and 564(1).

21.New subsection (3) provides that for the purposes of section 187A the current owner and the past owner may be the same person.

22.New subsection (4) explains what is meant by ‘relevant earlier time’ in new section 187A (2). It is any time that falls before the earliest time when the current owner is treated as owning the fixtures, but that time must be on or after 1 April 2012 for corporation tax purposes or 6 April 2012 for income tax purposes because of the commencement provisions in Paragraph 13 of the Schedule.

23.New subsection (5) ensures that the legislation does not apply where there has been a sale of an asset that is no longer a fixture at the time of sale, unless that sale is to a connected person. For example:  company A owns a building, containing an antique copper water heater, which it strips out and sells to an architectural salvage dealer.  Company B, not connected with company A, buys the copper water heater from the dealer and installs it in a property it owns. Company B is not required to establish the disposal value brought into account by Company A and is not precluded from claiming allowances based on what it paid for the asset.

24.New subsection (6) makes it clear that none of the conditions in section 187A (3) in relation to the current owner, affects the disposal value that the past owner must bring into account. So, for example, in a sale and purchase between two businesses, if the fixed value requirement is not satisfied because no election has been made, and neither has the tribunal been asked to determine the part of the sales proceeds that relates to the fixtures, so that the current owner’s qualifying expenditure is deemed to be nil, the past owner is still required to bring in a disposal value, in accordance with section 196 CAA.

25.New subsection (7) provides that expressions used in this section have the same meaning as expressions used in section 187A.

26.Paragraph 3 makes certain consequential amendments to section 198, CAA.

27.Paragraph 4 introduces changes to section 201 CAA.

28.Paragraph 4(3) introduces a new subsection 1A into section 201. The new subsection provides that where new subsection (7)(a) of new section 187A applies, and an application is made to the tribunal, then the time limit in section 201(1) does not apply, but is modified to run to the time the tribunal determines the application or the application is withdrawn.

29.Paragraph 5(1) makes a change to section 563, CAA, so that a question concerning the amount to be fixed in relation to the fixed value requirement can be referred to the tribunal, even if it only affects the liability to tax of one person, rather than of two or more persons. For example, where a taxpayer sells a fixture to a non taxpayer and agreement cannot be reached but the non taxpayer wishes for certainty in relation to the ability of a potential future business owner to be able to claim on those fixtures, then, absent the change to section 563, that matter could not have been referred to the tribunal, but in future it may be referred.  Paragraph 5(2) makes a consequential change to the heading of section 563, CAA.

30.Paragraph 6 introduces new section 186A into CAA

186A Fixtures on which a business premises renovation allowance has been made

31.There is a general rule in section 9 of CAA that if any person has claimed an allowance under any Part other than Part 2, then no other person is able to claim a fixture allowance under Part 2. The general rule is relaxed in the case of fixtures on which industrial buildings allowances, or research and development allowances, have been claimed. New section 186A introduces a similar relaxation in relation to business premises renovation allowances (BPRA), ensuring that where a property which has qualified for BPRA, under Part 3A, is sold then the new owner can claim allowances under Part 2, to the extent that the original BPRA qualifying expenditure was not relieved but only to that extent. In all other cases no allowances are available to the new owner. The drafting of new section 186A follows section 186 in most material respects. The only significant change from the consultation draft of the legislation published on 6 December 2011 is that the definition of ‘R’ has been changed as, unlike the IBA code, Part 3A does not reset ‘RQE’ following a balancing event (because there is no need to do so). ‘R’ is now defined as the qualifying expenditure incurred by the past owner on the fixture less the ‘net Part 3A allowances’ in respect of that asset. ‘net Part 3A allowances’ are defined as the total of any allowances made under Part 3A (that is, any initial allowance and any writing-down allowance) less the total of any balancing charges made under Part 3A in relation to that expenditure.

32.Paragraphs 7 to 10 make minor consequential amendments to sections 9, 57, 198 and 199 of CAA to include references to the amendments in respect of BPRA and the new section 186A.

33.Paragraph 11 explains that the amendments made by paragraphs 1 to 5 have effect:

34.Paragraph 12 explains that the amendments made in relation to BPRA  by paragraphs 6 to 10 have effect:

35.Paragraph 13(1) deals with expenditure of a past owner where the period of ownership was entirely before 1/6 April 2012 and provides that neither the pooling requirement nor requirements to fix formally the value of fixtures apply in relation to such a period of ownership.

36.Paragraph 13(2) disapplies the pooling requirement in relation to the new section 187A if the period for which the plant or machinery is treated as having been owned by the past owner ends no later than the end of the two years beginning with the commencement date, as defined in paragraph 13(3).  This is a change from the consultation draft of the legislation to cater for the case of a sale in the transitional period to a non-business owner, who is not entitled to claim allowances, and who would, therefore, be unable to pool any hitherto un-pooled qualifying expenditure on fixtures.  In effect, this change disapplies the pooling requirement for an extended period, where the period of ownership of a past owner (who was entitled to claim) ends no later than a period ending on 5 April 2014 (for income tax purposes) or 31 March 2014 (for corporation tax purposes).

37.Paragraph 13(3) gives the meaning of commencement date as used in paragraph 13(1) and the transitional period as used in paragraph 13(2).

The commencement date means

The transitional period means

Background Note

38.At Budget 2011, the Government announced that it would consult on proposals to ensure that the capital allowances rules for fixtures secured their original policy purpose of limiting allowances overall to the fixture’s original cost. That is, that the cost of a fixture should be written-off once, and once only, during that fixture’s useful economic life.

39.The Government decided to act in order to protect the Exchequer from further tax leakage and to make the rules fairer and clearer for businesses to understand and operate - without giving rise to disproportionate administrative burdens.

40.A formal consultation was launched on 31 May and closed on 31 August 2011.  The Government’s formal response to the consultation was published on 6 December 2011, together with a draft of the proposed legislative provisions, for a period of technical consultation, which closed on 10 February 2012.  Following this technical consultation some changes have been made to the draft provisions to help ensure the fairer application of the new rules, and these changes are highlighted in the detail of this Explanatory Note.

41.The fixtures legislation is contained in Chapter 14 of Part 2 of the Capital Allowances Act 2001 (CAA). To deliver the policy purpose - that expenditure on a fixture should be written-off against taxable profits only once over its economic life - the current legislation contains rules to limit the allowances that can be given to the lower of original cost (section 62 CAA) or the last disposal value that has been brought into account by any previous owner of the fixture (section 185 CAA).

42.However, the current law does not prescribe when expenditure on fixtures should be pooled, and there is no time limit laid down to govern when a seller and purchaser should agree the part of the sale price of a property that should be attributed to the fixtures.

43.These gaps have given rise to uncertainties and difficult questions of proof.  They have led to a large number of 'late' claims by current owners at a time when a single sale value for fixtures can no longer be agreed and brought into account by both parties.

44.This section and Schedule are designed to address these practical problems with the existing legislation, in order to ensure that the fixtures regime operates as originally intended in future.

45.An additional technical, fixtures issue, in relation to the Business Premises Allowances scheme (in Part 3A of CAA), emerged during the Government’s consideration of its proposed fixtures changes for Finance Act 2012.  The Government decided to address this issue at the same time as the other changes.

Section 44 Schedule 11 Expenditure on Plant and Machinery for Use in Designated Assisted Areas

Summary

1.Section 44 and Schedule 11 provide 100 per cent first-year allowances (FYAs) for companies investing in plant or machinery for use primarily in designated assisted areas within Enterprise Zones.  To qualify for this new relief, the expenditure must be incurred in the period from when an area is treated as being a designated assisted area and 31 March 2017.

Details of the Schedule

2.Paragraph 1 is introductory and explains that the Capital Allowances Act 2001 (CAA) is to be amended.

3.Paragraph 2 adds expenditure on plant and machinery for use in designated assisted areas to the categories of expenditure, listed in section 39 of CAA, that can qualify for FYAs.

4.Paragraph 3 introduces new sections 45K to 45N into CAA.

Section 45K Expenditure on plant and machinery for use in designated assisted areas.

5.New section 45K(1) sets out the circumstances in which expenditure on plant or machinery constitutes first-year qualifying expenditure.  The conditions are that the expenditure must be incurred:

and -

6.New section 45K(2) sets out the meaning of “designated assisted area”: this means an area which has been designated by an order made by the Treasury, and an area that falls wholly within an assisted area (see new subsection 14). This latter requirement is the first of a number designed to ensure that these new FYAs fallwithin Commission Regulation (EC) No 800/2008 known as the General Block Exemption Regulation (“GBER”) (see new subsection (13) in respect of State Aid. Because they provide a geographically selective benefit, the new FYAs would constitute regional State Aid.

7.New section 45K(3) sets out the circumstances in which an area may be designated by an order.  There are two requirements:

8.New section 45K(4) ensures that, where appropriate, the order may have retrospective effect.  So, for example, if the order so provides, the new FYAs may be made available in respect of qualifying expenditure incurred on or after 1 April 2012, even if the order is not made until some time after Royal Assent to Finance Act 2012, say, in late August 2012.

9.New section 45K(5) prevents an area being revoked or reduced in size with retrospective effect.

10.New sections 45K (6) to (10) set out the five further conditions (that is, in addition to those in New section 45K(1)), which also have to be met:

11.New sections 45K(11), (12) and (13) explain the meaning and scope of “replacement expenditure” and also provide for a just and reasonable apportionment where part only of the expenditure is replacement expenditure.

12.New section 45K (14) defines “assisted area”, “enterprise zone” and “the responsible authority”.

13.New section 45K (15) allows the Treasury to amend the definition of “assisted area” by order, if any changes are made to the areas in the UK which are granted assisted area status. The current list of assisted areas is due to be revised by the Commission with effect from 1 January 2014.

14.New section 45K(16) provides that new section 45K is subject to

Section 45L Exclusion of plant and machinery partly for use outside designated assisted areas.

15.New Section 45L is an anti avoidance rule to prevent exploitation where the company incurring the expenditure intends to use the plant or machinery outside the designated assisted area, but enters into “relevant arrangements”, designed to meet the “for use primarily in the area” test, where the main, or one of the main, purposes of those arrangements is to obtain the FYA, or a greater amount of FYA.  For example, a bus operator group of companies, that would normally have set up two new companies to operate two new bus fleets of similar size in two different areas (where one is a designated assisted area and the other is not), might seek to exploit the new FYAs by setting up one company and using both fleets alternately in both areas, to contrive the result that both fleets are used just over 50 per cent in the designated assisted area.  In such a case, the part (here, one-half) of the combined fleet which the group intended to use outside of the designated assisted area would be determined on a just and reasonable basis, and the expenditure on that part would be excluded from the FYA.

Section 45M Exclusions from allowances under section 45K

16.New section 45M(1) provides that expenditure incurred by a person is not first-year qualifying expenditure under new section 45K if it falls within sections 45M(2), (4), (6) or (7).  The exclusions in these subsections are GBER requirements.

17.New sections 45M(2) to (5) provide that expenditure does not qualify for new section 45K allowances if the person who incurred the expenditure is, or forms part of, an “undertaking” that is:

or -

18.New section 45M(6) provides that expenditure does not qualify for relief if it is incurred on a means of transport or transport equipment by a person carrying on a qualifying activity in the road freight or air transport sectors. This does not mean that all expenditure incurred by businesses in those sectors is excluded; only their expenditure on means of transport and transport equipment is ineligible for relief.

19.New sections 45M(7) provides that no new section 45K allowances are to be made if a relevant grant or relevant payment is made towards that expenditure, or any other expenditure incurred by any person in respect of the same designated assisted area and on the same “single investment project.”  (See new subsection (12), where “single investment project” is given the same meaning as in the GBER). For example, a company building a new production facility in a designated assisted area cannot receive both the new FYA and any other State aid in relation to, say, either the building costs of the actual facility (as opposed to the plant and machinery to be used in the facility, which would qualify for the new FYAs) or, say, staff training costs, to be incurred on training employees on how to use the new equipment.  If any company can apply for another State aid in relation to the same project, then it will have to decide which State aid is of greater value to it.

20.The GBER at Article 13(10) explains what a “single investment project” is and the preamble at paragraph 41 further explains that the scope of the project should not be construed narrowly and should be assessed independently from ownership. This means that a “single investment project” is not limited to the project of a single company, but includes one carried out by an undertaking or undertakings, for example, a joint venture.  So, if, for example, two companies are involved in the same “single investment project” as a joint venture  and one company receives any form of State aid (other than the new FYA) in relation to the project, then neither company can claim the new FYA, even if one of the companies did not receive any other State aid in respect of that joint venture project.

21.A grant or payment is relevant if it is a State aid (other than a FYA under these new provisions), or if it is declared, by Treasury order, to be relevant.

22.This new subsection 45M(7) and the next, subsection 45M(8), together with the cap on these new FYAs (as provided for in paragraph 7 of this Schedule) are designed to ensure that the new FYA rules are fully compliant with the GBER rules about the cumulation of State aid.  A large, investment project, that received State aid in excess of the cap, would not generally fall within the terms of the GBER, and would have to be separately notified to the European Commission, before any State aid could be granted.  The tax system is not structured to cater for the cumulation of different forms of aid, so, for the purposes of these FYAs, the cap in relation to a large investment project is calculated with reference to the new FYAs alone.  This means that companies with a choice between the new FYAs and other forms of State aid for the same “single investment project” must effectively choose whether to claim the FYA or another State subsidy.  If, however, a company that had claimed the new FYAs in one year, only became aware in the next that another State grant would have been more beneficial, then it could still claim the grant, but then the next subsection 45M(8) would apply and the FYAs would become repayable.

23.New sections 45M(8) to (11) provide that if a relevant grant or payment is made after the making of the new FYA allowance, the allowance is to be withdrawn if the relevant grant or payment is made towards the expenditure. If the relevant grant or payment is made toward any other expenditure incurred on the same “single investment project” (which term has the same meaning as in the GBER) then the relief is only withdrawn if the relevant grant or payment is made within 3 years of the qualifying expenditure being incurred.  Provision is made for all necessary assessments and adjustments to be made for this purpose. In addition, a person who has made a return, who becomes aware that anything in the return has become incorrect because of the operation of this section, must give notice to an Officer of Revenue and Customs of the necessary amendment, within 3 months of first becoming aware of it.

24.New section 45M(12) defines various terms used in new section 45M.

25.New section 45M(13) makes it clear that any reference to State aid in the section is not to be read narrowly, so as to apply only to State aid that is required to be notified to, and approved by, the European Commission. So, for example, State aid that is brought within the terms of the GBER, so that it is exempt from prior notification, is still a relevant grant or payment.

26.New section 45M(15) states that the Treasury may, by order, make such provision to amend new section 45M as appears to them appropriate to give effect to any future amendments to, or instruments replacing, the particular European Regulations, Guidelines, Directive or Treaty, listed in this new subsection.

Section 45N Effect of plant or machinery subsequently being primarily for use outside designated assisted area.

27.New section 45N(1) of this new section requires that the plant or machinery, in relation to which the new section 45K FYAs have been claimed, must be primarily used by the person claiming the allowance (or a connected person) for at least 5 years within the relevant designated assisted area. If, within that 5 year period, the person claiming the allowance, or a connected person, begins to use the plant or machinery primarily outside that area, the FYAs must be withdrawn, as if the expenditure had never qualified for the new FYAs.  This section is included both to prevent exploitation of the new FYAs and also to satisfy the GBER State aid requirements in relation to regional aid.

28.New sections 45N(2) and (3) define ‘relevant time’ and ‘relevant period’.

29.New sections 45N(4) to (6) provide that all such necessary assessments and adjustments are to be made for the purpose of withdrawing the relief.  In addition, a person who has made a return, who becomes aware that anything in the return has become incorrect because of the operation of this section, must give notice to an Officer of Revenue and Customs of the necessary amendment, within 3 months of first becoming aware of it.

30.Paragraph 4 adds new section 45K to the list of provisions to which the general exclusions in section 46 apply. These general exclusions provide that expenditure is not FYA expenditure if, for example, it is incurred on the provision of a car, or on plant or machinery for leasing, or in the chargeable period in which the qualifying activity of the business is permanently discontinued.

31.Paragraph 5 adds expenditure on plant and machinery for use in designated assisted areas to the Table of FYAs, and their respective rates, in section 52(3) of CAA, and sets the rate of these new FYAs at 100 per cent.  It also provides an addition to section 52(5), to the effect that the new FYAs are subject to new “section 212U (cap on first-year allowances: expenditure on plant and machinery for use in designated assisted areas)”.

32.Paragraph 6 changes section 52A to make it clear that not only can a person not claim an annual investment allowance and a FYA in relation to the same expenditure, but also a person cannot claim a FYA under two or more of the provisions listed in section 39 in respect of the same expenditure.

33.Paragraph 7(1) introduces new section 212U into CAA.

Section 212U Cap on first-year allowances: expenditure on plant and machinery for use in designated assisted areas

34.New section 212U(1) and (2) cap the amount of expenditure incurred on plant or machinery, primarily for use in a particular designated assisted area that can qualify for the new FYAs, at a maximum of €125 million per person (“the investor”), or at a maximum of €125 million for any such expenditure, incurred by any person, in respect of the same “single investment project”.  The cap on the new FYAs, is expressed in terms of a “single investment project”, in order to ensure compliance with the GBER in relation to the cumulation of aid, and in recognition of the fact that the GBER does not provide a general exemption for large investment projects.

35.New section 212U(3) provides how expenditure incurred in a currency other than the euro is to be converted into Euros for the purposes of the €125 million cap.

36.New section 212U(4) provides that the Treasury may by regulations increase the cap.

37.New section 212U (5) defines terms used in new section 212U and provides that the term “single investment project” has the same meaning as in the GBER.

38.Paragraph 7(2) makes a minor consequential amendment to the heading to Chapter 16B.

39.Paragraph (8) provides that the amendments made by the new Schedule have effect for chargeable periods ending on or after 1 April 2012.

Background Note

40.The proposal to introduce Enterprise Zones was announced at Budget 2011. The main benefits for businesses in the new zones comprise simplified planning and business rates discounts.  The Budget statement also announced that the Government would work with Local Enterprise Partnerships (LEPs) to consider introducing enhanced capital allowances (in other words, first-year capital allowances (‘FYAs’) in Enterprise Zones in assisted areas.

41.In an HM Treasury Press Notice on 17 August 2011, the Government announced its decision to proceed with the enhanced capital allowances (that is, FYA) proposal.  On 26 August 2011, HM Treasury wrote to LEPs providing details of the proposed design of the new 100 per cent FYAs scheme, and seeking bids from the LEPs, based on that design. In addition, the letter outlined the criteria against which the bids would be judged.

42.The Government announced that it would make 100 per cent FYAs available in various designated assisted areas, within specific English enterprise zones in 2011, as well as in an additional zone in Humber, which was announced in February 2012.  At Budget 2012, the Government further announced that it would also make 100 per cent FYAs available in a designated assisted area of the London Royal Docks enterprise zone, in three Scottish enterprise zones (in Irvine, Nigg and Dundee) and in Deeside in Wales.  A full list of current zones and designated assisted areas delineated by maps will be published on the Treasury website in due course.

43.The standard rates of writing-down allowances for businesses’ qualifying  capital expenditure on plant or machinery are either 18 per cent or 8 per cent per annum (the rates that will apply from April 2012), depending on the nature of the asset.  100 per cent FYAs therefore provide business with a valuable tax-timing benefit.

Section 45: Allowances for Energy-Saving Plant and Machinery

Summary

1.Section 45 provides that where feed-in tariffs or renewable heat incentive tariffs are paid in respect of electricity or heat generated (or gas or fuel produced) 100 per cent first-year allowances (FYAs) are not available under section 45A of Capital Allowances Act 2001 (CAA) for expenditure incurred on the plant and machinery (P&M) that generates or produces it. This change generally applies for expenditure incurred on or after 1 April 2012 (for businesses within the charge to corporation tax) or 6 April 2012 (for businesses within the charge to income tax) but where the expenditure is on combined heat and power systems the change applies from 1 or 6 April 2014.

2.This section also provides that expenditure incurred on solar panels, on or after 1 April 2012 (for corporation tax purposes) or 6 April 2012 (for income tax purposes), is special rate expenditure for capital allowances purposes.

Details of the Section

3.Subsection (1) provides for changes to be made to Part 2 of CAA. The changes are specified in subsections 2 to 4.

4.Subsection (2) inserts a new subsection 45A(1A) into CAA. This provides that section 45A is subject to the new section 45AA.

5.Subsection (3) inserts new section 45AA into CAA.

6.New subsection (1) of section 45AA provides that expenditure incurred on P&M on or after the relevant dates (see paragraph 9) is treated as though it never qualified for FYAs under section 45A if a payment is made or another incentive is given for the purposes of:

a.

Section 41 Energy Act 2008, in respect of electricity generated by that P&M; or

b.

Section 100 Energy Act 2008 in respect of heat generated, or gas or fuel produced, by that P&M.

7.New subsection (2) provides for the making of assessments, or amendments to assessments, that may be necessary to give effect to new subsection (1), for example if an FYA is given and needs to be withdrawn because a feed-in tariff or renewable heat incentive tariff is paid subsequently.

8.New subsections (3) and (4) provide that a person who has made a tax return, and later becomes aware that it is incorrect because of subsection (1), must give notice of the amendments required as a result to HM Revenue and Customs within three months of the day on which the person became aware that the return had become incorrect.

9.New subsections (5) and (6) define the relevant dates for new subsection (1). These are, generally, 1 April 2012 for corporation tax purposes and     6 April 2012 for income tax purposes. Where the expenditure is incurred on combined heat and power systems, these are 1 April 2014 for corporation tax purposes and 6 April 2014 for income tax purposes.

10.Subsection (4) amends section 104A CAA. It adds a new subparagraph 104A(1)(g) which designates expenditure on solar panels as special rate expenditure for capital allowances purposes. New subsection 104A(3A) provides that the amendment to 104A(1) takes effect from 1 April 2012 for the purposes of corporation tax and 6 April 2012 for the purposes of income tax.

Background Note

11.Capital allowances allow the cost of capital assets to be written off in computing the taxable profits of a business. They take the place of depreciation charged in the commercial accounts, which is not allowed for tax.

12.Most businesses are entitled to an annual 100 per cent allowance, the Annual Investment Allowance (AIA), for their investment in most P&M up to an annual limit, which from April 2012 will be £25,000 per annum. For expenditure above that limit, writing-down allowances (WDA) are available, which from April 2012 will be given at the main rate of 18 per cent or the special rate of 8 per cent per annum. The legislation lists (in section 104A of CAA) the categories of expenditure that are special rate; special rate expenditure includes expenditure on integral features of a building and on long-life assets (generally equipment expected to have a useful economic life of 25 years). If expenditure is not designated as special rate then it will attract allowances at main rate.

13.First-year allowances (FYAs) may be available for expenditure on certain types of plant or machinery as an alternative to AIA and WDA. FYAs are special allowances, currently available at a rate of 100 per cent, which provide a cash flow advantage over normal WDAs (as all the qualifying expenditure may be deducted from profits in the year in which it is incurred), as a targeted incentive to invest in particular P&M. FYAs, commonly described as enhanced capital allowances (ECAs), may be claimed on designated energy-saving P&M that meets the criteria required by either the Energy Technology Product or Criteria Lists.

14.The Energy Act 2008 provided for incentives to encourage low carbon energy and heat generation.  The Feed-in Tariffs (FITs) scheme was introduced on 1 April 2010 and is designed to incentivise small scale electricity generation. The renewable heat incentive (RHI) supports heat generation from renewable sources. Generally, technologies that qualify under the FITs scheme will not be eligible for FYAs. However, many, although not all, of the technologies that could qualify for tariffs under the RHI scheme could also qualify for FYAs.

15.FYAs are intended to complement, rather than duplicate, the effects of other Government policies supporting such investment. Therefore, the legislation is being amended so that FYAs will not be available for expenditure on P&M, where the P&M generates heat or electricity or produces gas or fuel that attracts a tariff under either the FITs or the RHI scheme.

16.Businesses will be able to choose whether to claim the benefit of FYAs or tariff payments but will not be able to receive both. Where an FYA is given and a tariff payment is made subsequently, then the FYA will be withdrawn by means of an assessment or an amended assessment.

17.This change will apply to expenditure incurred on or after 1 April 2012 for businesses within the charge to corporation tax, or 6 April 2012 for businesses within the charge to income tax. However, because the RHI tariff rate for ‘renewable’ combined heat and power (CHP) will not be finalised until after April 2012 FYAs will continue to be available for expenditure incurred on renewable CHP until 31 March 2014 for businesses within the charge to corporation tax and 5 April 2014 for businesses within the charge to income tax, even when RHI tariffs are paid.

18.Expenditure on solar panels incurred on or after 1 April 2012 (by businesses within the charge to corporation tax) or 6 April 2012 (by businesses within the charge to income tax) will be designated as special rate so that it attracts the lower rate of WDA.  Capital allowances are intended to provide tax relief that broadly reflects average rates of economic depreciation, so special rate is considered to be the appropriate rate of WDA for these assets. Expenditure on solar panels is being specifically designated as special rate to ensure clarity of treatment for business. The rate of WDA appropriate for expenditure on other plant or machinery that generates electricity or heat that attracts FITs or RHI tariffs will be determined on the facts by applying the normal rules for plant and machinery allowances.

Section 46: Plant and Machinery Long Funding Leases

Summary

1.Section 46 ensures that the rules for calculating the disposal value for the lessee at the end of a long funding lease operate as intended so that the relief available by way of capital allowances does not exceed the net expenditure of the lessee not otherwise relieved.

Details of the Section

Section 70E of CAA 2001

2.Subsection (1) introduces the amendments to section 70E of the Capital Allowances Act 2001 (CAA).

3.Subsection (2) amends section 70E(2A) of CAA to extend the definition of “R” referred to in the formula in that subsection. It will now include not only any “relevant rebate” but also any other “relevant leased-related payment”.

4.Subsection (3) inserts new sections 70E(2FA) to (2FC).

5.New section 70E(2FA) defines “relevant lease-related payment” setting out a number of conditions to be met.

6.New section 70E(2FA)(a) contains the first condition and requires a payment to be payable for the direct or indirect benefit of the lessee or a person connected with the lessee. This is irrespective of when the payment was payable and is not therefore restricted only to payments at the termination of the lease.

7.New section 70E(2FA)(b) contains the second condition. It requires the payment to be connected either to the long funding lease or with any arrangement that is connected with that long funding lease.

8.New section 70E(2FA)(c) provides that “relevant lease-related payment” does not include certain types of payment.

9.New section 70E(2FA)(c)(i) and (ii) exclude payments made by the lessee to the lessor if they are initial or any other payments made under the long funding lease or under a guarantee of any residual amount. For these purposes “residual amount” is as defined in section 70YE of CAA.

10.New section 70E(2FA)(c)(iii) excludes initial or other payments made under a relevant superior lease, defined in new Section 70E(2FB), by the lessee under that superior lease to the lessor under that superior lease.

11.New Section 70E(2FA)(c)(iv) excludes a payment of sale proceeds of plant or machinery to the seller where that sale meets the conditions set out in new section 70E(2FC)

12.The final part of new section 70E(2FA) excludes as “relevant lease-related payments” any payment, or part of any such payment, that has otherwise been brought into tax either as income or as a disposal receipt by the person for whose benefit the payment was payable. This exclusion is extended to persons that would have brought the payment so into account for tax purposes if they had been within the charge to tax.

13.New section 70E(2FB) provides that for the purposes of new section 70E(2FA) “payment” includes the passing of benefit in any form and that “relevant superior lease” is any lease to which the long funding lease in new section 70E(2FA)(1)(a) is inferior.

14.New section 70E(2FC) provides the conditions to be met for new section 70E(2FA)(c)(iv) to apply. The conditions are that a person has entered into a relevant transaction within section 213(1)(a) of CAA, the plant or machinery is the subject of a sale and leaseback within section 216(1)(b) of CAA and in relation to that sale and leaseback the conditions in section 227(2) of CAA are met.

15.Subsection (4) amends section 70E(2G) by extending substitution of an arm’s length amount for “relevant lease-related payment”, as well as for “relevant rebate”, where the lease is not a transaction at arm’s length.

16.Subsection (5) provides the amendments made to section 70E of CAA have effect in cases where a “relevant event” occurs on or after 21 March 2012. “Relevant event” is defined in section 70E(1A).

Background Note

17.The long funding lease rules were introduced into CAA, and other relevant parts of the Tax Acts, by Schedule 8 of Finance Act 2006.

18.These rules provide that where the relevant conditions are satisfied, the lessee, rather than the lessor, is entitled to claim capital allowances for expenditure on the plant or machinery which is the subject of the long funding lease.

19.Sections 70B and 70C of CAA provide the rules for how the lessee’s qualifying expenditure for capital allowances at the commencement of, respectively, a long funding operating lease or a long funding finance lease is to be calculated. At commencement of the lease this is necessarily an estimate because the lessee actually incurs the expenditure over the course of the lease

20.The rules in section 70E of CAA deal with disposal events and disposal values. For all long funding leases a formula is used though the definition of one part of the formula, “QA” (Qualifying Amount), differs depending upon whether the lease in question is a finance or operating lease.

21.The purpose of the formula is to adjust the amount of capital allowances available to the lessee, which were initially based on estimated expenditure, to match the lessee’s actual expenditure less any rebates received (i.e. net expenditure).

22.These amendments address disclosed avoidance schemes that involve arrangements which include transactions, the claimed effect of which is that an amount is received by the lessee in connection with a long funding lease but which is not taken into account in the prescribed formula for disposal value. The tax effect claimed is that capital allowances are due to the lessee in excess of the net expenditure (not otherwise relieved) by the lessee on the leased asset.

Section 47 Schedule 12: Foreign Income and Gains

Summary

1.Section 47 and Schedule 12 introduce changes to the remittance basis of taxation.

Details of the Schedule

Increased remittance basis charge

2.Part 1 of the Schedule introduces an increased remittance basis charge of £50,000 payable by individuals who claim the remittance basis of taxation and who have been resident in the UK in at least 12 of the 14 tax years preceding the tax year in which they make that claim.

3.Paragraph 2 of the Schedule amends section 809C of the Income Tax Act 2007 (ITA) and introduces the 12-year residence test and the 7-year residence test. An individual will meet the 12-year test in any tax year in which they have been resident in the UK in at least 12 of the 14 tax years preceding that year and will meet the 7-year test in any tax year in which they have been resident in the UK in at least seven of the nine tax years preceding that year. It also amends section 809C(4) to provide for two alternative figures for the maximum relevant tax increase of £50,000 (where the 12-year test is met) and £30,000 (where only the 7-year test is met).

4.Paragraph 3 of the Schedule amends section 809H ITA and provides that an individual claiming the remittance basis will be liable to pay the £50,000 remittance basis charge for any tax year in which they meet the 12-year test, and liable to pay the £30,000 annual charge for any tax year in which they only meet the 7-year test. It also substitutes the term ‘the applicable amount’ for ‘£30,000’ each time it occurs in that section.

5.Paragraph 4 of the Schedule substitutes a new section 809V in ITA. It provides that, in cases where an individual uses their foreign income and gains to pay the £50,000 or the £30,000 annual charge, those income and gains will not be treated as having been remitted to the UK. It also provides that this rule will not apply to the extent that the payments are repaid by HM Revenue & Customs (HMRC).

6.Paragraph 5 of the Schedule provides for the amendments made by paragraphs 1 to 4 to have effect from the start of the 2012-13 tax year.

Remittance for Investment Purposes

7.Part 2 of the Schedule introduces a new tax relief for foreign income and gains which are brought to the UK for the purposes of making a qualifying investment. In such cases, provided the relevant conditions are met, those foreign income and gains will not be taxed under the remittance basis.

8.Paragraph 6 of the Schedule replaces the heading which currently precedes section 809V with ‘Relief for money used to pay tax, etc’.

9.Paragraph 7 of the Schedule introduces new sections 809VA to 809VO of ITA.

10.New section 809VA provides that certain income and gains brought to the UK for investment purposes are not treated as remitted to the UK.

11.Subsection (1) of section 809VA sets out the qualifying conditions for the business investment provisions. These are that a relevant event occurs which would otherwise be treated as a remittance of an individual’s income and gains and that the individual makes a claim for the relief under this section.

12.Subsection (2) of section 809VA provides that, where the conditions set out in subsection 809VA(1) are met, the income and gains of the individual are treated as not remitted to the UK and therefore not liable to tax in the UK.

13.Subsection (3) of section 809VA defines a ‘relevant event’ for the purposes of subsection 809VA(1) as an event in which money or other property is either used by relevant person to make a qualifying investment (as defined in section 809VC), or is brought to or received in the UK for the purpose of making such an investment.

14.Subsection (4) of section 809VA provides that the relief provided by this Part is also available in situations where a qualifying investment is made using the proceeds from the sale of property which has been purchased outside the UK using foreign income and gains.

15.Subsection (5) of section 809VA provides that, in order to qualify for the relief, a qualifying investment must be made within 45 days of the money or other property being brought to or received in the UK.

16.Subsection (6) of section 809VA provides that, where only part of the money or other property brought to the UK is used to make a qualifying investment within 45 days, the amount of income and gains which qualifies for the relief provided by new subsection 809VA(2) is to be determined on a just and reasonable basis.

17.Subsection (7) of section 809VA is an anti-avoidance provision which denies the relief provided in subsection 809VA(2) in circumstances where a relevant event occurs, or an investment is made, as part of or as a result of a scheme or arrangement whose main purpose, or one of whose main purposes, is tax avoidance.

18.Subsection (8) of section 809VA provides that an individual is required to make a claim for the relief no later than the first anniversary of 31 January of the tax year following the tax year in which the income and gains used to make a qualifying investment would otherwise be treated as a remittance of those income and gains.

19.New section 809VB deals with cases where money or other property is brought to the UK with the intention of making a qualifying investment but in the event some or all of that money or other property is not invested within 45 days of being brought to the UK.

20.Subsection (1) of section 809VB provides that this section applies to any amount of income and gains which does not qualify for the relief provided by subsection 809VA(2) because it was not used to make a qualifying investment within the 45-day period. It defines the ‘45-day period’ as the 45-day period beginning with the date on which the money or other property was brought to or received in the UK.

21.Subsection (2) of section 809VB provides that the amount referred to in subsection 809VB(1) is treated as not remitted to the UK to the extent that the remaining money or other property is taken offshore (as defined in section 809Z8) within the 45-day period.

22.Subsection (3) of section 809VB provides that, where only a part of the remaining money or other property is taken offshore within the 45-day period, the amount of income and gains which is treated as not remitted to the UK under subsection 809VA(2) is to be determined on a just and reasonable basis.

23.Subsection (4) of section 809VB provides that, notwithstanding subsection 809VA(2), the underlying income and gains in any remaining money or other property which is taken offshore within the 45-day period will be treated as being remitted to the UK if something is subsequently done with those income and gains which would itself count as a remittance.

24.Subsection (5) of section 809VB provides that references to the ‘remaining’ money or other property in this section are to the amount of the money or other property brought to or received in the UK which is not used to make a qualifying investment.

25.New section 809VC defines a qualifying investment for the purposes of section 809VA.

26.Subsection (1) of section 809VC provides that an investment is made for the purpose of section 809VA where a person either buys newly issued shares in a company or makes a loan to a company.

27.Subsection (2) of section 809VC provides that, for the purposes of this Part, the company in which an investment is made is referred to as ‘the target company’.

28.Subsection (3) of section 809VC provides that a person’s shares in or rights under a loan to a company, or a mixture of both, are referred to as ‘the holding’ for the purposes of this Part.

29.Subsection (4) of section 809VC provides that, where conditions A and B are met at the time the investment is made, that investment is counted as a qualifying investment.

30.Subsection (5) of section 809VC provides for the definition of conditions A and B in sections 809VD and 809VF respectively.

31.Subsection (6) of section 809VC provides that any reference to shares in this section includes securities.

32.Subsection (7) of section 809VC provides that, where a loan agreement authorises a company to draw down amounts of a loan over time, entry into that loan agreement is not treated as the making of a loan. Instead, a separate loan is treated as being made each time an amount is drawn down under that agreement.

33.Subsection (8) of section 809VC provides that, in cases referred to in subsection 809VC(7), each time an amount is drawn down under a loan agreement, a separate investment will be treated as having been made. It also provides that references in subsection 809VC(3) to a person’s rights under the loan applies to the extent that those rights which relate to the amount are actually drawn down.

34.Example: an individual enters into a loan agreement under which the target company is able to draw down £1 million in four equal amounts of £250,000 over a four-year period. If the £1 million is retained outside the UK before being drawn down, each drawdown will be treated as a separate qualifying investment and receive the relief afforded by subsection 809VA(2).

35.New section 809VD defines condition A for the purposes of subsection 809VC(4).

36.Subsection (1) of section 809VD provides that the investment must be in an eligible trading company, an eligible stakeholder company or an eligible holding company to be a qualifying investment.

37.Subsection (2) of section 809VD defines an eligible trading company as a private limited company (as defined in subsection 809VD(11)) which is carrying on at least one commercial trade (as defined in section 809VE), or is preparing to do so within the next two years, and where carrying on a commercial trade is all, or substantially all, it does or it is reasonably expected to do once it begins trading.

38.Subsection (3) of section 809VD defines an eligible stakeholder company as a private limited company which exists wholly, ignoring minor or incidental purposes, for the purpose of making investments in eligible trading companies (as defined in subsection 809VD(2)). An eligible stakeholder company must actually hold at least one investment in an eligible trading company or be preparing to do so within the next two years.

39.Subsection (4) of section 809VD explains that ‘making investments’ in subsection 809VD(3) takes the same meaning as in section 809VC.

40.Subsection (5) of section 809VD defines an eligible holding company as a member of an eligible trading group, or a member of a group which is expected to become an eligible trading group within the next two years, and which has a 51 per cent subsidiary which is an eligible trading company. Where the eligible holding company owns the share capital of the eligible trading company indirectly, each intermediary company must also be a member of the group.

41.Subsections (6) to (11) of section 809VD define certain terms used in section 809VD.

42.Subsection (6) of section 809VD defines ‘group’ as a parent company and its 51 per cent subsidiaries.

43.Subsection (7) of section 809VD defines ‘parent company’ as one which is not itself a 51 per cent subsidiary of any other company and which has at least one 51 per cent subsidiary.

44.Subsection (8) of section 809VD defines ‘eligible group’ as one in which the parent company and each of its 51 per cent subsidiaries are private limited companies.

45.Subsection (9) of section 809VD defines ‘eligible trading group’ as an eligible group in which all or substantially all of its activities, taking the members of the group as a whole, are carrying on a commercial trade.

46.Subsection (10) of section 809VD provides that section 1155 of the Corporation Tax Act 2010 applies to determine whether a company owns the share capital of a subsidiary indirectly.

47.Subsection (11) of section 809VD defines ‘private limited company’ as a body corporate with limited liability, none of whose shares are listed on a recognised stock exchange. It also excludes all limited liability partnerships.

48.New section 809VE defines a commercial trade for the purposes of section 809VD.

49.Subsection (2) of section 809VE provides that for the purposes of section 809VD ‘trade’ includes any activity that is treated as a trade for corporation tax purposes and a business of generating income from land. The meaning of ‘generating income from land’ is provided by section 207 of Corporation Tax Act 2009 and includes generating income from both residential and commercial property.

50.Subsection (3) of section 809VE provides that a commercial trade is one conducted on a commercial basis with a view to making profits.

51.Subsection (4) of section 809VE provides that carrying on research and development activities will be treated as carrying on a commercial trade for the purposes of section 809VD, provided it is intended that a commercial trade will be derived or will benefit from those research and development activities.

52.Subsection (5) of section 809VE provides that preparing to carry on research and development activities is not a commercial trade for the purposes of section 809VD.

53.New section 809VF sets out condition B for the purposes of determining whether an investment is a qualifying investment for subsection 809VC(4).

54.Subsection (1) of section 809VF provides that condition B is met where no relevant person has obtained, or becomes entitled to obtain, any related benefit or expects to obtain such a benefit, whether directly or indirectly. Whether a benefit is ‘related’ is determined by subsection 809VF(3) and a relevant person takes its meaning from section 809M.

55.Subsection (2) of section 809VF defines a benefit for the purposes of this section as including the provision of anything which would not be provided to the relevant person in the ordinary course of business, or would be provided but on less favourable terms. It also provides that a benefit does not include the provision of anything to the relevant person in the normal course of business and on arm’s length terms.

56.Subsection (3) of section 809VF sets out when benefit is ‘related’ for the purposes of subsection 809VF(1). This is widely defined and includes benefits which are directly or indirectly attributable to the making of the investment (whether the benefit arose before or after that investment was made), and benefits which, it is reasonable to assume, would not be available if the investment had not been made.

57.Subsection (4) of section 809VF provides that references to ‘the provision of anything’ in subsection 809VF(2) are to the provision of anything in money or money’s worth and includes anything which provides any enjoyment or benefit to a person, whether on a temporary or permanent basis.

58.New section 809VG sets out the circumstances in which income and gains which are brought to the UK to make a qualifying investment are treated as remitted to the UK. It also clarifies the relevant grace period which applies for these purposes, and splits combined investments into those that qualify for the relief and those that do not.

59.Subsection (1) of section 809VG provides that subsection (2) applies if foreign income and gains have been used to make a qualifying investment and so are treated as not remitted by section 809VA(2), a potentially chargeable event (as defined in section 809VH) has subsequently occurred and the appropriate mitigation steps (as defined in section 809VI) have not been taken within the relevant grace period (as defined in section 809VJ).

60.Subsection (2) of section 809VG provides that in the circumstances set out in subsection 809VG(1) the affected income and gains are to be treated as having been remitted immediately after the end of the relevant grace period.

61.Subsections (3) and (4) of section 809VG provide that the grace period allowed for appropriate mitigation steps is determined by the type of mitigation step which is required to be taken. Where the appropriate mitigation step is the disposal of the entire holding, the grace period is set out in subsection 809VJ(1). Where the mitigation step is the taking offshore or re-investment of disposal proceeds, the grace period is set out in subsection 809VJ(2).

62.Subsection (5) of section 809VG defines the affected income and gains as that portion of the income or gains which, in the absence of the relief provided in subsection 809VA(2), would have been treated as remitted to the UK, which reflects the portion of the investment affected by the potentially chargeable event.

63.Subsection (6) of section 809VG provides that, where the potentially chargeable event is a disposal of a part of the holding, the portion of the investment affected by that potentially chargeable event is equal to the portion that is disposed of. Where the potentially chargeable event is something other than a part disposal of the holding, the whole of the investment is affected.

64.Example: where the potentially chargeable event is that a company ceases to be an eligible trading company, the portion of the investment affected by that potentially chargeable event is the entire investment. If the appropriate mitigation step is not taken within the relevant grace period, all of the income and gains that were previously treated as not remitted because they were used to make a qualifying investment are treated as having been remitted at the end of that grace period.

65.Example: where an investor disposes of half of a shareholding, but fails to take the appropriate mitigation step within the relevant grace period, the portion of the investment affected by that potentially chargeable event is half.

66.Subsection (7) of section 809VG provides for sections 809VN and 809VO to apply alongside section 809VG.

67.Subsection (8) of section 809VG provides that, where an investment is made which consists partly of funds which qualify for relief under the business investment provisions and partly of other funds, the investment is treated as two separate investments. These combined investments are treated as split into investments which qualify for the relief and those which do not. It also provides that any references in the business investment provisions to ‘the investment’ and to ‘the holding’ only relate to qualifying investments.

68.Subsection (9) of section 809VG provides that, where there is a second or subsequent potentially chargeable event in relation to a single investment, the affected income or gains that are treated as remitted do not include any amounts treated as remitted, taken offshore or re-invested or used to make a tax deposit within section 809VK, as a result of a previous potentially chargeable event.

69.Example: an investor disposes of half of their qualifying investment and takes the appropriate mitigation steps in relation to that potentially chargeable event in year one.  In year two, they dispose of the remaining half of their investment, but fail to take the appropriate mitigation steps in respect of that disposal. As a result, only half of the investment, and therefore half of the income and gains which the original investment contained, is affected by the second part disposal and treated as remitted to the UK.

70.New section 809VH defines a potentially chargeable event. Where a potentially chargeable event occurs and the appropriate mitigation steps are not taken, income and gains will be treated as remitted in accordance with section 809VG.

71.Subsection (1) of section 809VH provides that a potentially chargeable event will occur where:

72.Subsection (2) of section 809VH sets out the circumstances in which the extraction of value rule is breached for the purposes of subsection 809VH(1). The rule is breached if the relevant person who made the investment or any other relevant person receives, or receives the benefit of, value in money or money’s worth from either an involved company or from anyone else in circumstances which are attributable to the investment or to any other investment made by a relevant person in an involved company. The extraction of value rule is not breached if the value is received as a result of a disposal of the holding because the disposal is itself a potentially chargeable event.

73.Subsection (3) of section 809VH provides that the extraction of value rule is not breached merely because a relevant person receives value which is treated as income for tax purposes (or would be if the relevant person were liable either to income or corporation tax), provided the value is paid or provided on arm’s length terms and in the ordinary course of business.

74.Example: where an individual makes a qualifying investment in a company of which they are a director, the receipt of director’s remuneration would not constitute an extraction of value, providing the remuneration is treated as a receipt for income tax purposes and paid on arm’s length terms in the ordinary course of business.

75.Subsection (4) of section 809VH defines an involved company for the purposes of subsection 809VH(2) as:

76.Subsection (5) of section 809VH sets out when the 2-year start-up rule is breached. The rule will be breached if the target company is non-operational immediately after the end of the period of two years from the day on which the qualifying investment was made. The rule will also be breached if the target company becomes non-operational at any time after the end of this period. This ensures that, after the 2-year start-up period has ended, the target company must either be trading, hold shares in at least one 51 per cent subsidiary company which is trading or be a stakeholder in at least one eligible trading company which is trading. Where this is not the case, a potentially chargeable event will occur.

77.Subsection (6) of section 809VH explains that a target company will be non-operational for the purposes of the 2-year start-up rule in subsection 809VH(5) if it is an eligible trading, stakeholder or holding company but does not trade or, as a stakeholder company, does not hold shares in at least one eligible trading company that is trading, or as a holding company, has no 51per cent subsidiaries that trade. An eligible holding company will be non-operational if it is not a member of an eligible trading group.

78.Subsection (7) of section 809VH provides that references to ‘trading’ in subsection 809VH(6) mean carrying on one or more commercial trades, including research and development activities.

79.Subsection (8) of section 809VH provides that where the potentially chargeable event is a disposal of a qualifying investment and the consideration for the disposal is paid in instalments, then each instalment is treated as a separate disposal and a separate potentially chargeable event.

80.Subsection (9) of section 809VH provides that, where a potentially chargeable event occurs because of an insolvency step taken for genuine commercial reasons, it will not be treated as a potentially chargeable event. However, this does not prevent the receipt of value as a result of the insolvency step from being a potentially chargeable event.

81.Subsection (10) of section 809VH defines an insolvency step for the purposes of subsection 809VH(9). An insolvency step is taken if a company enters into administration or receivership, or is wound up or dissolved. An insolvency step is also taken if similar steps are taken in relation to a company under the law of a country or territory outside the UK. The company taking the insolvency step may be the target company or any eligible trading company that the target company has invested in as an eligible stakeholder or eligible holding company.

82.New Section 809VI sets out the ‘appropriate mitigation steps’ that must be taken, following a potentially chargeable event, in order to prevent the affected income and gains being treated as remitted to the UK under subsection 809VG(2). The appropriate mitigation steps must be taken within the relevant grace periods set out in section 809VJ. There are two types of appropriate mitigation steps depending on the type of potentially chargeable event.

83.Subsection (1) of section 809VI sets out the appropriate mitigation steps where the potentially chargeable event is a disposal of all or part of the holding. In this case the proceeds arising from the disposal must be taken offshore or re-invested.

84.Subsection (2) of section 809VI sets out the appropriate mitigation steps for any other potentially chargeable event. In this case the individual must dispose of the entire holding (or whatever part still belongs to the individual at the date of the potentially chargeable event) and either take the proceeds offshore, or re-invest them. For the purposes of the appropriate mitigation steps, the meaning of taking proceeds offshore is dealt with in section 809Z9 and the meaning of ‘ re-invested’ is provided in subsection 809VI(7).

85.Subsection (3) of section 809VI provides that, in cases where the disposal proceeds exceed amount X, it is only amount X that needs to be taken offshore or re-invested as the appropriate mitigation step.

86.Subsection (4) of section 809VI defines the amount ‘X’ for the purposes of subsection 809VI(3). Amount X is equal to the sum originally invested, less so much of that amount that has previously:

87.Limiting the amount that has to be taken offshore or re-invested after a disposal in this way ensures that an individual will never be required to take offshore or re-invest more in total than the amount that was actually used to make the investment. If the whole of the holding is sold for more than the sum invested, so that there is a capital gain, then the individual is not required to take offshore or re-invest the amount of the capital gain. However, where there is a part disposal of the holding P is required to take offshore or re-invest the full amount of the proceeds up to the amount of the sum invested, even where the proceeds include an element of UK gain. The total amount that an individual is required to take offshore or re-invest can never exceed the total amount invested.

88.Example: an individual invests £3 million foreign income in an eligible trading company in year one. In year five, they dispose of half of the holding for £2 million. The disposal proceeds are £2 million and X (the sum originally invested) is £3 million. The investor must therefore take £2 million offshore or re-invest it to take the appropriate mitigation step.

89.In year seven, the investor sells the remainder of the holding for £3 million. The disposal proceeds are £3 million but, assuming that the appropriate mitigation step was taken after the first part disposal in year five, amount X is £3 million (the sum originally invested) less £2 million (the amount of the sum invested taken offshore or re-invested on a previous occasion). The investor must therefore take £1 million offshore or re-invest it. In summary, the individual has invested £3 million and has been required to take offshore or re-invest a total of £3 million as the appropriate mitigation steps following two potentially chargeable events.

90.Subsection (5) of section 809VI provides that, in determining amount ‘X’, the ‘amount originally invested’ is the amount of money used to make the original investment, or, if the investment was made using property other than money, the market value of that property.

91.Subsection (6) of section 809VI provides that, for the purposes of subsection 809VI(5), where market value needs to be applied because the original investment was made using property other than money, that property must be valued at the date of the relevant event. ‘Relevant event’ is defined in section 809VA as either the making of a qualifying investment or the bringing of money or other property to the UK for the purpose of making such an investment.

92.Subsection (7) of section 809VI provides that proceeds are re-invested, and the appropriate mitigation steps will be regarded as having been taken, where they are used to make another qualifying investment, whether in the same or a different company.

93.Example: where a share for share exchange has occurred whereby an individual disposes of shares in a qualifying company and simultaneously acquires new shares in the same or another qualifying company, the appropriate mitigation steps will be regarded as having been taken when the exchange takes place. In other words, the exchange will be treated as an immediate reinvestment in another qualifying company.

94.Subsection (8) of section 809VI provides that where a breach of the extraction of value rule takes place in connection with the winding up or dissolution of the target company there is no requirement to dispose of the holding and references to the disposal proceeds in this section and elsewhere in the business investment provisions are to be read as references to the value received.

95.New section 809VJ sets out the grace periods during which the appropriate mitigation steps must be taken.

96.Subsection (1) of section 809VJ provides a 90-day grace period for the step mentioned in subsection 809VI(2)(a) (disposal of the holding or the part of the holding still retained at the time of the potentially chargeable event). The 90 days starts from either of two points: where the potentially chargeable event is a breach of the extraction of value rule, it starts on the day the value is received. In all other cases it starts on the day on which a relevant person first became aware, or ought reasonably to have become aware, of the potentially chargeable event. ‘Relevant person’ is defined in the existing section 809M.

97.Subsection (2) of section 809VJ provides a 45-day grace period that operates in two circumstances: first, where the potentially chargeable event was itself a disposal, and second, where the potentially chargeable event was something other than a disposal and the individual has complied with the requirement in subsection 809VI(2)(a) to dispose of the holding (or whatever part of it remains in their possession). The individual has 45 days to take the proceeds offshore or re-invest them. The 45 days starts on the day that the proceeds first become available for use by P or by any other relevant person, or the proceeds first become available for use for the benefit of P or any other relevant person.

98.Subsection (3) of section 809VJ provides that an individual can ask an officer of HMRC to agree to extend a grace period in exceptional circumstances. HMRC will publish guidance on what is meant by exceptional circumstances.

99.Subsection (4) of section 809VJ allows an officer of HMRC to extend the grace period allowed for an appropriate mitigation step in circumstances specified in regulations made by the Commissioners.

100.The Government intends to introduce regulations under this power that will allow grace periods to be extended in the following circumstances:

101.Subsection (5) of section 809VJ allows any regulations made by HMRC to take into account investments made before the regulations come into force.

102.Subsection (6) of section 809VJ provides that any regulations made under the power in subsection 809VJ(4) will not restrict the operation of HMRC’s power to extend a grace period in exceptional circumstances under subsection 809VJ(3).

103.Subsection (7) of section 809VJ provides that the powers conferred on an officer of HMRC to agree to extend a grace period for a length of time that is indefinite but which is capable of becoming definite by means identified in the agreement such as the satisfaction of conditions.

104.HMRC will issue guidance about the procedures that individuals will need to follow when making applications to extend grace periods and on the sorts of conditions that might be imposed.

105.New section 809VK provides the conditions under which part of the proceeds from a disposal of a qualifying investment can be retained in the UK to meet a capital gain tax (CGT) liability without being treated as remitted.

106.Subsection (1) of section 809VK sets out the conditions which have to be met before anything can be retained in the UK.  These are that:

107.Subsection (2) of section 809VK defines ‘the shortfall’ for the purposes of this section as the difference between the actual disposal proceeds and amount ‘Y’ (as defined in subsection 809VK(4)).

108.Subsection (3) of section 809VK defines ‘the actual disposal proceeds’ as the disposal proceeds disregarding any effect of subsection 809Z8(4). That subsection provides that, where the disposal is not made by way of a bargain on arm’s length terms, the disposal is deemed to be made for a consideration equal to the market value of the holding immediately before the disposal. This means that the shortfall is calculated by reference to the proceeds which were actually received even where the disposal was not made on arm’s length terms.

109.Subsection (4) of section 809VK defines amount ‘Y’ as the sum of the amount that would otherwise be required to be taken offshore under subsection 809VI(1) or 809VI(2)(b), and the amount resulting when the highest potential CGT rate is applied to the chargeable gain resulting from the disposal.

110.Subsection (5) of section 809VK defines the highest potential CGT rate for the purposes of subsection 809VK(4) as that specified in section 4(3) of the Taxation of Chargeable Gains Act 1992 (TGCA) for trustees and personal representatives, and as specified in section 4(4) of that Act in all other cases.

111.Subsection (6) of section 809VK provides that, where an amount is retained in the UK under the provisions of section 809VK, the amount required to be taken offshore by subsection 809VI(1) or subsection 809VI(2)(b) is to be reduced by the amount which has been retained.

112.Subsection (7) of section 809VK defines ‘the permitted amount’ as the amount of the shortfall used to purchase a certificate of tax deposit within the 45-day grace period allowed for taking the proceeds offshore or re-investing them.

113.Subsection (8) of section 809VK provides that the reduction provided for in subsection 809VK(6) may not be made unless there is written confirmation to HMRC that the certificate of tax deposit purchased is intended to relate to section 809VK and does not exceed the shortfall calculated under subsection 809VK(2).

114.Example: an individual makes a qualifying investment using £10 million of their foreign income. They subsequently dispose of part of the investment and receive disposal proceeds of £1 million, of which £500,000 are a chargeable gain. This is the first disposal of any part of this qualifying investment and no funds have previously been taken offshore or re-invested as part of a mitigation step required by subsection 809VI(1) and subsection 809VI (2)(b).

115.The actual disposal proceeds are £1 million. The whole of the disposal proceeds would, but for this section, be required to be taken offshore by subsection 809VI(1). The highest potential CGT rate, as provided for an individual under section 4(4) TCGA, is 28 per cent. Therefore amount Y is the sum of £1 million and 28 per cent of £500,000, or £1.14 million. The actual disposal proceeds are less than Y, and the difference between them is £140,000, which is the shortfall.

116.The individual is therefore allowed to use any amount of the disposal proceeds up to £140,000 to purchase a certificate of tax deposit, provided this is done within the 45-day grace period from the date those proceeds first become available for the individual P to use, as provided by subsection 809VJ(2), and that it is confirmed in writing to HMRC that this deposit relates to this section.

117.The individual places the permitted amount of £140,000 in a certificate of tax deposit within the 45-day grace period. The amount that must be taken offshore under subsection 809VI(1) is reduced by £140,000, so £860,000 of the disposal proceeds must now be taken offshore or re-invested within the same grace period.

118.New Section 809VL describes the effect of taking the appropriate mitigation steps within the relevant grace period.

119.Subsection (1) of section 809VL explains that this section applies if appropriate mitigation steps are taken within the relevant grace period.

120.Subsection (2) of section 809VL provides that where an individual disposes of a qualifying investment and takes the proceeds offshore, subsection 809VA(2) will not prevent those proceeds, or anything deriving from them, from being treated as a taxable remittance in the usual way if they are brought to the UK on any subsequent occasion.

121.Subsection (3) of section 809VL deals with cases where an individual uses the proceeds from a disposal of a qualifying investment to re-invest in another qualifying investment. In such situations, the underlying income and gains (defined in subsection (6)), continue to be treated as not remitted to the UK. It also provides that part 2 of the Schedule will apply to that re-investment in the same way as it applied to the original investment.

122.Subsection (4) of section 809VL sets out rules which apply the business investment provisions in cases where the proceeds from the disposal of a qualifying investment are re-invested in another qualifying investment. These are that:

123.Example: an individual disposes of a qualifying investment on 18 March 2015 and re-invests the entire proceeds in another qualifying investment on 31 March 2015. The disposal on 18 March was a potentially chargeable event, and this is counted as the relevant event for the purposes of subsection 809VA(3). The original investment was made with £1 million foreign income which continues to be treated as not remitted to the UK and to retain its original character in the new qualifying investment.

124.Subsection (5) of section 809VL provides further rules which apply where there is a re-investment which uses more than the disposal proceeds from the original investment. In such cases, the investment is to be treated as two separate investments, one of an amount equal to the disposal proceeds from the original investment, and one an amount equal to the balance.  Only the former amount is to be regarded as ‘the investment’ or ‘the holding’ for the purposes of the business investment provisions.

125.Subsection (6) of section 809VL defines ‘the underlying income or gains’ as the affected income or gains, or, in cases where the disposal proceeds are partly taken offshore and partly re-invested, a corresponding proportion of the affected income or gains as determined under section 809VG.

126.Subsection (7) of section 809VL requires the individual to make a further claim to business investment relief in respect of any amount re-invested. The deadline for making such a claim is the first anniversary of 31 January following the tax year in which the re-investment is made. It also provides that failure to make such a claim will mean that the appropriate mitigation steps will not be regarded as having been taken and subsection 809VG(2) will apply to treat the original investment as remitted to the UK.

127.Subsection (8) of section 809VL provides that section 809VM makes further provision in relation to cases involving a tax deposit.

128.New section 809VM deals with cases where there has been a disposal of a qualifying investment and part of the disposal proceeds have been put into a certificate of tax deposit to pay the CGT liability arising on the UK gain on that disposal, as provided by section 809VK.

129.Subsection (1) of section 809VM provides the conditions that need to be satisfied for this section to apply. These conditions are that:

130.Subsection (2) of section 809VM provides that references to ‘the tax deposit’ in this section are to the deposit which gave rise to the reduction.

131.Subsection (3) of section 809VM provides that if funds in a certificate of tax deposit by virtue of the provisions in section 809VK are used to meet the relevant tax liability, then the underlying foreign income and gains in those funds shall not be treated as having been remitted to the UK. In particular, the relief afforded by subsection 809VA(2) shall continue to apply to those income and gains.

132.Subsection (4) of section 809VM provides that if any of the certificate tax deposit (CTD) conditions are breached then the underlying income and gains are to be treated as having been remitted to the UK.

133.Subsection (5) of section 809VM defines ‘the underlying income and gains’. Where the underlying income and gains relate to funds in a certificate of tax deposit being used to meet the relevant tax liability (as in subsection (3)), then they are to be treated as the portion of the affected income and gains that the payment represents. Where there has been a breach of the CTD conditions, the underlying income and gains are the portion of the affected income and gains affected by the breach.

134.Affected income and gains are defined generally in subsection 809VG(5) and specifically for mixed funds in subsection 809VO(8).

135.Subsection (6) of section 809VM provides for the CTD conditions.  These are that:

136.Subsection (7) of section 809VM provides that, where funds in a certificate of tax deposit are taken offshore or re-invested within the 45-day period allowed by subsection (6) in line with the CTD conditions, those funds are treated, for the purposes of section 809VL, as if they were disposal proceeds which had been taken offshore or re-invested.

137.Subsection (8) of section 809VM provides definitions of the following terms used in this section:

It also provides that references to a withdrawal in this section include any repayment.

138.New section 809VN provides rules which determine the order in which disposals are treated as being made where there are multiple acquisitions and disposals in the same target company or group and where both qualifying and non-qualifying investments have been made.

139.Subsection (1) of section 809VN sets out when the first in, first out rule provided by subsection 809VN(2) is to apply. This is where an individual has made different qualifying investments in either the same target company or the same eligible trading group or in both an eligible trading company and its eligible stakeholder company.

140.The terms ‘target company’, ‘eligible trading group’, ‘eligible trading company’ and ‘eligible stakeholder company’ are defined in section 809VD.

141.Subsection (2) of section 809VN provides that, where income and gains are treated as remitted to the UK under section 809VG, all the investments and holdings are treated as a single investment and a single holding. Any disposal of all or part of that investment or holding is then treated as a disposal of the single investment but with the effect of disposals in the order in which the individual qualifying investments were made, starting with the qualifying investment which was made first.

142.Subsection (3) of section 809VN provides that subsection 809VN(4) applies where foreign income and gains are treated as not remitted to the UK as a result of one or more qualifying investments, and where a relevant person holds one or more other investments in the same eligible trading company, eligible trading group or a related eligible company in a situation where that other investment is not a qualifying investment.

143.Subsection (4) of section 809VN provides that, where income and gains are treated as remitted to the UK under section 809VG, all the investments and holdings are treated as a single investment and a single holding. Any disposal of all or part of that investment or holding is then treated as a disposal of a holding of all qualifying investments before a disposal of any of the non-qualifying investments.

144.Subsection (5) of section 809VN defines a ‘related eligible company’ for the purposes of subsection 809VN(3). In the case of an eligible trading company, a related eligible company is an eligible stakeholder company which holds investments in that trading company. In the case of an eligible stakeholder company, a related eligible company is an eligible trading company in which that company holds investments.

145.Subsection (6) of section 809VN provides that subsection 809VN(2) and subsection 809VN(4) apply both where the investments are held by the same relevant person and where they are held by different relevant persons.

146.New section 809VO deals with qualifying investments which are made from a mixed fund. A mixed fund is defined in section 809Q(6) as an overseas fund of money or other property which contains or consists of more than one type of income or gains, or income or gains from more than one tax year. Where an amount is remitted from a mixed fund, there are special ordering rules which determine how the remitted amount is taxed.

147.Subsection (1) of section 809VO provides for this section to apply where a qualifying investment is made from a mixed fund as defined in section 809Q.

148.Subsection (2) of section 809VO provides that the relevant event is treated as an offshore transfer for the purposes of section 809R(4). A ‘relevant event’ is defined in subsection 809VA(3) as using income and gains to make a qualifying investment or bringing income and gains to the UK for the purpose of making such an investment.

149.Broadly, the effect of treating a relevant event as an offshore transfer is that the amount brought to the UK is treated as containing the same proportions of income, gains and capital as there was in the mixed fund immediately before the transfer took place.

150.Subsection (3) of section 809VO provides that the holding also is to be treated as containing a proportion of each kind of income and capital as there was in the invested property, but equal to the fixed proportion.

151.Subsection (4) of section 809VO defines ‘the fixed proportion’ for the purposes of subsection 809VO(3) as the proportion of income or capital contained in the invested property (as defined in subsection 809VO(5)) which is determined by the application of the offshore transfer rules.

152.Subsection (5) of section 809VO defines ‘the invested property’ as the money or other property which was used to make the qualifying investment.

153.Subsection (6) of section 809VO provides that subsection 809VO(7) applies where the money or other property is treated as not remitted to the UK because an amount is taken offshore, re-invested or used to make a tax deposit.

154.Subsection (7) of section 809VO provides that the amount referred to in subsection 809VO(6) as being taken offshore, re-invested or used to make a tax deposit is treated as containing the fixed proportion of each kind of income and capital as was contained in the holding.

155.Subsection (8) of section 809VO provides that the amount of the different kinds of income and gains in the holding (determined by applying the fixed proportion rule) is ‘the fixed amount’. Where income and gains are treated as remitted to the UK because the appropriate mitigation steps were not taken within the grace period, the amount treated as remitted (the affected income and gains) are so much of the fixed amount of each kind of income and gain as was contained in the amount invested which reflects the portion of the investment affected by the potentially chargeable event. In other words, the mixed fund rules do not apply to determine the amounts remitted.

156.Subsection (9) of section 809VO applies sections 809R(2), 809R(3) and 809S to section 809VO.

157.Paragraph 8 of the Schedule inserts the heading ‘Relief for certain UK services’ after the sections inserted by paragraph 7 of the Schedule.

158.Paragraph 9 of the Schedule inserts the heading ‘Exempt property relief’ immediately before section 809X.

159.Paragraph 10 of the Schedule amends section 809Y ITA by inserting new subsections (6) to (10). These deal with cases where property which has ceased to be exempt property is subsequently used to make a qualifying investment. Section 809Y(1) provides that property which ceases to be exempt property is to be treated as remitted at the time it ceases to be exempt property.

160.New subsection (6) of section 809Y prevents exempt property from being treated as remitted to the UK under subsection 809Y(1) if it is used to make a qualifying investment, provided that investment is made within 45 days of it ceasing to be exempt property. This rule also applies to anything into which that property is converted. This treatment is only allowed if the remittance basis user (as defined in section 809Z10) makes a claim for this relief on or before the anniversary of 31 January following the end of the tax year in which the property ceased to be exempt property.

161.New subsection (7) of section 809Y provides that references in subsection 809Y(6)(a) to anything into which exempt property is converted are, in cases where the property is sold, to the proceeds of that sale or, where the property is converted into money in some other way, the money into which it is converted. This is also the case when the conversion takes place after the property ceases to be exempt property.

162.New subsection (8) of section 809Y provides rules which apply where subsection 809Y(1) does not apply by virtue of subsection 809Y(6).

163.Subsection (8)(a) of section 809Y provides that the property, or anything into which that property is converted, is treated as containing or deriving from an amount of each of the categories of income and gains set out in the mixed fund rules in subsection 809Q(4)(a) to (h) as is equal to the fixed amount. These amounts do not include any capital contained in the property or from which the property has been derived.

164.Subsection (8)(b) of section 809Y provides that the foreign income and gains which are treated under section 809X as not remitted to the UK will continue to be treated as not remitted, even though the property has ceased to be exempt property

165.Subsection (8)(c) of section 809Y provides that the business investment provisions apply to the foreign income and gains in the same way as they apply to foreign income and gains which are treated as not remitted to the UK under subsection 809VA(2).

166.New subsection (9) of section 809Y defines ‘the fixed amount’ for the purposes of subsection 809Y(8)(a) as the amount of that category of foreign income and gain which was contained in the property when it was brought to or received in the UK.

167.New subsection (10) of section 809Y provides that, where a qualifying investment is made using exempt property (including anything into which that property is converted) together with money or other property, only that part of the investment made using the exempt property is the qualifying investment for the purposes of the business investment provisions.

168.Paragraph 11 of the Schedule removes the definition of a relevant person in subsection 809Z(2)(a).

169.Paragraph 12 of the Schedule amends section 809Z4 and provides that the time in which exempt property is invested in a qualifying investment under section 809VA is not a countable day for the purposes of the temporary importation rule. The temporary importation rule allows exempt property to be brought to the UK without triggering a remittance, provided the number of days it spends in the UK (‘countable days’) does not exceed 275 in total.

170.Paragraph 13of the Schedule substitutes the phrase ‘this Chapter’ for ‘sections 809L, 809N and 809O’ in section 809M.

171.Paragraph 14 of the Schedule removes subsection 809Z7(7).

172.Paragraph 15 of the Schedule introduces the heading ‘Meaning of ‘foreign income and gains’, etc.’ for section 809Z7.

173.Paragraph 16 of the Schedule inserts new interpretative provisions in new sections 809Z8 to 809Z10.

174.Subsection (1) of section 809Z8 provides that ‘the disposal proceeds’ means the consideration for the disposal less any agency fees which are deducted before the consideration is paid or otherwise made available to or for the benefit of the person making the disposal or any other relevant person.

175.Subsection (2) of section 809Z8 provides that subsections 809Z8(3) to 809Z8 (7) apply in determining the consideration for the disposal.

176.Subsection (3) of section 809Z8 provides that, where the consideration is provided in a form other than money, the amount of the consideration is the market value of what is provided at the time of the disposal.

177.Subsection (4) of section 809Z8 provides that, where the disposal is not made on arm’s length terms, the consideration is the market value of what is disposed of immediately before the disposal takes place.

178.Subsection (5) of section 809Z8 provides that any disposal made to another relevant person or to a person connected with a relevant person is not treated as being made on arm’s length terms and therefore that the consideration is the market value of what is disposed of immediately before the disposal takes place.

179.Subsection (6) of section 809Z8 defines ‘agency fees’ as any fees and other incidental costs of a disposal charged to the person making the disposal or any other relevant person by or through whom the disposal is effected. It also provides that ‘agency fees’ excludes any costs either charged by a relevant person or in any way applied for the benefit of a relevant person.

180.Subsection (7) of section 809Z8 provides that the exclusion of costs charged by a relevant person or in any way applied for the benefit of a relevant person from the definition of agency fees does not apply where the fees or costs relate to a service provided by the relevant person in connection with the disposal and do not exceed the amount which would be charged for that service if it were provided in the ordinary course of business on arm’s length terms.

181.New section 809Z9 provides further rules which apply when something is taken offshore or used to make a qualifying investment.

182.Subsection (1) of section 809Z9 provides that section 809Z9 applies to the various provisions in the chapter which require something, including disposal proceeds, to be taken offshore or to be used by a relevant person to make a qualifying investment.

183.Subsection (2) of section 809Z9 defines what is meant by ‘taken offshore’. A thing is taken offshore when it is taken out of the UK such that it ceases to be available to be used or enjoyed in the UK by or for the benefit of a relevant person, or ceases to be available to be used or enjoyed in any other way that would count as a remittance of income or gains to the UK.

184.Subsection (3) of section 809Z9 provides for situations in which money is required to be taken offshore or invested and is paid temporarily into a bank account. Under such circumstances, the money will be regarded as having been taken offshore or invested only where the money taken offshore or invested is taken from the same bank account.

185.Subsection (4) of section 809Z9 provides for circumstances in which something other than money is received as sales proceeds. In such cases, that thing will be regarded as having been taken offshore or invested if it is either taken offshore or invested, or if money or property of the equivalent value is taken offshore or invested.

186.Subsection (5) of section 809Z9 defines ‘the equivalent value’ for the purposes of subsection 809Z9(4) as the market value of the thing at the date of the sale or other disposal which triggered the requirement to send that thing offshore or invest it.

187.Subsection (6) of section 809Z9 provides for situations where consideration is deemed under subsection 809Z8(4) to be equal to the market value because the disposal was not made on arm’s length terms. In such cases, the requirement for proceeds to be taken offshore or invested may be satisfied by taking offshore or investing an amount equal to the deemed consideration less any agency fees deducted before the consideration is paid to or for the benefit of a relevant person.

188.Subsection (7) of section 809Z9 prevents an individual taking offshore or investing an asset of the equivalent value if the asset in question falls within one of three categories: it is exempt property under section 809X, or is consideration for the disposal of exempt property, or is consideration for the disposal of an investment qualifying for business investment relief.  In these three situations, the individual will already be required, under one of the provisions elsewhere in the chapter, to take offshore or re-invest the money or other property in order to take the appropriate mitigation steps.

189.Subsection (8) of section 809Z9 provides that, where an equivalent amount is taken offshore or invested, it is to be treated as deriving from the thing to which it is equivalent and as having the same proportions of kinds of income and capital as that thing.

190.Subsection (9) of section 809Z9 provides that, where there is provision that requires something to be taken offshore or invested, an individual may satisfy that provision by taking the whole thing offshore, investing the whole thing, or taking part offshore and investing the remaining part.

191.Subsection (10) of section 809Z9 provides that references to something being ‘invested’ in this section are to something being used by a relevant person to make a qualifying investment.

192.Subsection (11) of section 809Z9 provides special rules for cases covered by subsection 809VB(2) which requires money brought to the UK for the purposes of making a qualifying investment either to be used for that purpose within 45 days or else taken back offshore within the same period. In such cases, references in section 809Z9 to investing are to be disregarded, and if appropriate the date for valuing a property other than money is the date of the relevant event as defined in subsection 809VA(3).

193.New section 809Z10 provides definitions of the following terms used in the Chapter:

194.Paragraph 17 of the Schedule provides that the amendments made by part 2 of the Schedule apply to any relevant event which takes place on or after 6 April 2012. A relevant event is defined in subsection 809VA(3) as an event in which a relevant person either makes a qualifying investment or brings or receives money or other property  to the UK for the purpose of making such an investment.

Sales of Exempt Property

195.Part 3 of the Schedule introduces a new exemption for the tax which otherwise would arise on the remittance of foreign income and gains when exempt property is sold in the UK. It also treats any UK gain which arises on such sales as a foreign chargeable gain.

196.Exempt property is defined in sections 809X as property deriving wholly or partly from foreign income and gains which meets certain conditions and which would otherwise be subject to tax on the remittance basis if it were brought to the UK. Exempt property does not include property which derives wholly from capital or from UK income and gains or a combination of the two.

197.Under section 809Y(3), exempt property will cease to be exempt property where it is sold or otherwise converted into money in the UK, at which point the foreign income and gains will be taxed on the remittance basis.

198.Paragraph 18 of the Schedule introduces new sections 809YA to 809YD ITA.

199.Subsection (1) of section 809YA provides that exempt property which is sold in the UK will not be treated as a taxable remittance of foreign income and gains where conditions A to F are met.

200.Subsections (2) to (5), (7) and (9) of section 809YA set out conditions A to F for the purposes of section 809YA:

201.Subsection (6) of section 809YA defines ‘the final deadline’ for the purposes of condition D as the first anniversary of the 5 January following the tax year in which the sale takes place. This deadline is necessary to ensure that it falls within the time limit for making amendments to an individual’s self-assessment for the tax year in which the disposal takes place.

202.Subsection (8) of section 809YA provides that, where any of the sale proceeds are released within 45 days of the final deadline, condition E will be met with respect to those proceeds only where they are taken offshore or used to make a qualifying investment on or before the final deadline.

203.Example: if a part of the sale proceeds are released teo days before the final deadline, they still have to be taken offshore by the final deadline, rather than having a further 43 days to be sent offshore or re-invested, in order to meet condition E.

204.Subsection (10) of section 809YA defines when sale proceeds are ‘released’ as the day on which they first become available for use by or for the benefit of any relevant person. This is the case where the proceeds are paid in a number of instalments and where they are paid in a single instalment.

205.Subsection (11) of section 809YA provides that the exemption for sales of exempt property does not apply where such sales are made as part or as a result of a scheme whose main purpose or one of the main purposes of which is tax avoidance.

206.New section 809YB contains supplementary provisions with regard to condition E.

207.Subsection (1) of section 809YB provides that an officer of HMRC can agree to extend the time limit in which sale proceeds, including proceeds paid in separate instalments, must be taken offshore or used to make a qualifying investment in order to meet condition E.

208.Subsection (2) of section 809YB provides that the extension to the time limit stipulated in subsection 809YA(1) can be made only in exceptional circumstances and when a remittance basis user has requested such an extension.

209.New section 809YC describes the effect of disapplying section 809Y.

210.Subsection (1) of section 809YC provides that section 809YC applies where exempt property does not cease to be exempt property when it is sold, or otherwise converted into money, by virtue of section 809YA.

211.Subsection (2) of section 809YC provides that the foreign income and gains which are treated as not having been remitted to the UK under 809X will continue to be treated as not remitted to the UK after the exempt property is sold, even though that property has ceased to be exempt property as a result of that sale.

212.Subsection (3) of section 809YC provides that subsection 809YC(2) will not prevent the underlying income and gains from being treated as remitted to the UK where anything is done with any part of the sale proceeds after they have been taken offshore or used to make a qualifying investment. The underlying income and gains means part or all of the foreign income and gains which were used to purchase the exempt property.

213.Subsection (4) of section 809YC provides that the sale proceeds will be treated as containing or deriving from an amount of each kind of income and gains mentioned in the mixed fund rules in section 809Q(4)(a) to (h) which is equal to the amount of each type of those income or gains contained in the exempt property when it was brought to or received in the UK.

214.Example: an individual purchases property overseas using £2 million foreign income, £3 million foreign gains and £1 million clean capital. They subsequently bring the property to the UK where it is sold for £8 million. Under subsection 809YC(4), the sale proceeds of £8 million are treated as containing or deriving from £2 million foreign income and £3 million foreign gains. Any clean capital used to purchase the property and any UK gains arising on the sale are disregarded for these purposes.

215.Subsection (5)(a) of section 809YC provides that, where the disposal proceeds are used to make a qualifying investment, the foreign income and gains which continue to be treated as not remitted under subsection 809YC(2) will be subject to the business investment provisions in the same way as those provisions apply to income or gains which are treated as not remitted because they are used to make a qualifying investment under subsection 809VA(2).

216.Subsection (5)(b) of section 809YC provides that, where the disposal proceeds are used to make a qualifying investment, and where other amounts were also used to make the investment, only that part of the investment made using the disposal proceeds is treated as the investment for the purposes of the business investment provisions.

217.New section 809YD provides that a charge to CGT which accrues on a disposal of exempt property in the UK will be treated as a foreign chargeable gain when the sale is made in circumstances in which section 809YA applies.

218.Subsection (1) of section 809YD provides that section 809YD applies to an individual where a chargeable gain (‘the relevant UK gain’) accrues on the sale of exempt property which would, in the absence of section 809YA, be treated as remitted to the UK as a result of that sale under subsection 809Y(1). For the purposes of this section, an individual is either the person to whom the gain accrues or a person to whom part of the gain is treated as accruing by virtue of being a UK resident participator in a company resident outside the UK.

219.Subsection (2) of section 809YD treats the relevant UK gain for the purposes of the remittance basis as if it were the individual’s foreign chargeable gain. In the case of an individual who is taxed on the remittance basis without a requirement to make a claim to do so by virtue of section 809E, it also treats the relevant UK gain as it if were not part of their UK income and gains.

220.Subsection (3) of section 809YD provides that, where the individual is not domiciled in the UK and is taxed on the remittance basis in the applicable tax year, the relevant UK gain is charged as if it were a foreign chargeable gain in accordance with section 12 of TGCA.

221.Subsection (4) of section 809YD defines ‘relevant UK gain’ for the purposes of section 809YD as the gain accruing to the individual or, in the case of a person to whom part of the gain is treated as accruing by virtue of being a UK resident participator in a company resident outside the UK, as that part of the gain which is treated as accruing to him.

222.Subsection (5) of section 809YD defines ‘applicable tax year’ for the purposes of section 809YD as the year in which the relevant UK gain accrues. In cases where the gain accrues when the individual is temporarily non-resident and the gain is treated as accruing in the year in which they become resident or ordinarily resident in the UK (the ‘year of return’), it also defines ‘applicable tax year’ as that year of return.

223.Subsection (6)(a) of section 809YD provides that, in applying this Chapter to a relevant UK gain, any foreign chargeable gains which are treated as contained in the sale proceeds by virtue of subsection 809YC(4) are increased by the amount of the relevant UK gain.

224.Example: an individual purchases property overseas using £5 million of their foreign chargeable gains and £1 million clean capital which they bring to the UK. The property is sold for £7 million. The sale proceeds will be treated as containing £6 million foreign chargeable gains, made up of the £5 million gains used to purchase the property plus the £1 million relevant UK gain accruing on the sale of the property.

225.Subsection (6)(b) of section 809YD provides that, in applying this Chapter to a relevant UK gain, section 809U should be disregarded because it has no relevance to the application of section 809YD.

226.Subsection (6)(c) of section 809YD provides that, in applying this Chapter to a relevant UK gain, anything which is done in relation to any part of the sale proceeds before it is taken offshore or used to make a qualifying investment is not treated as a remittance of any of the relevant UK gain to the UK.

227.Subsection (7) of section 809YD provides that the relevant UK gain is treated as if it were a foreign chargeable gain for the purposes of the following sections of TCGA:

228.Subsection (8) of section 809YD provides that section 809YD applies despite section 14A(2) TGCA, which otherwise holds that the part of the chargeable gain treated as accruing to an individual under section 12 is a foreign chargeable gain if, and only if, the asset is situated outside the UK.

229.Subsection (9) of section 809YD provides that section 809YD does not apply to a chargeable gain where an individual gives notice to HMRC.

230.Subsection (10) of section 809YD provides that a notice given under subsection 809YD(9) must be provided in writing, must identify the gain in question and must be given no later than a year after the 31 January of the year following the applicable tax year and cannot be revoked after that date.

231.Paragraph 19 of the Schedule provides that the exemption provided by paragraph 18 is available for all sales of exempt property sold on or after 6 April 2012.

Nominated Income

232.Part 4 of the Schedule amends the rules which determine the tax treatment of nominated income and gains remitted to the UK.

233.Paragraph 20 of the Schedule disapplies section 809I ITA where the new £10 test is not met.

234.Sub-paragraph (2) of paragraph 20 introduces the £10 test into section 809I(1).

235.Sub-paragraph (3) of paragraph 20 defines a ‘nomination year’ for the purposes of section 809I as any year in which an individual has nominated income and gains under section 809C ITA.

236.Sub-paragraph (4) of paragraph 20 introduces the £10 test as new subsections (5) and (6) of section 809I. An individual will breach the £10 test in a tax year where they have remitted any of their nominated income and gains and the amount of nominated income and gains from any one tax year which is remitted exceeds £10. Provided an individual never nominates more than £10 of their foreign income or gains from a particular tax year, they will never breach the £10 test.

237.Example: in year one, an individual nominates £15 of foreign income or gains and remits £5 of the nominated amount to the UK.  As the total amount of nominated income and gains remitted in year one is less than £10, they do not meet the £10 test and section 809I does not apply.  In year two the individual remits the balance of nominated income from year one consisting of £10 to the UK.  The cumulative total of nominated income and gains from year one remitted to the UK now exceeds £10, so the ordering rules in section 809I will apply.

238.Paragraph 21 of the Schedule provides that the amendments made by paragraph 20 apply for the tax year 2012-13 or any subsequent tax year.

Background Note

239.The remittance basis is an alternative basis of taxation which applies to foreign income and capital gains. It is available to UK resident individuals who are not domiciled and/or not ordinarily resident in the UK. Such individuals have the option of electing to be taxed on the remittance basis and those who do so are liable to UK tax on all their income and capital gains which arise in the UK, but only liable to UK tax on their foreign income and capital gains to the extent that they are remitted to the UK.

240.The remittance basis rules were revised in Finance Act 2008. The main revisions were the introduction of an annual Remittance Basis Charge of £30,000 for individuals who had been resident in the UK for at least seven out of the preceding nine years and who wished to claim the remittance basis and a series of provisions to address a number of loopholes and anomalies in the previous remittance basis regime.

241.Further minor changes to the remittance basis were introduced in the Finance Acts 2009, 2010 and 2011.

242.At Budget 2011, the Government announced a package of measures to reform the remittance basis with the objective of ensuring that non-domiciled individuals pay a fair tax contribution and of encouraging them to bring their foreign income and gains to the UK to invest in businesses. It also announced a number of technical simplifications to some aspects of the current rules to reduce undue administrative burdens.

243.On 17 June 2011, the Government published a consultation document, ‘Reform of the taxation of non-domiciled individuals: a consultation’ which sought views on the detailed design of the changes announced in the Budget. Consultation ended on 9 September 2011.

244.The main features of the proposed reforms were:

245.The Government published its response to the representations made during the consultation on 6 December 2011.

246.Following further consultation, a number of changes were made to the draft legislation, including a new exemption for CGT on sales of exempt property and a new provision to allow individuals taking advantage of the investment relief to retain an amount of the proceeds from the disposal of an investment in the UK to meet any CGT liability. A series of further minor changes were made to the legislation in response to representations made during consultation. The consultation period ended on 10 February 2012.

Increased Remittance Basis Charge

247.Under section 809H ITA, individuals who have been UK resident in at least seven of the nine preceding tax years are required to pay an annual charge of £30,000 to access the remittance basis.

248.Part 1 of the Schedule introduces an increased annual charge of £50,000 payable by individuals who have been UK resident in at least 12 of the preceding 14 tax years. Those individuals who have been UK resident in at least seven of the nine preceding tax years and who claim the remittance basis will still be required to pay the annual charge of £30,000.

Remittance for Investment Purposes

249.Under the existing rules, remittance basis taxpayers are liable to UK tax on any foreign income or capital gains which they remit to the UK, irrespective of the purpose for which those income and gains are used. This can discourage such individuals from making commercial investments in the UK. Part 2 of the Schedule seeks to remove this disincentive by allowing remittance basis taxpayers to bring their overseas income and gains to the UK without becoming liable to tax provided they are brought to the UK for the purpose of making a commercial investment in a qualifying company.

250.To prevent abuse, there are a number of conditions to prevent an investor from using the relief as a means of enjoying their overseas income and gains in the UK tax-free.

Sales of Exempt Property

251.Sections 809X to 809Z6 ITA contain certain exceptions to the remittance basis which permit an individual to bring property purchased out of unremitted foreign income and gains to the UK without being taxed on the remittance of those income and gains. These exceptions are where the property is:

252.Such property is defined as ‘exempt property’ in section 809X ITA. Under section 809Y ITA, these exceptions cease to be available where the property is sold or otherwise converted into money whilst in the UK. This can be a disincentive to remittance basis taxpayers who wish to sell such property in the UK. The changes introduced by Part 3 of the Schedule seek to remove this disincentive by allowing exempt property to be sold in the UK without a tax liability arising.

253.In order to qualify for the exemption, the entire sale proceeds must be paid to the seller by the first anniversary of the 5 January following the tax year in which the sale takes place. This is in order to ensure that the exemptions can operate within the Self Assessment system.

254.This part of the Schedule also introduces a new rule which treats gains arising on sales of exempt property as foreign chargeable gains where the conditions are met for the exemption from the tax on the remittance of exempt property.

Nominated Income

255.Under section 809H ITA, individuals who have been UK resident in at least seven of the nine preceding tax years are required to pay an annual charge of £30,000 to access the remittance basis. Part 1 of the Schedule introduces a further annual charge of £50,000 for individuals who have been UK resident in at least 12 of the preceding 14 tax years.

256.Under section 809C, such individuals are required to nominate an amount of their foreign income or gains for each tax year in which they are liable to pay the annual remittance basis charge. This nominated amount forms the basis for calculating the annual charge.

257.Where such individuals remit the foreign income and gains which they have nominated under section 809C before any other of their foreign income and gains, the order in which those income and gains are remitted is determined by rules in sections 809I and 809J.

258.The amendments made by part 4 of the Schedule allow such individuals to remit up to £10 of their nominated income or gains each year without having to take steps to ensure that no part of that nominated amount is remitted to the UK before other foreign income or gains.

Section 48 Schedule 13: Employer Asset-Backed Pension Contributions Etc

Summary

1.Section 48 and the first four parts of Schedule 13 amend Part 4 of Finance Act (FA) 2004 as it relates to employer pensions tax relief by inserting a number of new sections into FA 2004 as well as providing transitional provisions in order to ensure that the amount on which relief is given in respect of a contribution paid by any employer accurately reflects, but does not exceed, the payments received by the registered pension scheme.

2.Specifically, the Schedule will apply to asset-backed contribution (ABC) arrangements used by some employers to fund their registered pension schemes.

3.An ABC arrangement involves offsetting an employer’s legal obligation to pay a pension contribution against the registered pension scheme’s legal obligation to purchase an asset from the employer directly or indirectly, using the contribution. There are also ABC arrangements that involve an upfront monetary contribution.

4.These types of arrangement enable an employer, or a person connected with the employer (hereafter referred to as “the employer etc”), to provide for payments over a period of time (or an income stream) to the pension scheme. A more complex ABC arrangement typically involves a special purpose vehicle (for example, a partnership of which the employer is a member (an employer-related partnership)), in which case the employer provides the pension scheme with the income stream indirectly through the vehicle. The income stream is derived from assets of the employer or a connected party including an employer-related partnership.

5.Part 5 of the Schedule contains minor and related amendments to the structured finance legislation(2), which concerns structured finance arrangements (SFAs).

6.Detail of the commencement provisions applicable to these parts is given in the following sections. References to Parts, sections or paragraphs are references to the Schedule unless otherwise stated. Where a reference to a section can mean a reference to it in Part 1 or Part 3, then a reference to the relevant Part is also given.

Details of the Schedule

7.Part 1 inserts new sections 196B to 196I after section 196A FA 2004. These provisions have effect on the contribution paid between 29 November 2011 and 21 February 2012 under an ABC arrangement.

8.However, new section 196G also applies to pre-November arrangements that are SFAs. In addition, it contains provisions that have effect on certain events that take place on or after 21 March 2012. There are two types of events. The first type places a person in a more advantageous tax position as a result of the application of the new section 196G. The second type relates to an employer ceasing to be chargeable to tax as set out in new section 196H.

9.Part 2 (paragraphs 4-14) introduces transitional provisions for ABC arrangements where the contribution was paid before 29 November 2011 and the SFA rules do not apply. For those arrangements where the contribution was paid before 22 February 2012, which are ‘acceptable’ SFAs(3), the transitional provision is new section 196G in Part 1 (detail in the next section). If they are unacceptable SFAs(4), then Part 4 (see paragraph 13 below) applies from 22 February and new section 196G in Part 1 only applies to events that occur between 29 November and 21 February.

10.There are also provisions to recover excess relief when an employer ceases to be chargeable to tax by regarding the date of such cessation as the date on which the arrangement is completed. These provisions have effect from 21 March 2012.

11.Part 3 inserts new sections 196B to 196L after section 196A FA 2004. These provisions have effect on the contribution paid on or after 22 February 2012 under an ABC arrangement.

12.However, new section 196I in Part 3 contains provisions that have effect on certain events that take place on or after 21 March 2012. There are two types of events. The first type places a person in a more advantageous tax position as a result of the application of the new section 196I. The second type relates to an employer ceasing to be chargeable to tax as set out in new section 196J in Part 3.

13.Part 4 (paragraphs 18-31) introduces transitional provisions for those ABC arrangements where the contribution was paid before 22 February 2012, the arrangement is not an acceptable SFA and Part 2 does not apply. There are also provisions similar to those included in new section 196J in Part 3 and these have effect from 21 March 2012.

14.Part 5 (paragraphs 32-42) provides for minor and related changes to the SFA rules. They have effect in relation to arrangements whenever made but only on those amounts arising on or after 21 March 2012.

Part 1 – sections 196B to 196I and paragraphs 2-3

15.The new provisions in Part 1 follow the design of the structured finance legislation (see footnote 1) which applies where a person enters into a SFA. This is an arrangement where in accordance with generally accepted accounting practice, a person (the borrower) records in the borrower’s accounts a financial liability in respect of a sum (the advance) paid by “the lender”, and the advance will be repaid by an income stream.

16.In the case of ABC arrangements, the obligations of the employer and the registered pension scheme give rise to a situation similar to a SFA, where “the borrower” is the employer etc or an employer-related partnership or other relevant person, and the borrower receives money or another asset (the advance) from the pension scheme (the lender). The advance is wholly or partly funded out of the employer’s contribution and the lender is entitled to a series of payments in respect of the borrower’s asset (the security).

17.The main provisions (new sections 196B to 196D) will deny pensions tax relief (upfront relief) to the employer on the contribution paid using the ABC arrangement if the SFA rules do not apply. Instead deductions against the profits or income of the employer will be given in respect of each payment that the employer makes to the pension scheme (the lender) directly or indirectly under the income stream (“pay as you go” relief). Amounts of an income stream, which were previously taxable in the hands of the employer, are likely to cease to be taxable upon the transfer of the income stream to the lender or a connected person (the lender etc).

18.There are also revenue protection provisions (new sections 196F to 196H) –

19.However, in the examples of the events mentioned in the second bullet of the last paragraph, new sections 196G and 196H will only have effect when either event takes place on or after 21 March 2012. Otherwise these provisions will have effect on events that take place on or after 29 November 2011.

20.A series of new provisions – new sections 196E, 196I and 196J – provide for supplementary provisions and application. Paragraph 2 makes consequential changes and paragraph 3 makes provision for commencement of the new provisions.

The simple case – new section 196B

21.New section 196B deals with the simple case where the employer etc is the borrower and the lender is a person who acts for, or is otherwise connected with, the registered pension scheme. It stipulates in sub-section 1 the conditions under which relief under section 196 FA 2004 (upfront relief) will not be given to the employer (the borrower) in respect of a contribution paid under the ABC arrangement.

22.New sections 196B(2), (4) and (5) set out these conditions as follows:

23.New section 196B(2) also makes it clear that those arrangements that fall within new section 196C(2) and 196D(2) do not fall within new section 196B(2).

24.New section 196B(3) states that condition A is met even if an entitlement of the lender etc is subject to any condition.

25.New section 196B(6) makes it clear that condition C is met even if repayments of the loan might be subject to any condition, or the accounts of any person do not record a financial liability in respect of the advance or is not otherwise treated as representing a loan for the purposes of the accounts of any person. However, this is subject to all the relevant circumstances being taken into account in order to get to the essence of the matter.

26.New section 196B(7)(a) ensures that references to a person connected with the borrower or lender do not include the lender or borrower respectively. This means that new section 196B cannot be triggered accidentally just because the borrower and lender are connected. New section 196B(7)(b) ensures that if the borrower is not the employer, the reference to a person connected to the borrower includes a person connected with the employer who would not otherwise be connected with the borrower.

The complex case – new sections 196C and 196D

27.New sections 196C and 196D deal with complex types of ABC arrangement involving a partnership receiving the advance, and changes in profit sharing arrangements in relation to the lender etc.

28.New section 196C will apply where, as part of the ABC arrangement which is used to make the contribution, the employer etc (the transferor) transfers an asset to a partnership and is a member of that partnership immediately after the transfer (whether or not a member immediately before the transfer), and there is a relevant change in relation to the partnership as set out in new section 196E. In that circumstance, new section 196C(1) provides that the employer will not receive upfront tax relief under section 196 FA 2004 in respect of the contribution paid to the registered pension scheme when conditions A and B are met.

29.New sections 196C(2) and (5) set out these conditions as follows:

30.New section 196C(3) ensures that where the transferor is not the employer, the reference to a person connected to the transferor includes a person connected with the employer who would not otherwise be connected with the transferor.

31.New section 196C(4) provides that condition A is met even if the determination of the share of partnership’s profits is subject to any condition.

32.New section 196D will apply where the ABC arrangement which the employer uses to make the contribution to the pension scheme also involves a partnership receiving the advance but the security is held by a pre-existing partnership. As part of the ABC arrangement, the partnership receives an advance that is funded in some way by the employer’s contribution. In that circumstance, new section 196D(1) provides that the employer will not receive upfront tax relief under section 196 FA 2004 in respect of the contribution paid to the registered pension scheme under the ABC arrangement when conditions A and B are met.

33.New sections 196D(2) and (4) set out these conditions as follows:

34.New section 196D(3) provides that condition A is met even if the determination of the share of partnership’s profits is subject to any condition.

35.New section 196E provides that a relevant change in relation to the partnership occurs (which in turn enables the conditions in new sections 196C and 196D to be met) if one of the conditions - condition X or condition Y - is met. New sections 196E(2) and (3) set out these conditions as follows:

36.References used in this new section and in new sections 196C and 196D are explained in new sections 196E(4) and (5).

Anti-avoidance – new section 196F

37.New section 196F is an anti-avoidance provision to deny upfront relief or recover any relief already given when the employer etc sets up an arrangement (the avoidance arrangement) mainly for the purpose of securing tax relief that will exceed the amount the employer should receive relative to the total amount of payments the employer will make to the pension scheme under the ABC arrangement. This provision will only apply to ABC arrangements where the contribution is paid between 29 November 2011 and 21 February 2012 and its effect continues after 21 February.

38.New section 196F(1) provides that this new provision applies where the employer etc enters into an avoidance arrangement and where upfront relief for the ABC arrangement is not denied under new sections 196B, 196C, or 196D because the arrangement is a SFA.

39.New section 196F(2) provides that where the avoidance arrangement is entered into at or before the time when the advance referred to in new sections 196B, 196C or 196D is received, upfront relief is denied on the contribution paid under the ABC arrangement by deeming that Condition B in one of those sections is met.

40.New section 196F(3) provides that where the avoidance arrangement is entered into after the advance is received, then the amount of the relevant financial liability at the time the avoidance arrangement is entered into is treated as profit or income that is charged to the employer for the period in which that time falls.

41.New section 196F(4) sets out that the amount treated as profit or income is not to exceed the total amount of relief given to the employer in respect of the ABC arrangement. The terms used in this new section are defined in new section 196F(5).

Relief recovery for a financial liability reduction by an event other than the making of payments – new sections 196G and 196H

42.New section 196G is a new provision to recover upfront relief given to an ABC arrangement (including a pre-November arrangement) that is an acceptable SFA when the financial liability is later reduced by an event other than the making of payments. This provision applies to this type of ABC arrangement where the contribution is paid at any time before 21 February 2012 but in the case of those arrangements with contributions paid before 29 November 2011, it only applies where the event occurs on or after 29 November 2011. There are two exceptions to these commencement provisions and they concern new section 196G(3) and new section 196H (which is an extension of new section 196G) - see details in paragraphs 45, and 48 to 50 below.

43.New section 196G(1) provides that the section applies where the ABC arrangement is an acceptable SFA, and an event, other than the making of payments to the pension scheme, occurs which results in the advance (or part of it) no longer being recorded as a financial liability in the employer’s (or partnership’s) accounts.

44.If the financial liability is reduced to nil, the ABC arrangement will cease to be a SFA under new section 196G(2).

45.New section 196G(3) cancels the effect of the application of new section 196G if a person is to be placed in a tax position which is more advantageous than the tax position in which the person would have been had new section 196G never applied. This subsection will have effect from 21 March 2012.

46.New section 196G(4) provides that the amount of the reduction in the relevant financial liability immediately before this event will be treated as profit or income chargeable on the employer in the period in which the event occurs.

47.New section 196G(5) provides that the amount treated as profit or income under new sub-section 4 cannot exceed the total amount of relief already given to the employer in respect of the arrangement. The terms used in new section 196G are defined under new section 196G(6).

48.New section 196H is an extension of new section 196G as set out in new section 196H(1).

49.New section 196H provides in new subsections (2) and (3) that the financial liability is treated as being reduced to nil in the relevant period of accounts(5) when the employer who has an ABC arrangement where the contribution was paid between 29 November 2011 and 21 February 2012, ceases to be chargeable to tax on or after 21 March 2012.

50.New sections 196H(4) and (5) set out the circumstances under which such cessation takes place. There are different circumstances depending on whether the employer’s business is a company, a limited liability or other type of partnership. These circumstances also include cases where the employer company goes into administration or winds up, or the employer partnership dissolves or when an individual who is the employer dies.

Treatment of advances that fall within the SFA rules – new section 196I

51.New section 196I provides that any advance made before 22 February 2012 under an ABC arrangement that is a SFA and that gives rise to a loan within the meaning of Chapter 3 of FA 2004 is not prevented from meeting the definition of a scheme administration employer payment in S180 FA 2004 regardless of whether the advance also meets the definition of a loan for the purposes of FA 2004. This means that no unauthorised payment charge will arise under section 208 FA 2004 purely by virtue of the fact that the advance gives rise to a loan which is not capable of meeting the conditions of section 179 FA 2004.

Supplementary provisions and application – new section 196J and paragraph 2

52.New section 196J provides a number of definitions and other supplementary provisions for new sections 196B to 196I.

53.New section 196J(2) explains the references to relief being given in respect of a contribution paid by an employer under a registered pension scheme.

54.New section 196J(3) refers to the meaning of connected persons in section 1122 Corporation Tax Act (CTA) 2010.

55.New section 196J(4) explains the references to a SFA are to the definition of a type 1, type 2 or type 3 arrangement under Part 13 of the Income Tax Act (ITA) 2007 (for income tax purposes) or Part 16 of CTA 2010 (for corporation tax purposes).

56.New section 196J(5) provides that sections 774 (accounts), 775 (arrangements) and 776 (assets) of CTA 2010 apply to new sections 196B to 196I in the same way as they do for the purposes of Part 16 of CTA 2010.

57.Paragraph 2 make a consequential amendment to section 280(1) FA 2004 (abbreviations) by inserting a reference to CTA 2010.

Commencement and application of new sections 196B to 196J – paragraph 3

58.Paragraphs 3(1) and (2) provide that the amendments made by new sections 196B to 196J shall have effect for contributions paid by employers between 29 November 2011 and 21 February 2012.

59.Paragraph 3(3) provides that new section 196G also has effect for contributions paid before 29 November 2011 where the relevant event as described in new section 196G(1)(d) occurs on or after 29 November 2011. Where this paragraph applies, new sections 196B to 196D also have effect for the purpose of applying new section 196G.

60.Paragraph 3(4) provides that new section 196G(3) only has effect on an event as set out in that section when it takes place on or after 21 March 2012.

61.Paragraphs 3(5) and (6) respectively provide that new sections 196H and 196I also have effect for contributions paid before 29 November 2011 and assumes that new sections 196B to 196D have effect in relation to these contributions for the purposes of applying new sections 196H and 196I.

Part 2 - Transitional rules (paragraphs 4 to 14)

62.Part 2 contains transitional provisions which apply the “relevant effect” of the SFA rules to any pre-November ABC arrangement that does not fall within the SFA rules. These rules apply to income amounts that arise on or after 29 November 2011. There are also rules to introduce a mechanism to make a tax adjustment at the end of any of these arrangements which ensures the employer receives tax relief in respect of the total amount of payments made to the pension scheme under the ABC arrangement.

63.The transitional provision that will apply to pre-November ABC arrangements which are acceptable SFAs is new section 196G. This section recovers any excess relief given where the relevant event occurs on or after 29 November 2011, with the exception of sub-section (3) where the relevant event occurs on or after 21 March 2012, as set out in the preceding section concerning Part 1 of the Schedule. Further detail can be found in that section and is not repeated in this part of the note.

Detail of transitional rules
Paragraphs 4 to 8 – application and interpretation

64.Paragraphs 4-8 provide for application and interpretation of the terms used in Part 2.

65.Paragraph 4 provides that transitional provisions will apply where an ABC arrangement with the contribution paid before 29 November 2011 would not have received relief under new sections 196B to 196D in Part 1 had the contributions been paid on or after 29 November 2011 and the arrangement is not ‘completed’ as determined under paragraph 6 before that date.

66.Paragraph 5 provides that for the purposes of Part 2, the terms used in new sections 196B to 196D in Part 1 have the same meaning as in those new sections and where necessary it is assumed that those new sections have effect in relation to the employer’s contribution.

67.Paragraph 6 provides that an ABC arrangement that would be denied upfront relief under new sections 196B, 196C or 196D in Part 1 had the contribution been paid on or after 29 November 2011 is completed if :

“Responsible authority” is defined under paragraph 6(7) to mean those persons who from time to time are either the trustees of the relevant pension scheme or the persons controlling its management.

A responsible authority is entitled to a payment in connection with the ABC arrangement if it is entitled to the payment directly or indirectly in consequence of the arrangement or otherwise in connection with the arrangement.

Payments include drawings or distributions from a partnership, payments in respect of security and other payments in respect of an asset as read in accordance with section 776(4)(b) of CTA 2010.

68.Paragraph 7 provides that “the completion day” is the earliest of the day on which the ABC arrangement is to be completed as determined as at the beginning of 29 November 2011, or the day on which the arrangement is actually completed, or after 22 February 2012, the day on which a completion event takes place, or after 21 March 2012, an event as set out in paragraph 8 occurs. Only changes to payments made to the pension scheme in connection with an ABC arrangement will be taken into account in a completion event.

69.Paragraph 7(3) explains when a completion event occurs. This is where there is a change in the number of either payments or drawings/other payments, a significant change in the amount of either a payment or a drawing/other payment is to be made, or a significant change in the time at which either a payment or a drawing/other payment is to be made.

70.A “paragraph 8” event occurs when the employer ceases to be chargeable to tax. Paragraph 8 sets out the circumstances, similar to those set out in new sections 196H(4) and (5) in Part 1, surrounding such cessation (see paragraphs 48 to 50 above concerning Part 1).

71.These two paragraphs (7 and 8) prevent the employer seeking to extend the duration of the arrangement or make a material change to the original position as at 22 February or 21 March 2012 (depending on the type of events) to avoid the transitional provisions set out in paragraphs 12 to 14.

Paragraphs 9 to 11 – certain tax consequences not to have effect

72.Paragraphs 9-11 deem the relevant ABC arrangements not to have “the relevant effect” as set out in paragraphs 9(3), 10(3) and 11(2). This means that on or after 29 November 2011, no deduction will be given to any income payments that the borrower (the employer or a connected party or other relevant person) makes to the lender etc under the ABC arrangement and any income amounts that have been transferred to the lender etc will be bought back into tax charge on the employer etc or other relevant person.

73.Paragraph 9(1) provides that paragraph 9 applies to an ABC arrangement where, had the employer’s contribution been paid on or after 29 November 2011, new section 196B in Part 1 would have applied so that the arrangement would have the “relevant effect”. The “relevant effect” defined in paragraph 9(3) is that the borrower etc (the employer etc) would receive relief for payments to the lender etc (the pension scheme) made under the arrangement either by way of an income deduction or by an income amount which would otherwise have been charged to tax not being so charged.

74.Paragraph 9(2) deems the arrangement not to have the “relevant effect” which is set out in paragraph 9(3). This means that either no relief will be given for any income payments the borrower etc (the employer etc) makes to the lender etc (the pension scheme) under the ABC arrangement or any income amounts that would have been charged to tax if not for the ABC arrangement will be brought back into tax as a charge on the employer etc.

75.Paragraph 9(4) defines the relevant effect if the borrower is a partnership.

76.Paragraph 9(5) provides that “amount” in sub-paragraphs 3 and 4 means an amount that arises on or after 29 November 2011 but on or before the completion day as set out in paragraph 7. This means that before the completion day, this paragraph prevents relief for income payments made on or after 29 November 2011 or brings back income amounts into charge from that date.

77.Paragraph 10(1) provides that paragraph 10 applies to an ABC arrangement where, had the employer’s contribution been paid on or after 29 November 2011, new section 196C in Part 1 would have applied so that the ABC arrangement would have the “relevant effect”. The “relevant effect”, defined in paragraph 10(3), is that the transferor etc (the employer etc) would receive relief either by way of an income deduction or by an amount which would otherwise have been charged to tax not being so charged.

78.Paragraph 10(2) deems the arrangement not to have the “relevant effect”. This means that either no relief will be given for any income payment made by the partnership to the lender etc (the pension scheme) under the arrangement or any amount that would have been charged to tax if not for the ABC arrangement will be brought back into tax as a charge on the transferor etc (the employer etc).

79.Paragraph 10(4) provides that for the purposes of sub-paragraph 3, “amount” means an amount that arises on or after 29 November 2011 but on or before the completion day as set out in paragraph 7. This means that before the completion day, this paragraph prevents relief for income payments made on or after 29 November 2011 or brings back income amounts into charge from that date.

80.Paragraph 10(5) provides that in determining whether the ABC arrangement would have the relevant effect, it is to be assumed that the amounts of income equal to the payments mentioned in new section 196C(2)(g) were payable to the partnership before the relevant change occurred.

81.Paragraph 11(1) provides that paragraph 11 applies to an ABC arrangement where had the employer’s contribution been paid on or after 29 November 2011, new section 196D in Part 1 would have applied so that the ABC arrangement would have the “relevant effect”. The “relevant effect”, defined in paragraph 11(2), is that the “relevant member” would receive relief by way of an income deduction or by an income amount which would otherwise have been charged to tax not being so charged.

82.Paragraph 11(3) provides that a “relevant member” is a person who was a member of the partnership immediately before the relevant change in the partnership occurred and the person is not the lender.

83.Paragraph 11(4) provides that for the purposes of sub-paragraph 2, “amount” means an amount that arises on or after 29 November 2011 but on or before the completion day as set out in paragraph 7. This means that before the completion day, this paragraph prevents relief for income payments made on or after 29 November 2011 or brings back income amounts into charge from that date.

84.Paragraph 11(5) deems the arrangement not to have the “relevant effect” as set out in paragraph 11(2). This means no relief will be given for any income payments made from the partnership to the lender (the pension scheme) or any income amounts that would have been charged to tax if not for the ABC arrangement will be brought back into tax as a charge on the relevant member (the employer etc or other relevant person).

85.Paragraph 11(6) provides that in determining whether the ABC arrangement would have the relevant effect, it is to be assumed that the amounts of income equal to the payments mentioned in new section 196D(2)(e) were payable to the partnership before the relevant change occurred.

Paragraphs 12 to 14 adjustments

86.Paragraphs 12-14 provides for a tax adjustment on the employer when the ABC arrangement ends to ensure that the total amount on which relief is given to the employer will accurately reflect, but will not exceed, the total amount of payments actually given to the pension scheme under the arrangement.

87.This adjustment mechanism will take into account not just all the payments actually made to the pension scheme but also all the relief in the form of deductions against taxable profits or income given to the employer before and after 29 November 2011. Any deductions and payments given before 29 November 2011 will be cancelled out in the overall adjustment so the amounts set out in paragraphs 12-14 do not include these sums. The adjustment can result in either a charge on the employer or further tax relief.

88.The following example uses the facts as set out in Example 3 in the consultation document, Employer Asset-backed Pension Contributions (6) published on 24 May 2011 on both the HMRC and HM Treasury websites, and illustrates how the adjustment mechanism as set out in paragraphs 12-14 works.

89.Paragraph 12(1) defines Amount A, Amount B and Amount C for the purposes of making tax adjustment as set out in paragraphs 13 and 14:

90.Paragraph 12(2) defines “income deduction” for the purposes of sub-paragraph 1.

91.Paragraphs 12(3) and (4) provide that where, had the employer’s contribution been paid on or after 29 November 2011, new section 196B in Part 1 would have applied, Amount C is the payment (if any) which the borrower etc makes to the lender etc in order to acquire the security or an asset in place of the security under the ABC arrangement.

92.Paragraphs 12(5) and (6) provide that where, had the employer’s contribution been paid before 29 November 2011, new sections 196C or 196D in Part 1 would have applied, Amount C is the payment (if any) which the employer etc makes to the lender etc in order to reverse the relevant change in relation to the partnership or any payment made by the employer etc to the responsible authority to buy back its interest in any partnership involved in an arrangement.

93.Paragraphs 12(7) provides that Amount C is to be taken to be nil where, between 22 February 2012 and the day before the completion day, a commitment is given to a “relevant person” directly or indirectly and the commitment is to secure that a person receives money or another asset that is linked to the making of the payment covered by Amount C.

94.Paragraph 12(8) defines “relevant person” as the employer, a person connected with the employer, a person acting at the direction or request, or with the agreement of the employer or the connected person, a person chosen by the employer or the connected person or a class of person so chosen, or a partnership. However, as set out in paragraph 12(9), the relevant person does not include the persons who from time to time are the trustees of the pension scheme or the persons controlling the management of the scheme.

95.Paragraph 13 provides that at the end of the completion day, if the amount of tax relief that has been given to the employer in respect of the contribution paid under an ABC arrangement is greater than the total amount of payments made to the pension scheme, then the excess tax relief in the form of the difference between the two amounts will be recovered from the employer.

96.Paragraphs 13(1) and (2) provide that where amount A is greater than the sum of Amount B and Amount C, the excess will be either treated as a profit or income arising on the employer in the period of accounts (see footnote 4) in which the completion day falls.

97.Paragraph 14 provides that that at the end of the completion day, if the amount of tax relief that has been given to the employer in respect of the contribution paid under the ABC arrangement is less than the total amount of payments made to the scheme, then the employer will be entitled to additional relief. Where the sum of Amount B and Amount C exceeds Amount A, the excess is treated as an employer contribution paid on the completion day for which the employer is to be given relief in accordance with section 196 FA 2004.

Part 3 – sections 196B to 196L and paragraphs 16-17

98.Part 3 follows the design of Part 1 including a reference to the SFA legislation. The main difference is the introduction of new qualifying conditions set out in new sections 196C, E and G that must be met in respect of ABC arrangements in order to qualify for upfront relief.

99.The main provisions (new sections 196B to 196G) of Part 3 will deny upfront relief to the employer on a contribution paid using an ABC arrangement if the arrangement does not meet the new qualifying conditions. Instead deductions against the profits or income of the employer will be given in respect of each payment that the employer makes to the pension scheme (the lender) directly or indirectly under the income stream (“pay as you go” relief). Amounts of an income stream, which were previously taxable in the hands of the employer, are likely to cease to be taxable upon the transfer of the income stream to the lender or a connected person (the lender etc). However, if the arrangement is an unacceptable SFA with the contribution paid on or after 22 February, relief is only given to the finance charge under the SFA rules.

100.There is a revenue protection provision (new section 196I) to ensure that, where an arrangement is an acceptable SFA and has received upfront relief, excess tax relief is recovered when certain changes or events occur. A balancing tax charge will arise by treating the outstanding financial liability immediately before these events as an amount of income or profit of the employer. If the financial liability is only reduced in part, then only the excess relief will be recovered at the time when that event occurs.

101.The provisions will have effect from 22 February 2012 with the exception of events that are set out in new sections 196I(6) and 196J (see paragraphs 45, and 48 to 50 above which describe similar provisions in section 196G(3) and 196H in Part I); the provisions will only have effect on those events that occur on or after 21 March 2012.

102.A series of new provisions – new sections 196H, 196K and 196L – provide for supplementary provisions and application. Paragraph 16 makes consequential changes and paragraph 17 makes provision for commencement of the new provisions.

The simple case – new sections 196B and 196C

103.All the conditions for the simple case as set out in Part 1 (see paragraphs 21-26 above) remain unchanged with the exception of Condition B where the reference is made to an acceptable SFA rather than a SFA. This new reference is required in relation to new qualifying conditions which are set out in new section 196C.

104.New section 196C set out the following conditions that must be met for those ABC arrangements that fall within Conditions A, B and C of new section 196B before they can qualify as an acceptable SFA:

105.New section 196C(10) defines “relevant person” which has the same meaning as “relevant person” (as defined in paragraph 11(8) of the new Schedule) in relation to Amount C. New section 196C(11) stipulates that the “responsible authority” means the trustees or the persons in control of the management of the pension scheme.

The complex case – new sections 196D to 196G

106.New sections 196D to 196G deal with complex types of ABC arrangement involving a partnership receiving the advance, and changes in profit sharing arrangements in relation to the lender etc as set out in Part 1 (see paragraphs 27-36 above). As with the simple case, the only change in the conditions for the complex case is in relation to Condition B where the reference is made to an acceptable SFA as set out in new sections 196E and G respectively.

107.The new qualifying conditions are similar to those applicable in the simple case (see paragraphs 104 and 105 above) with the exception that a partnership is the party that receives the advance from the pension scheme and references to payment in respect of security are replaced by references to drawing (including the receiving of distributions from the partnership) and other payment.

Revenue protection provisions – new sections 196I and 196J

108.New section 196I is a new provision to recover excess relief given to an ABC arrangement that is an acceptable SFA. It is extended by new section 196J from 21 March 2012 which describes further events which cause new section 196I to apply.

109.New sections 196I(1), (3), (9) and (10) stipulate the conditions when a balancing charge will arise to recover excess relief from the employer by treating the outstanding financial liability immediately before:

as profit or income in the relevant period of accounts.

New section 196I applies to this type of ABC arrangement where the contribution is paid on or after 22 February 2012, but in the case of a “new section 196J” event, it only has effect if the event takes place on or after 21 March 2012.

110.New sections 196I(2), (3), (9) and (10) provide that the amount of the reduction in the relevant financial liability other than by the making of payments will be treated as profit or income chargeable on the employer in the period in which the event occurs.

111.New section 196I(4) sets out that the amount treated as profit or income under new sub-section 3 cannot exceed the total amount on which relief has been given to the employer in respect of the arrangement.

112.New section 196I(5) provides that where a balancing charge applies under sub-section 3, the arrangement ceases to be a SFA.

113.New section 196I(6) cancels the effect of the application of new section 196I if a person is to be placed in a tax position which is more advantageous than the tax position in which the person would have been had new section 196I never applied. This subsection will have effect from 21 March 2012.

114.New section 196I(7) stipulates that new section 196I will not apply in cases where the change in the lender’s original position, or the occurrence or non-occurrence of the event arises from an administrative error which is remedied promptly or changes in the pension scheme trustees or the persons in control of the management of the pension scheme.

115.New section 196I(8) stipulates that the occurrence or non-occurrence can be one that is authorised by a term of the ABC arrangement.

116.The terms used in new section 196I are defined in new section 196I(10).

117.New section 196J is an extension of new section 196I, which sets out further events that fall within new section 196J(1).

118.The relevant events are those where the employer, who has an ABC arrangement with the contribution paid on or after 22 February 2012, ceases to be chargeable to tax on or after 21 March 2012.

119.New sections 196J(2) and (3) set out the circumstances under which such cessation takes place. There are different circumstances depending on whether the employer’s business is a company, a limited liability or other type of partnership. These circumstances include cases where the employer company goes into administration or winds up, or the employer partnership dissolves or when an individual who is the employer dies.

Treatment of advances under acceptable SFAs – new section 196K

120.New section 196K provides that any advance under an ABC arrangement which is an acceptable SFA with the contribution on or after 22 February 2012 and which gives rise to a loan within the meaning of Chapter 3 of FA 2004 is not prevented from meeting the definition of a scheme administration employer payment in S180 FA 2004. This means that no unauthorised payment charge will arise under section 208 FA 2004 purely by virtue of the fact that the advance gives rise to a loan which is not capable of meeting the conditions of section 179 FA 2004.

Supplementary provisions and application – new section 196L and paragraph 16

121.New section 196L provides a number of definitions and other supplementary provisions for new sections 196B to 196K.

122.New section 196L(2) explains the references to relief being given in respect of a contribution paid by an employer under a registered pension scheme.

123.New section 196L(3) refers to the meaning of connected persons in section 1122 of CTA 2010.

124.New section 196L(4) provides that sections 774 (accounts), 775 (arrangements) and 776 (assets) of CTA 2010 apply to new sections 196B to 196K in the same way as they do for the purposes of Part 16 of CTA 2010.

125.New section 196L(5) provides that a reference to a disposal of an asset includes:

This is to ensure that all types of asset transfers in relation to ABC arrangements are covered.

126.New section 196L(6) stipulates that section 776(2) of CTA 2010 applies for the purposes of sub-section 5(b) set out above.

127.New section 196L(7) sets out the meaning of “non-working day”.

128.Paragraph 16 make a consequential amendment to section 280(1) FA 2004 (abbreviations) by inserting a reference to CTA 2010.

Commencement and application of new sections 196B to 196L – paragraph 17

129.Paragraph 17 provides that the amendments made by new sections 196B to 196L shall have effect on contributions paid by employers on or after 22 February 2012 with the exception of the events set out in new sections 196I(6) and 196J (only those events that take place on or after 21 March 2012 are covered).

Part 4 - Transitional rules (paragraphs 18 to 31)

130.Part 4 contains transitional provisions which apply the “relevant effect” of the SFA rules to those ABC arrangements where the contribution was paid before 22 February 2012, they are not an acceptable SFA, and Part 2 does not apply. These rules apply to income amounts that arise on or after 22 February 2012. There are also rules to introduce a mechanism to make a tax adjustment at the end of any of these arrangements which ensures the employer receives tax relief in respect of the total amount of payments made to the pension scheme under the ABC arrangement.

131.The transitional provision that will apply to ABC arrangements which are an acceptable SFA, and the contribution is paid on or after 22 February 2012 is new section 196I of Part 3. This section recovers any excess relief given where the relevant change or event occurs on or after either 22 February or 21 March 2012 as set out in the preceding section concerning Part 3 of the Schedule. Further detail can be found in that section and is not repeated in this part of the note.

Detail of transitional rules
Paragraphs 18 to 22 – application and interpretation

132.Paragraphs 18-22 provide for application and interpretation of the terms used in Part 4.

133.Paragraph 18 provides that these transitional provisions will apply where Part 2 does not apply and an ABC arrangement with the contribution paid at any time would not have received relief under new sections 196B, 196D or 196F of Part 3 had the contributions been paid on or after 22 February 2012, and the arrangement is not ‘completed’ as determined under paragraph 20 before that date. However, the reference to one year in new sections 196C(5), 196E(5) and 196G(5) should be read as a reference to 18 months for this provision.

134.Paragraph 19 provides that for the purposes of Part 4, the terms used in new sections 196B, 196D or 196F have the same meaning as in those new sections and where necessary it is assumed that those new sections have effect in relation to the employer’s contribution.

135.Paragraph 20 provides that an ABC arrangement that would be denied upfront relief under new section 196B, 196D or 196F had the contribution been paid on or after 22 February 2012 is completed if :

136.Paragraph 21 provides that “the completion day” is the earliest of the day on which the ABC arrangement is to be completed as determined at the beginning of 22 February 2012, the day on which the arrangement is actually completed, the day which is the last day of the period of 25 years from the day on which the employer’s contribution is paid, or the day on which either a completion event occurs, or, after 21 March 2012, the day on which an event as set out in paragraph 22 of this Schedule occurs. Only changes to payments made to the pension scheme in connection with an ABC arrangement will be taken into account in a completion event. Payments include drawings or distributions from a partnership, payments in respect of security and other payments in respect of an asset as read in accordance with section 776(4)(b) of CTA 2010.

137.A completion event occurs where there is a change in the number of either payments or drawings/other payments, a significant change in the amount of either a payment or a drawing/other payment is to be made, or a significant change in the time at which either a payment or a drawing/other payment is to be made.

138.A “paragraph 22” event occurs when the employer who has an ABC arrangement ceases to be chargeable to tax. Paragraph 22 sets out the circumstances, similar to those set out in new sections 196H(4) and (5) in Part 1, surrounding such cessation (see paragraphs 48 to 50 in the section covering Part 1 of the Schedule).

139.These two paragraphs (21 and 22) prevent the employer seeking to extend the duration of the arrangement or make a material change to the original position as at 22 February or 21 March 2012 (depending on the type of events) to avoid the transitional provisions set out in paragraphs 29 to 31.

Paragraphs 23 to 28 – certain tax consequences not to have effect

140.Paragraphs 23-28 deem the relevant ABC arrangements not to have “the relevant effect” as set out in paragraphs 23(3), 24(3) and 25(2). This means that on or after 22 February 2012, no deduction will be given to any income payments that the borrower (the employer or a connected party or other relevant person) makes to the lender etc under the ABC arrangement and any income amounts that have been transferred to the lender etc will be bought back into charge on the employer etc or other relevant person.

141.Paragraph 23(1) provides that paragraph 23 applies to an ABC arrangement where, had the employer’s contribution been paid on or after 22 February 2012, new section 196B in Part 3 would have applied so that the arrangement would have the “relevant effect”. The “relevant effect” defined in paragraph 23(3) is that the borrower etc (the employer etc) would receive relief for payments to the lender etc (the pension scheme) made under the arrangement either by way of an income deduction or by an income amount which would otherwise have been charged to tax not being so charged.

142.Paragraph 23(2) deems the arrangement not to have the “relevant effect” which is set out in paragraph 23(3). This means that either no relief will be given for any income payments the borrower etc (the employer etc) makes to the lender etc (the pension scheme) under the ABC arrangement or any income amounts that would have been charged to tax if not for the ABC arrangement will be brought back into tax as a charge on the employer etc.

143.Paragraph 23(4) defines the relevant effect if the borrower is a partnership.

144.Paragraph 23(5) provides that “amount” in sub-paragraphs 3 and 4 means an amount that arises on or after 22 February 2012 but on or before the completion day as set out in paragraph 21. This means that before the completion day, this paragraph prevents relief for income payments made on or after 22 February 2012 or brings back income amounts into charge from that date.

145.Paragraph 24(1) provides that paragraph 24 applies to an ABC arrangement where, had the employer’s contribution been paid on or after 22 February 2012, new section 196D in Part 3 would have applied so that the ABC arrangement would have the “relevant effect”. The “relevant effect”, defined in paragraph 24(3), is that the transferor etc (the employer etc) would receive relief either by way of an income deduction or by an amount which would otherwise have been charged to tax not being so charged.

146.Paragraph 24(2) deems the arrangement not to have the “relevant effect”. This means that either no relief will be given for any income payment made by the partnership to the lender etc (the pension scheme) under the arrangement or any amount that would have been charged to tax if not for the ABC arrangement will be brought back into tax as a charge on the transferor etc (the employer etc).

147.Paragraph 24(4) provides that for the purposes of sub-paragraph 3, “amount” means an amount that arises on or after 22 February 2012 but on or before the completion day as set out in paragraph 21. This means that before the completion day, this paragraph prevents relief for income payments made on or after 22 February 2012 or brings back income amounts into charge from that date.

148.Paragraph 24(5) provides that in determining whether the ABC arrangement would have the relevant effect, it is to be assumed that the amounts of income equal to the payments mentioned in new section 196D(2)(g) in Part 3 were payable to the partnership before the relevant change occurred.

149.Paragraphs 25(1) provides that paragraph 25 applies to an ABC arrangement where had the employer’s contribution been paid on or after 22 February 2012, new section 196F in Part 3 would have applied so that the ABC arrangement would have the “relevant effect”. The “relevant effect”, defined in paragraph 25(2), is that the “relevant member” would receive relief by way of an income deduction or by an income amount which would otherwise have been charged to tax not being so charged.

150.Paragraph 25(3) provides that a “relevant member” is a person who was a member of the partnership immediately before the relevant change in the partnership occurred and the person is not the lender.

151.Paragraph 25(4) provides that for the purposes of sub-paragraph 2, “amount” means an amount that arises on or after 22 February 2012 but on or before the completion day as set out in paragraph 21. This means that before the completion day, this paragraph prevents relief for income payments made on or after 22 February 2012 or brings back income amounts into charge from that date.

152.Paragraph 25(5) deems the arrangement not to have the “relevant effect” as set out in paragraph 25(2). This means no relief will be given for any income payments made from the partnership to the lender (the pension scheme) or any income amounts that would have been charged to tax if not for the ABC arrangement will be brought back into tax as a charge on the relevant member (the employer etc or other relevant person).

153.Paragraph 25(6) provides that in determining whether the ABC arrangement would have the relevant effect, it is to be assumed that the amounts of income equal to the payments mentioned in new section 196F(2)(e) in Part 3 were payable to the partnership before the relevant change occurred.

154.Paragraph 26 applies instead of paragraph 23, 24 or 25 if a relevant charging provision under the SFA rules applies to the ABC arrangement.

155.Paragraph 27 applies not to treat the amount of the relevant interest provision as interest if the amount arises on or after 22 February 2012 but on or before the completion day.

156.Paragraph 28 stipulates that new section 196G in Part 1 does not apply in relation to the employer’s contribution if the relevant event occurs on or after 22 February 2012. It also states that new section 196H in Part 1 does not apply to the contribution.

Paragraphs 29 to 31 adjustments

157.Paragraphs 29-31 provide for a tax adjustment on the employer when the ABC arrangement ends to ensure that the total amount on which relief is given to the employer will accurately reflect, but will not exceed, the total amount of payments actually given to the pension scheme under the arrangement.

158.This adjustment mechanism will take into account not just all the payments actually made to the pension scheme but also all the relief in the form of deductions against taxable profits or income given to the employer before and after 22 February 2012. Any deductions and payments given before 22 February 2012 will be cancelled out in the overall adjustment so the amounts set out in paragraphs 29 to 31 do not include these sums. The adjustment can result in either a charge on the employer or further tax relief.

159.The following example illustrates how the adjustment mechanism as set out in paragraphs 29-31 works in relation to an unacceptable SFA.

160.Paragraph 29(1) defines Amount A, Amount B and Amount C for the purposes of making tax adjustments as set out in paragraphs 30 and 31:

161.Paragraph 29(4) defines “income deduction” for the purposes of sub-paragraph 1.

162.Paragraphs 29(5) and (6) provide that where, had the employer’s contribution been paid on or after 22 February 2012, new section 196B in Part 3 would have applied, Amount C is the payment (if any) which the borrower etc makes to the lender etc in order to acquire the security or an asset in place of the security under the ABC arrangement.

163.Paragraphs 29(7) and (8) provide that where, had the employer’s contribution been paid before 22 February 2012, new sections 196D or 196F in Part 3 would have applied, Amount C is the payment (if any) which the employer etc makes to the lender etc in order to reverse the relevant change in relation to the partnership.

164.Paragraphs 29(9) provides that Amount C is to be taken to be nil where, between 22 February 2012 and the day before the completion day, a commitment is given to a “relevant person” directly or indirectly and the commitment is to secure that a person receives money or another asset that is linked to the making of the payment covered by Amount C.

165.Paragraph 29(10) defines the relevant person as the employer, a person connected with the employer, a person acting at the direction or request, or with the agreement of the employer or the connected person, a person chosen by the employer or the connected person or a class of person so chosen, or a partnership. However, as set out in paragraph 29(11), the relevant person does not include the persons who from time to time are the trustees of the pension scheme or the persons controlling the management of the scheme.

166.Paragraph 30 provides that at the end of the completion day, if the amount of tax relief that has been given to the employer in respect of the contribution paid under an ABC arrangement is greater than the total amount of payments made to the pension scheme, then the excess tax relief in the form of the difference between the two amounts will be recovered from the employer.

167.Paragraphs 30(1) and (2) provide that where amount A is greater than the sum of Amount B and Amount C, the excess will be either treated as a profit or income arising on the employer in the period of accounts in which the completion day falls.

168.Paragraph 31 provides that that at the end of the completion day, if the amount of tax relief that has been given to the employer in respect of the contribution paid under the ABC arrangement is less than the total amount of payments made to the scheme, then the employer will be entitled to additional relief. Where the sum of amount B and Amount C exceeds Amount A, the excess is treated as an employer contribution paid on the completion day to which the employer is to be given to relief in accordance with section 196 FA 2004.

Part 5 – Related changes to structured finance legislation(7) (paragraphs 32 to 42)

169.Paragraphs 32 – 36 provide for amendments to the structured finance legislation in Chapter 5B of Part 13 ITA 2007.

170.Paragraph 33 amends section 809BZA of ITA 2007, providing that for type 1 finance arrangements, it does not matter if the entitlement of the lender or a person connected with the lender is subject to any condition.

171.Paragraph 34 amends condition A in section 809BZF of ITA 2007 so that an arrangement may be a type 2 finance arrangement where a person connected with the transferor is a member of the partnership immediately after the disposal. The paragraph also provides that type 2 finance arrangements will include finance arrangements where the determination of the shares in the partnership’s profits of the person involved in the relevant change is subject to any condition.

172.Paragraph 35 amends section 809BZH ITA 2007, which applies to type 2 finance arrangements, so that any mention of the transferor additionally includes a person connected with the transferor. This applies to section 809BZH(3) ITA 2007, which defines relevant effects, with the consequence that a relevant effect as defined in that subsection may now arise in respect of a person connected with the transferor, as well as in respect of a transferor. It also applies to section 809BZH(2) ITA 2007, with the consequence that where that subsection applies, it may provide additionally that Part 9 of the Income Tax (Trading and Other Income) Act 2005 is to have effect as if the relevant effect had not occurred in relation to a person connected with the transferor.

173.Paragraph 36 amends section 809BZJ ITA 2007 so that for type 3 finance arrangements, it does not matter if any determination of the share in the partnership’s profits of the person involved in the relevant change is subject to any condition.

174.Paragraphs 37 to 41 provide for amendments to the structured finance legislation in Chapter 2 of Part 16 CTA 2010. Paragraph 38 amends section 758 CTA 2010, so that for type 1 finance arrangements, it does not matter if the entitlement of the lender, or a person connected with the lender is subject to any condition.

175.Paragraph 39 amends condition A in section 763 of CTA 2010 so that an arrangement may be a type 2 finance arrangement where a person connected with the transferor is a member of the partnership immediately after the disposal. The paragraph also provides that type 2 finance arrangements will include finance arrangements where the determination of the shares in the partnership’s profits of the person involved in the relevant change is subject to any condition.

176.Paragraph 40 amends section 765 CTA 2010, which applies to type 2 finance arrangements, so that any mention of the transferor additionally includes a person connected with the transferor. This applies to section 765(3) CTA 2010, which defines relevant effects, with the consequence that a relevant effect as defined in that subsection may now arise in respect of a person connected with the transferor, as well as in respect of a transferor. It also applies to section 765(2) CTA 2010, with the effect that where that subsection applies, it may provide additionally that sections 1259 to 1265 CTA 2009 are to have effect as if the relevant effect had not occurred in relation to a person connected with the transferor.

177.Paragraph 41 amends section 767 CTA 2010 so that for type 3 finance arrangements, it does not matter if any determination of the share in the partnership’s profits of the person involved in the relevant change is subject to any condition.

178.Paragraph 42 states that the amendments made by Part 5 are to have effect whenever the arrangements are made, but that in relation to arrangements made before 21 March 2012, an amount is to be charged to tax or brought into account in calculating any income for tax purposes or deducted from any income for tax purposes only if the amount arises on or after 21 March 2012. It also states that the amendments in Part 5 have no effect for the purposes of new section 196I(4) in Part 1 and have no effect for the purposes of new sections 196C(2)(b), 196E(2)(b) or 196G(2)(b) in Part 3 if the ABC arrangement is one where the contribution is paid before 21 March 2012.

Background Note

179.This Schedule limits the amounts on which tax relief will be given to an employer in respect of a contribution paid under an asset-backed arrangement so that the relief accurately reflects, but does not exceed, the total amount of payments made to the registered pension scheme. It also contains minor and related changes to the structured finance legislation in the last part of the Schedule (Part 5).

180.The effects of the Schedule do not apply to any straightforward monetary sum that a sponsoring employer gives to the registered pension scheme as a pension contribution or any employer’s transfer of an asset to the pension scheme which is unconditional or outright so that the pension scheme gains complete ownership of the asset on an irrevocable basis. In these cases, relief will continue to be given to the employer in respect of the contribution paid under section 196 in Finance Act 2004 provided that the requirements of that section are met.

181.At Budget 2011, the Government announced that it would consult on changing tax rules to prevent unintended and excessive relief arising from employer asset-backed pension contributions, while preserving as much flexibility as possible for employers and their pension schemes to use these contributions, as well as ensuring that the compliance process is deliverable for Government without creating undue burdens on HM Revenue & Customs or customers.

182.A consultation document, Employer Asset-backed Pension Contributions was published on 24 May 2011 and the consultation closed on 16 August 2011. The document invited views on two broad options: (a) providing upfront relief to the employer only for giving a monetary contribution or a cash-convertible asset to the pension scheme, and (b) providing either upfront relief or “pay as you go” relief depending on whether the structured finance legislation would apply to the asset-backed arrangement in order to ensure that the economic substance of the arrangement would be accurately reflected and excessive relief would not arise. The main purpose of the consultation was to establish which option would better meet the Government’s objectives as set out in the last paragraph while also ensuring that pensions tax relief would remain fair and sustainable in the long term.

183.Following the consultation, legislation was announced published on 29 November 2011 and 22 February 2012 respectively, which is designed on the basis of the second option above and informed by responses to and information received during the consultation and feedback received on the draft legislation. In order to prevent certain activity or behaviour in relation to these types of arrangement which brings a significant risk to the Exchequer, the legislation has effect from the respective dates of announcement.

184.Amendments to February and structured finance legislation were also announced on 21 March 2012 (Budget Day) to take immediate effect. These amendments are covered in a Budget supplementary document in the form of a Technical Note, which was published on the same day.

185.There are also relieving or clarifying changes to the February legislation, taking effect from 22 February 2012. The full set of legislation has been consolidated into Finance Act 2012 and published.

186.Further detail is available in the consultation document, the two Budget reports and other Budget supplementary documents, the

Autumn Statement, the Written Ministerial Statements made in November and February, the summary of responses document, and the two Tax Information and Impact Notes published on 29 November 2011 and 22 February 2012.

Section 49 Schedule 14: Gifts to the Nation

Summary

1.Section 49 and Schedule 19 provide for a reduction in income tax, capital gains tax and/or corporation tax where individual and corporate donors make gifts of pre-eminent objects to the nation in accordance with a scheme set up by the Secretary of State.

Details of the Section

2.The Schedule comprises four parts. Part 1 of the Schedule outlines the circumstances when the tax reduction will apply to a gift of pre-eminent property.  Parts 2 and 3 of the Schedule set out the details of how the tax reduction will apply to individual and corporate donors respectively.  Part 4 of the Schedule makes general provisions in connection with the tax reduction.

3.Paragraph 1 of the Schedule outlines the circumstances when a gift of pre-eminent property for the benefit of the public or the nation will be a qualifying gift for the purposes of the tax reduction.  In particular, a gift that qualifies for the tax reduction must be registered and accepted under the scheme set up by the Secretary of State.

4.Paragraph 2 of the Schedule specifies that the provisions in Part 2 of the Schedule apply to the income tax and capital gains tax liabilities of individual donors.  The donor must be acting in their own personal capacity, so the tax reduction does not extend to individuals who are acting as trustees or personal representatives.

5.Paragraph 3 of the Schedule sets out how the tax reduction is to be applied.  If an individual makes a qualifying gift then part of that individual’s tax liability for a relevant tax year is treated as having been paid, leading to a reduction in the amount of tax the individual still has to pay for that period. An individual may, subject to agreement in accordance with the scheme, apply the tax reduction against their income tax and/or capital gains tax liabilities in the tax year in which the offer was registered or any of the succeeding four tax years.

6.Paragraph 4 of the Schedule sets out how an individual may allocate the tax reduction across more than one relevant tax year.  The “total tax reduction” is first computed under paragraph 4(5).  The total tax reduction for an individual is 30 per cent of the value of the qualifying gift.  The individual may then agree, pursuant to the scheme, that the total tax reduction amount is to be allocated across the five relevant tax years in whatever amounts they wish, including nil amounts for any year.  Where an individual has on a previous occasion made a gift of another pre-eminent object under the scheme, any amount of tax reduction already allocated to a particular tax year in respect of that earlier gift of pre-eminent property is applied in priority to any tax reduction allocated to the same tax year in respect of the later gift. The individual is not required to use the whole of the tax reduction available, for example where the value of the gift is very high and/or the individual knows that their tax liabilities will not be sufficiently large so as to be able to use the full amount of the tax reduction.

7.Paragraph 4(6) of the Schedule provides that HM Treasury may, by order, amend the rate of the tax reduction, as set out in paragraph 4(5).

8.Paragraph 5 of the Schedule enables the individual to specify how the tax reduction is to be split between their income tax and capital gains tax liabilities.  If the individual does not express any preference, the tax reduction will be applied first to the individual’s income tax liability and thereafter to any capital gains tax liability.

9.Paragraph 6 of the Schedule makes clear that where an offer of a gift is accepted under the scheme, resulting in an amount of the tax liability being treated as having been satisfied as provided for in paragraphs 3 and 4, then no late payment interest or late payment penalties will be payable on that amount from the date of registration. Paragraph 6(5) specifies that where there are multiple due dates for a tax year, the deemed payment should be allocated to due amounts in a manner that minimises any late payment interest and penalties due. Paragraph 6(7) makes it clear that late payment interest and late payment penalties that accrue before the registration date are not affected by anything in these provisions.

10.Paragraph 7 of the Schedule provides that, where the donor’s tax liability for a year subsequently changes, the portion of that tax liability for a relevant tax year (to which the tax reduction has applied) is to be recalculated.  In many cases, the effect of this provision is limited.  Paragraph 7(2) makes plain that the schedule of set off of the tax reduction (as contained in the agreed terms) cannot be revised once agreed, even if the donor’s circumstances subsequently change.

11.Paragraph 8 of the Schedule makes provision for the tax reduction to be withdrawn where the qualifying gift is set aside or declared void, for example by order of a Court.  Where the tax reduction has already been used, an amount representing the tax reduction (together with any late payment penalties and interest) due up to and including the date of payment, is payable within 30 days of the date the gift was set aside or declared void.  Where the tax reduction has not yet taken effect, the normal due dates for the payment of the tax will apply.

12.Paragraph 9 of the Schedule specifies that the provisions in Part 3 of the Schedule apply to the corporation tax liabilities of company donors.

13.Paragraph 10 of the Schedule provides that the tax reduction is to be applied to the accounting period in which the offer is registered.  The date on which the corporation tax is treated as being satisfied is the date on which the tax liability became due (or, if the liability was due before the offer of gift was registered, the date on which the offer was registered).

14.Paragraph 11 of the Schedule specifies that the amount of the tax reduction for a gift under the scheme by a company is 20 per cent of the value of the property forming the gift.  The company may choose to accept a lower percentage if it wishes, for example where the value of the gift is very high or the company’s tax liability for that particular accounting period will not be sufficient to use the full amount of the tax deduction.

15.Paragraph 12 of the Schedule makes clear that where an offer of a gift is accepted under the scheme, resulting in an amount of the tax liability being treated as having been satisfied as provided for in paragraphs 10 and 11, then no interest or late payment penalties will be payable on that amount from the date of registration. Paragraph 12(5) specifies that where there are multiple due dates for an accounting period, the deemed payment should be allocated to due amounts in a manner that minimises any late payment interest and penalties due. Paragraph 12(7) makes it clear that late payment interest and penalties that accrue before the registration date are not affected by anything in these provisions.

16.Paragraph 13 of the Schedule allows the tax liability for the relevant accounting period to be recalculated where the company’s corporation tax liability for the accounting period subsequently changes.  The effect of this provision is limited.

17.Paragraph 14 of the Schedule makes provision for the tax reduction to be withdrawn where the qualifying gift is set aside or declared void, for example by order of a Court.  Where the tax reduction has already been used, an amount representing the tax reduction (together with any late payment penalties and interest) due up to and including the date of payment, is payable within 30 days of the date the gift was set aside or declared void.  Where the tax reduction has not yet taken effect, the normal due dates for the payment of the tax will apply.

18.Part 4 of the Schedule makes a number of general provisions.

19.Paragraph 15 provides that an order amending the percentage of a tax reduction is to be made by statutory instrument using the negative procedure.

20.Paragraph 16 of the Schedule defines the property that may be gifted under the terms of the scheme.  The definition is intended to the mirror the definition which applies for the Acceptance in Lieu scheme under section 230 of the Inheritance Act 1984, with the exception of land and buildings.  In practice objects or collections of objects may be pre-eminent  if they have an especially close association with our history and national life; or are of especial artistic or art-historical interest; or are of especial importance for the study of some particular form of art, learning or history; or have an especially close association with a particular historic setting.  The decision as to whether an object is pre-eminent rests with the “relevant Minister”.

21.Paragraph 17 of the Schedule defines the term “relevant Minister”.  The relevant Minister is the Secretary of State for Culture, Media and Sport unless the item, defined as an object or collection of objects, has an interest with one of Scotland, Northern Ireland or Wales.  Two levels of interest are defined:

22.Paragraph 18 of the Schedule defines a number of terms used in the Schedule.

23.Paragraph 19 of the Schedule makes plain that there is no obligation for an offer of a gift under the scheme to be accepted, even if it meets all of the qualifying circumstances pursuant to the scheme.

24.Paragraphs 21 provides for exemption from inheritance tax of a gift of property under the scheme.

25.Paragraph 22 of the Schedule amends the inheritance tax rules where the donor of the object under the scheme had received it in a potentially exempt transfer (PET).  It ensures that there is no chargeable transfer if the person from whom the donor received the object dies within 7 years of the PET.

26.Paragraphs 23 and 24 of the Schedule exempt a gift of a conditionally exempt object from inheritance tax recapture charges.  Paragraph 23(3) inserts new sections 32(4A) and (4B) into Inheritance Tax Act 1984 (IHTA).

27.New sections 32(4A)(a) and (4B) of IHTA ensure that, where a donor gives a conditionally exempt object under the scheme, the gift will not be a chargeable event which would otherwise result in the inheritance tax held over on the object to become payable.

28.New sections 32(4A)(b) and (4B) of IHTA apply where a person inherits a conditionally exempt object on the death of its previous owner. That person may give that object to the nation under the scheme within 3 years of the previous owner’s death without triggering the inheritance tax recapture charge that would otherwise have become due on the death of the previous owner and without any need to renew its conditional exemption.  It also confirms that that person’s later death would not itself occasion such a recapture charge.

29.Paragraph 24(2) of the Schedule similarly inserts new sections 32A(5A) and (5B) into IHTA in relation to gifts to the nation under the scheme of objects conditionally exempt from inheritance tax because of their historical association with an outstanding building.

30.Paragraph 24(4) of the Schedule inserts new section 32A(7A) into  IHTA. This provision confirms that the later death of the person who made the gift under the scheme would not itself occasion such a recapture charge.

31.Paragraphs 25 and 26 of the Schedule make consequential amendments to sections 33 and 34 IHTA.

32.Paragraph 27 of the Schedule inserts new section 258(1A) into section 258 of the Taxation of Chargeable Gains Act 1992 (TCGA).  New section 258(1A) exempts the donor of an object under this scheme from capital gains tax or corporation tax on a chargeable gain, which would normally arise on the disposal of a chargeable asset.

33.Paragraph 28 of the Schedule applies to non-domiciled and/or not ordinarily UK resident donors who use the remittance basis of tax.  Normally, a tax charge is triggered when property derived from untaxed foreign income or gains is brought to the UK, subject to a number of limited exemptions.  Paragraph 28(3) inserts new section 809YD into the Income Tax Act 2007 which ensures that, where such property has been brought into the UK and has been accepted under the scheme, there will be no charge to income tax or capital gains tax on the remittance of that property.

34.Paragraph 29 of the Schedule provides for the scheme to commence on an appointed day by order of the Treasury.  The first tax period to which the scheme may apply is the tax year beginning on 6 April 2012.

Background Note

35.The details of how the application and acceptance process in connection with the scheme will operate are set out in detailed guidance issued by the Department for Culture, Media and Sport.

36.The basic rules for an individual in deciding how to allocate a tax reduction across the relevant tax years are that:

37.The following table gives examples of how an individual might choose to apply a total tax reduction of £500,000 across five relevant tax years.

Example
Year 1Year 2Year 3Year 4Year 5Total
500,000----500,000
----500,000500,000
-100,000-300,000100,000500,000
200,00050,00050,00050,00050,000400,000

38.Paragraph 6 ensures that where an offer of a gift is accepted under the scheme, resulting in an amount of the tax liability being treated as having been satisfied (as set out in the scheme) then no late payment interest or late payment penalties will be payable on that amount from the date of registration.  It is being explored whether, and to what extent, provisions should be made to defer payments of tax, interest and late payment penalties during the negotiation period in respect of tax becoming payable on or after the registration of an offer, where the offer has been made in good faith. However, if a qualifying gift was not made for any reason (say, for example, because the offer was rejected in accordance with the scheme or because the offer was withdrawn by the donor), then the donor would be required to pay to HMRC both the tax due and any late payment interest due up to and including the date of payment. It is currently envisaged that if the tax and interest remains unpaid within 30 days the donor will be subject to late payment penalties.

39.Paragraphs 23 to 26 of the Schedule provide for exemption from inheritance tax where an object that is conditionally exempt from inheritance tax is given under the scheme.  It is intended to make similar provisions for objects that are conditionally exempt from estate duty.  However gifts of such objects will not be eligible for the tax reduction set out in Parts 1 and 2 of the Schedule.

Section 50: Gift Aid: Giving through Self-Assessment Return

Summary

1.Section 50 repeals, with effect from 6 April 2012, the “SA Donate” scheme which enables an individual, who makes a self-assessment return, to direct HM Revenue & Customs (HMRC) to make any repayment of tax due for the tax year to a charity.

Details of the Section

2.Subsection (1) repeals section 429 of the Income Tax Act (ITA) 2007 which gives effect to the SA Donate scheme.

3.Subsections (2) and (3) make consequential amendments to remove references to section 429 of ITA 2007 from the Taxes Acts.

Background Note

4.Section 429 ITA 2007 provides for a scheme known as “SA Donate”. It enables an individual who makes a self-assessment return to direct HMRC to make any repayment of tax due for a tax year to a specified charity instead of to the individual.  In addition to the repayment, provided the individual has paid sufficient income tax or capital gains tax on the amount of the repayment donated to the charity, HMRC also pays the charity the basic rate of tax relating to the repayment in accordance with the gift aid rules at Chapter 2 of Part 8 of ITA 2007.

5.SA Donate has not been well used and is disproportionately expensive for HMRC to administer. It is being withdrawn with effect from 6 April 2012 in order to concentrate HMRC resource on the introduction of an online filing system for charities.  Taxpayers who receive repayments of tax from HMRC will still be able to give the money to their chosen charity under gift aid by making a direct gift to the charity.

Section 51 Schedule 15: Relief for Gift Aid and Other Income of Charities Etc

Summary

1.Section 51 and Schedule 15 make a number of amendments to the law to put onto a statutory footing the current practice of HM Revenue & Customs (HMRC) of making repayments of income tax, including under Gift Aid, to Community Amateur Sports Clubs (CASCs) charitable trusts, charitable companies and eligible bodies.

Details of the Section

2.Section 51 introduces Schedule 15 which contains provisions relating to CASCs, eligible bodies and charities that make Gift Aid repayment claims and other income tax repayment claims.

Details of the Schedule

3.Schedule 15 amends the rules for charitable trusts and companies, CASCs and eligible bodies as defined in section 468 of Corporation Tax Act (CTA) 2010. It allows charities, CASCs and eligible bodies to make claims for repayments of Gift Aid and other income tax outside a tax return. Currently:

4.Paragraph 1 amends section 538A of ITA 2007 by inserting a new subsection (A1). Section 538A ITA 2007 enables charitable trusts to claim exemption from income tax on Gift Aid, in what is known as a “free-standing claim.” A free-standing claim may be made during the tax year in which the income is received. Section 538A currently applies only to free-standing claims for exemption from tax, not for repayment, and it refers only to Gift Aid. New subsection (A1) allows charitable trusts to make free-standing claims for repayment of income tax where they receive a gift that qualifies for Gift Aid relief or other specified income that has suffered a tax deduction. Section 538A is also amended to allow free-standing claims for exemption from tax for the other income specified in new subsection (A1).

5.Paragraph 2 introduces amendments to Part 11 of CTA 2010, which applies to charitable companies and eligible bodies.

6.Paragraph 3 amends section 477A of CTA 2010 by inserting a new subsection (A1). Section 477A CTA 2010 enables charitable companies and eligible bodies to claim exemption from income tax on Gift Aid, in what is known as a “free-standing claim.” A free-standing claim may be made at any time during the tax year in which the income is received. Section 477A currently applies only to free-standing claims for exemption from tax, not for repayment. New subsection (A1) allows charitable companies and eligible bodies to make free-standing claims for repayment of income tax where they receive a gift that qualifies for Gift Aid relief.

7.Paragraph 4 inserts a new section 491A in CTA 2010. This section applies the provisions of section 477A to other specified income that has suffered an income tax deduction that is received by charitable companies and eligible bodies. This sets out how charitable companies and eligible bodies can make free-standing claims for this income to be exempt from tax and for  repayments of tax.

8.Paragraph 5 introduces amendments to Chapter 9 Part 13 of CTA 2010, which applies to CASCs.

9.Paragraph 6 inserts new section 661D into CTA 2010 which extends the Gift Aid legislation to CASCs.  New section 661D CTA 2010 treats qualifying donations to CASCs falling within the Gift Aid provisions of Chapter 2 of Part 8 of Income Tax Act (ITA) 2007 as being received under deduction of income tax, by reference to the current basic rate of tax. The income tax treated as deducted is treated as income tax paid by the club, and the grossed up amount of the donation, is charged to corporation tax. The donation is exempt from corporation tax under section 664 CTA 2010 provided it is used for qualifying purposes.

10.Paragraph 7 inserts new section 665A into CTA 2010. This allows CASCs to claim a repayment, either of income tax treated as deducted by new section 661D CTA 2010 in respect of Gift Aid donations, or of income tax deducted at source from interest income. The repayment can be claimed either by a “free-standing claim” or by a claim included in the CASC’s tax return. The provision also enables the Commissioners of HMRC to make regulations limiting the number of free-standing claims that may be made within a tax year and specifying the minimum amount that may be claimed in a free-standing claim.

11.Paragraph 8 inserts new subsection 413(6) into ITA 2007 to refer to the legislation on gift aid for CASCs in Chapter 9 Part 13 of CTA 2010.

12.Paragraph 9 amends section 59B TMA which provides that where a charitable trust receives a payment on which it bears income tax by deduction, the income tax must be set off against any income tax due. The amendment to this section exempts donations received by charitable trusts which qualify for Gift Aid and other specified income on which income tax has been deducted from the provisions of this section. This means that income tax claimed under Gift Aid or which has been deducted from other specified income may be repaid during the tax year instead of waiting until the end of the tax year to establish if there is income tax liability against which the income tax deducted should be offset.

13.Paragraph 10 inserts new subsection (5) into section 967 of CTA 2010. Section 967 provides that where a UK resident company receives a payment on which it bears income tax by deduction, the income tax suffered must be set against any corporation tax due. New subsection (5) of section 967 CTA 2010 exempts donations received by charitable companies, eligible bodies and CASCs in respect of Gift Aid and certain other specified income from the provisions of this section. This means that income tax claimed under Gift Aid or which has been deducted from other specified income may be repaid during the tax year instead of waiting until the end of the tax year to establish if there is corporation tax liability against which the income tax should be offset.

14.Paragraph 11 disapplies (in respect of certain sources of income) the requirement in section 42(2) of TMA that, where HMRC has already issued a notice to charitable trustees to make a tax return for the year, and the trustees are to make a claim, that claim must be included in a tax return.  New subsection 42(3ZA) TMA provides an expanded list of sources of income in respect of which this requirement does not apply, which includes Gift Aid income.  The result is that such claims for tax exemption can be made outside the return. New subsection (3ZB) excludes from the provisions of section 42(2) claims for repayment of income tax in respect of the income listed in subsection (3ZA) so that claims for tax repayment in respect of this income can be made outside the return.

15.Paragraph 12 makes a consequential amendment in paragraph 11 Schedule 8 to FA 2010.

16.Paragraph 13 introduces amendments to Schedule 18 to FA 1998 which applies to charitable companies, eligible bodies and CASCs.

17.Paragraph 14 substitutes a new sub-paragraph (2A) and adds a new sub-paragraph (2B) in paragraph 9 of Schedule 18 to FA 1998. Paragraph 9 prevents a company from making a claim before it makes a return for the period to which the claim relates. The amendments exempt from that provision claims for a repayment of tax under Gift Aid and in respect of other specified income by charitable companies, eligible bodies and CASCs.  This ensures that a company may claim a repayment of income tax under Gift Aid, and on other specified income, before it has submitted its tax return and applies to claims by charitable companies, eligible bodies and CASCs.

18.Paragraph 15 amends paragraph 57 of Schedule 18 to FA 1998 by substituting sub-paragraph (1A) with a new sub-paragraphs (1A), (1B) and (1C). Paragraph 57 requires that, if a company has been given a notice requiring it to deliver a return for a particular period, a claim that could be made in the return for that period must be made in the return. The amendment exempts from this requirement claims by charitable companies, eligible bodies and CASCs for a repayment of tax under Gift Aid, and in respect of other specified income, and for exemption from corporation tax in respect of Gift Aid and other specified income .

19.Paragraph 16 makes a consequential amendment in Schedule 8 to FA 2010.

20.Paragraph 17 sets out the commencement dates for the provisions as follows:

Background Note

21.HMRC has allowed charitable trusts and charitable companies and eligible bodies to submit income tax repayment claims in advance of filing a tax return (“in-year claims”) under their powers of collection and management, although in law some trusts and all companies are allowed to make a claim only in a tax return.  This applies to claims for repayment of income tax on income such as bank interest and royalties. It also applies in relation to repayments of income tax under Gift Aid but these in-year repayments were put on a statutory footing by paragraphs 4 to 7 of Schedule 8 to FA 2010. However, those changes to the Gift Aid legislation do not work as intended, so Schedule 15 amends the legislation to allow charities to make free-standing claims for Gift Aid and other income tax repayments.

22.HMRC allows registered CASCs to claim Gift Aid repayments on donations made to them provided that the donations are used for qualifying purposes. It is the intention that they should be able to claim Gift Aid in the same way as charitable companies. Owing to an error that occurred when legislation was re-written for Corporation Tax Act 2010, CASCs are not treated in the same way as charitable companies for the purpose of the Gift Aid legislation. Schedule 15 amends the legislation to allow CASCs to claim Gift Aid repayments and to put HMRC current practice on to a statutory footing.

Section 52: Meaning of “Community Amateur Sports Club”

Summary

1.Section 52 amends the conditions sports clubs must meet to enable HM Revenue & Customs (HMRC) to register them as Community Amateur Sports Clubs (CASCs). The change puts current HMRC practice onto a statutory footing.

Details of the Section

2.Subsection (1) amends the definition of a CASC by replacing the current legislation in subsection 658(1) CTA 2010 with new sections 658(1), (1A) and (1B). The effect of this is to remove the requirement that all qualifying conditions for a CASC have to be required by the CASC’s constitution. The five qualifying conditions listed in new section 658(1) are divided into two groups. The first three conditions are required by new section 658(1A) to be in the constitution of a CASC and to be met in practice. The further two conditions shown in new section 658(1B) only need to be met in practice to satisfy these conditions.

3.Subsection 2 repeals paragraph 31 to Schedule 6 to FA 2010, which introduced the later two qualifying conditions into section 658(1) CTA 2010.

4.Subsection 3 says that the amendments will apply with effect from 6 April 2010, when the last two qualifying conditions were introduced into section 658(1).

Background Note

5.HMRC registers sports clubs as CASCs provided that they meet certain qualifying conditions. The legislation currently requires all the qualifying conditions to be contained in a club’s constitution, although in practice two of the qualifying conditions are not included in the constitution of most, if any, registered CASCs. This section removes the requirement for these two conditions to be included in the constitution and it puts current HMRC practice onto a statutory footing.

Section 53: Site Restoration Payments

Summary

1.Section 53 provides for changes to the income tax and corporation tax rules which give a deduction for site restoration payments. The changes will prevent a deduction being given where a payment is made to a connected person until the work to which the payment relates is completed and will deny any deduction where the payment arises from avoidance arrangements. These changes will apply from 21 March 2012.

Details of the Section

2.Subsection (2) replaces the existing section 168(3) of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005 with new subsections (3) and (3A).

3.New section 168(3) provides the rules governing the timing of a deduction depending on whether a payment is made, directly or indirectly, to a connected person or otherwise made.

4.New section 168(3A) provides that no deduction is available for a payment arising from arrangements to which the person is party where the main purpose, or one of the main purposes, of the arrangements is to obtain a deduction for a site restoration payment.

5.Subsection (3) inserts new section 168(7). This defines “arrangements” for the purposes of new section 168(3A).

6.Subsection (5) replaces the existing section 145(3) of the Corporation Tax Act 2009 with new sections 145(3) and (3A).

7.New section 145(3) provides the rules governing the timing of a deduction depending on whether a payment is made, directly or indirectly, to a connected person or otherwise made.

8.New section 145(3A) provides that no deduction is available for a payment arising from arrangements to which the person is party where the main purpose, or one of the main purposes, of the arrangements is to obtain a deduction for a site restoration payment.

9.Subsection (6) inserts new section 145(7). This defines “arrangements” for the purposes of new section 145(3A).

10.Subsection (7) provides commencement rules.

11.Subsection (8) defines “an unconditional obligation” for the purposes of subsection (7).

Background Note

12.Payments made to restore a site to its original state after use in a waste disposal trade are historically capital in nature and without a specific statutory deduction would not be an allowable trading deduction.

13.The Government has become aware of businesses abusing the intended relief by making payments to connected persons many years in advance of future works and claiming relief is due as a payment has been made. This puts at risk substantial amounts of tax.

14.This section introduces new rules for income tax and corporation tax purposes to counter the avoidance exploiting deductions for site restoration payments with effect on or after 21 March 2012.

Section 54: Changes of Accounting Policy

Summary

1.Section 54 will ensure the change of basis tax legislation, dealing with the consequences of certain changes of accounting policy, applies to the accounting transition adjustments arising from all changes of accounting policy between one period of accounts and the next.  The revised legislation will therefore apply to the accounting transition adjustments arising from the proposed changes to UK Generally Accepted Accounting Practice (UK GAAP).

2.Acceptable accounting policies for computing taxable profits are those contained within International Accounting Standards (IAS) and UK Generally Accepted Accounting Practice (UK GAAP).  The Accounting Standards Board (ASB) announced in October 2010 that it intends to significantly change what constitutes UK GAAP during 2012.  There are a number of areas where the proposed new UK GAAP differs from current UK GAAP resulting in one-off accounting adjustments on transition.

Details of the Section

3.Subsection (1) replaces the term “relevant change of accounting approach” in section 227(3)(a) ITTOIA 2005 with the term “change of accounting policy”.  Section 227(4) ITTOIA 2005 is replaced with a new section 227(4) that explains a change of accounting policy can include, but is not limited to, a change from using UK GAAP to using IAS and vice versa.

4.Subsection (2) replaces the term “relevant change of accounting approach” in section 180(3)(a) CTA 2009 with the term “change of accounting policy”.  Section 180(4) CTA 2009 is replaced with a new section 180(4) that explains a change of accounting policy can include, but is not limited to, a change from using UK GAAP to using IAS and vice versa.

5.Subsection (3) provides that corresponding amendments are to be treated as having been made to section 64 FA 2002, the predecessor to s227 ITTOIA 2005 and CTA 2009.

6.Subsection (5)(a) provides that the section applies where a change of basis is adopted for a period of account which begins on or after 1 January 2012.

7.Subsection (5)(b) ensures that the section will also apply where accounts have not been prepared for periods of account beginning prior to 1 January 2012 where there is a change of basis for those periods of account resulting from adopting an accounting standard that changes on or after 1 January 2012.

8.Subsection (6) defines what constitutes an accounting standard.

Background Note

9.Acceptable accounting policies for computing taxable profits are those contained within IAS and UK GAAP.  The Accounting Standards Board (ASB) announced in October 2010 that it intends to significantly change what constitutes UK GAAP during 2012.  There are a number of areas where the proposed new UK GAAP differs from current UK GAAP resulting in one-off accounting adjustments on transition.

10.Current tax legislation governing accounting transition adjustments arising from certain specified changes of accounting policy is at Chapter 14, Part 3 Corporation Tax Act 2009 and Chapter 17, Part 2 Income Tax (Trading and Other Income Act) 2005. The legislation provides that, in particular circumstances, on a change of accounting policy income is taxed once and once only and expenditure allowed once and once only.  Current tax legislation would not apply to the accounting transition adjustments arising from the changes to UK GAAP.

11.This section will ensure that the legislation applies to all changes of accounting policy.  The revised legislation will apply to the accounting transition adjustments arising from the changes to UK GAAP.

Sections 55 to 179 Schedules 16 to 19: Solvency Ii and the Taxation of Life Insurance Companies

Summary

1.This legislation establishes a new regime for the taxation of life insurance companies. It represents a wide-ranging and fundamental revision of both the basis on which life companies' taxable profits are computed and the detailed rules by which those profits are taxed.

Details of the Sections

Part 2
Chapter 1

2.Chapter 1 contains sections 55 to 65 which explain the structure of this Part of the Act and define terms used in the legislation.

3.Section 56 defines “life assurance business”, and section 57 defines “basic life assurance and general annuity business” (BLAGAB), which excludes “protection business”, among other items. Sections 58 to 62 define terms used in section 57.

Chapter 2

4.Chapter 2 sets out the charge to tax on BLAGAB business, which is taxed on an I - E basis.

5.Section 66 explains that BLAGAB, non-BLAGAB long-term business and general insurance are to be treated as separate businesses.

6.Section 67 provides an exception to the separate trade treatment for BLAGAB when substantially all of the long-term business is not BLAGAB.

7.Section 68 imposes the charge to corporation tax on the I - E profit for BLAGAB; the “I - E profit” is explained in section 73.

8.Section 69 gives precedence to the I - E charge over the general charge to corporation tax on trade profits under section 35 of the Corporation Tax Act (CTA) 2009.

9.Section 70 explains what is meant by “the I - E rules”.

10.Section 71 applies the general corporation tax charge on trade profits to profits of non-BLAGAB long-term business, subject to Chapter 6 of the legislation and specific rules for transfers of non-BLAGAB long-term business.

11.Section 72 excludes companies carrying on only Permanent Health Insurance (PHI) business from Part 2 of the legislation and from provisions elsewhere in the Corporation Tax Acts which make special provision for long-term business carried on by insurance companies.

Chapter 3

12.Chapter 3 explains the I – E basis.

13.Section 73 sets out the steps used to calculate the I – E profit (where the result is a positive amount) or the excess BLAGAB expenses (where the result is a negative amount). It points to other sections where specific terms are explained.

14.Section 74 lists items that come within the definition of income in step 1 of section 73.

15.Section 75 explains how to calculate the BLAGAB chargeable gains for the purposes of step 2 of section 73.

16.Section 76 explains how to calculate the BLAGAB management expenses for the purposes of step 5 of section 73.

17.Sections 77 and 78 define some of the terms used in the calculation of BLAGAB management expenses in section 76.

18.Section 79 sets out special rules for acquisition expenses (which are defined in section 80). These are expenses that are payable for the purpose of the acquisition of new business. They are spread over 7 years rather than deducted in full when incurred.

19.Section 81 details some specific amounts that are allowable as BLAGAB management expenses.

20.Section 82 applies certain restrictions, which apply to the management expenses of a company with investment business, to the calculation of BLAGAB management expenses.

21.Sections 83 and 85 bring into the new regime the existing provisions allowing relief, in computing I - E profits, for certain annuity payments.

22.Section 86 modifies, for I – E purposes, the rules in CTA 2009 regarding the taxation of profits from property businesses. It provides that a life insurance company may have more than one property business. There is a separate property business in respect of property held other than for the purposes of the long-term business. Separate businesses are established for property matched to BLAGAB liabilities; for property matched to other long-term liabilities; and for unmatched property held for the purposes of the long term business.

23.Section 87 sets out the treatment, for I – E purposes, of losses from property businesses. To the extent that they are referable to BLAGAB, such losses are to be treated as BLAGAB management expenses.

24.Section 88 ensures that for the purposes of the I – E profit calculation the rules on loan relationships, derivative contracts and intangible fixed assets apply as though the BLAGAB business were not a trade. The relevant rules in CTA 2009 apply accordingly.

25.Section 89 provides for certain BLAGAB miscellaneous income to be treated as I – E receipts in so far as it exceeds miscellaneous losses.

26.Sections 90 and 91 replicate existing provisions which impute investment return for I – E purposes when certain risks under BLAGAB contracts of insurance are reinsured.

27.Section 92 deems certain BLAGAB trading receipts, which would not otherwise fall within the charge to corporation tax, to be I – E receipts.

28.Section 93 requires a comparison between the BLAGAB trade profit and the I - E result and imputes an additional I - E receipt if the former is greater than the latter.

29.Section 94 requires that, in making the comparison in section 93, any exempt dividends referable to BLAGAB are to be included as I - E receipts. This is because all dividends are taken into account when computing the BLAGAB trade profit.

30.Section 95 allows non-BLAGAB allowable losses to be deducted from the shareholders’ share of BLAGAB chargeable gains, but not to the extent that they would create an I - E loss.

31.Section 96 restricts management expenses of an overseas life insurance company carrying on BLAGAB business in the UK where the income of the company allocated to BLAGAB includes FOTRA (free of tax to residents abroad) profits.

Chapter 4

32.Section 97 introduces Chapter 4, which contains rules for the allocation to BLAGAB of investment income and losses, expenses, and chargeable gains and allowable losses for the purposes of I – E.

33.Section 98 requires that investment income or losses, and expenses referable to BLAGAB are to be determined by an acceptable commercial method. It explains what is an acceptable commercial method. HM Treasury is given a power to make regulations prescribing what is, or is not, an acceptable commercial method.

34.Sections 99 to 101 explain how chargeable gains and allowable losses referable to BLAGAB are determined.

35.Section 100 provides that gains or losses on assets are attributable to BLAGAB to the extent that the assets are wholly or partly matched to BLAGAB liabilities. The concept of matching is explained in section 138.

36.Section 101 explains that the extent to which gains or losses on assets, which are not matched to BLAGAB liabilities, are referable to BLAGAB is determined using an acceptable commercial method. The section applies to the unmatched proportion of a gain or loss where the asset is partly matched. It explains what is an acceptable commercial method, and gives HM Treasury a power to make regulations prescribing what is, or is not, an acceptable commercial method.

Chapter 5

37.Chapter 5 sets out the rate of tax to be applied to the policyholders’ share of the I–E profit and sets out how that share is to be determined.

38.Section 102 defines the rate of tax applicable to the policyholders’ share of the I – E profit as the basic rate for income tax.

39.Section 103 sets out how the policyholders’ share of the I – E profit is to be determined. For mutual insurance companies, the whole of the profit is attributable to policyholders.

40.Sections 104 and 105 explain terms used in sections 103 and 104.

41.Section 106 provides for a deduction in the calculation of the BLAGAB trade profits for tax of the accounting period charged at the policyholder rate.

42.Section 107 provides for an adjustment to BLAGAB trade profits in respect of deferred policyholder tax, and explains how it is to be calculated.

43.Section 108 defines terms used in section 107 and specifies the BLAGAB assets and liabilities in respect of which an adjustment may arise under that section. HM Treasury is given a power to amend by regulation the list of BLAGAB assets and liabilities.

Chapter 6

44.Section 109 applies the rules in Chapter 6 to the calculation of BLAGAB trade profit or loss and the non-BLAGAB long-term business profit.

45.Section 110 allows a deduction in calculating profits for sums allocated to policyholders except where certain sums of a capital nature are allocated to with-profits policyholders.

46.Section 111 brings dividends and other company distributions into account as receipts in calculating the profits unless they are capital distributions. This section overrides the general rule that such dividends and distributions are not taxable.

47.Section 112 disapplies the provisions in CTA 2009 which exempt the indexation return on index-linked gilt-edged securities (gilts) from tax under the loan relationship rules in computing trade profits. But the section does not apply where the gilts are held to back index-linked PHI liabilities to policyholders.

48.Section 113 excludes profits, receipts and expenses arising from long-term business fixed capital assets from the computation of profits.

Chapter 7

49.Section 114 explains that Chapter 7 details how to allocate accounting profits, losses and various adjustments between BLAGAB and non-BLAGAB long-term business.

50.Section 115 requires that the allocation is to be in accordance with an acceptable commercial method. The method must be consistent with the method used for the purposes of section 41(allocation of BLAGAB income, etc). The section also gives HM Treasury the power to prescribe cases in which a method is to be, or is not to be, regarded as an acceptable commercial method.

Chapter 8

51.Chapter 8 deals with changes in the allocation of assets and share pooling rules for life insurance business.

52.Section 116 deems a disposal and reacquisition at fair value when an asset moves between the categories set out in the section. This rule does not apply where none of the profits of a company are taxed on an I - E basis.

53.Section 117 modifies the rules in section 116 for overseas life insurance companies.

54.Section 118 sets out the rules where there is a transfer of business and as a consequence assets transferred move from one category to another.

55.Sections 119 and 120 adapt the capital gains share pooling rules for life insurance companies, including overseas life insurance companies.

Chapter 9

56.Chapter 9 explains how relief is provided for BLAGAB trade losses.

57.Section 123 applies the general trade loss rules in CTA 2009 to BLAGAB trade losses.

58.Section 124 describes how a BLAGAB trade loss may be carried forward to later accounting periods.

59.Section 125 explains the application of group relief rules to BLAGAB trade losses.

60.Section 126 says that losses relieved by way of section 123 or section 125 are to be reduced by the amount of any non-trading loan relationship deficit for the accounting period.

61.Section 127 prevents various reliefs (as identified in section 127(3)) from being set against the policyholders’ share of the I – E profit.

Chapter 10

62.Chapter 10 contains the rules on transfers of long-term business.

63.Where there is a transfer of BLAGAB business, Section 128 permits the transferee to receive relief for spread acquisition expenses (see section 79) which would have become available to the transferor in a period after the transfer if the transfer had not taken place.

64.Section 129 sets out the rules for the calculation of BLAGAB trade profits of the transferor and the transferee where there is a transfer of BLAGAB business within a group or from a mutual company to a non-mutual company.

65.Section 130 provides that, when there has been a transfer of business between unconnected parties on or after 1 January 2013, the transferee will get relief for the amortisation of an asset recognising the value of future profits arising from the business acquired when that amortisation is charged to the accounts .

66.Section 131 applies sections 129 and 130 where there is a transfer of non-BLAGAB long-term business.

67.Section 132 is an anti-avoidance provision, which applies where, on or after 1 January 2013, there is a transfer of long-term business (or part of a business) and the main purpose of a company entering into one or more of the arrangements is an unallowable purpose. Where it applies, the section requires necessary steps to be taken to negate the tax advantage arising.

68.Sections 133 and 134 set out the clearance procedure by which a company can seek confirmation from HMRC that section 132 does not apply.

69.Section 135 states that whether companies are members of the same group for the purposes of Chapter 10 is to be determined in accordance with section 170(2) to (11) of the Taxation of Chargeable Gains Act 1992.

Chapter 11

70.Chapter 11 contains definitions of terms and abbreviations used in this Part.

71.Section 138 explains the concept of matching of assets (or part assets) to liabilities, which is used in Chapter 4 and Chapter 8 of this Part.

Chapter 12

72.Section 142 gives HM Treasury powers to amend the legislation relating to life assurance business by way of secondary legislation in consequence of powers being exercised under the Financial Services and Markets Act 2000 (FSMA 2000).

73.Section 143 allows the meaning of the term “insurance business transfer scheme” to be amended by order following any change to section 105 FSMA 2000.

74.Section 144 provides a power to modify by regulations the legislation relating to overseas life insurance companies.

75.Sections 146 and 147 introduce Schedules 16 and 17, which contain minor and consequential amendments and transitional provisions respectively.

76.Section 148 states that the provisions of this Part are to have effect for accounting periods beginning on or after 1 January 2013.

77.Section 149 ensures that all life insurance companies will have an accounting period ending on 31 December 2012.

Part 3

78.Part 3 provides specific rules for the taxation of life assurance business and other long-term business carried on by friendly societies. Section 150 gives an overview of the contents of Part 3.

79.Section 151 applies the Corporation Tax Acts to long-term business carried on by friendly societies in the same way that they apply to mutual business carried on by insurance companies.

80.Section 152 states that the transfer of business rules in Chapter 11 of Part 1 or elsewhere apply to friendly societies and gives HM Treasury the power to modify those provisions by way of regulations.

81.Section 153 states that certain exempt BLAGAB or eligible PHI business will not be liable to corporation tax, and section 154 defines the term “BLAGAB or eligible PHI business”. Section 155 defines “exempt” BLAGAB or eligible PHI business.

82.Section 156 sets out specific provisions relating to exempt BLAGAB or PHI business (see section 155) for friendly societies whose rules prevent them from writing business above specified values.

83.Section 157 applies on a transfer of business to prevent any long-term business transferred to a friendly society from being exempt unless section 158 applied to the contracts before the transfer.

84.Section 158 allows previously exempt business to remain exempt if it is transferred to an insurance company, or the friendly society converts to a company. Such business comprises a separate business in the insurance company. Section 158 also provides for regulations to be made to modify the rules in the section.

85.Section 159 prevents profits on certain policies from coming within the exemptions from corporation tax provided by the legislation where the limits of the maximum benefits payable to members are breached.

86.Section 160 sets out limits on the value of exempt contracts which a policyholder may hold with one or more friendly societies at any time. Section 161 makes additional provisions for the purposes of section 160.

87.Section 162 provides for a friendly society or insurance company to require a policyholder to make a statutory declaration that the limits in section 105 have not been exceeded.

88.Section 163 allows the HMRC Commissioners to give a direction where it is considered necessary for the protection of revenue that an “old” society is to lose its status as an “old” society in respect of business carried on after the date of the direction.

89.Section 164 exempts a registered qualifying society (as defined) from a liability to tax on profits other than from life assurance business or PHI within “BLAGAB or eligible PHI business”, providing the society makes a claim.

90.Section 165 exempts an incorporated qualifying society (as defined) from a liability to tax on profits other than from life assurance business or from PHI within “BLAGAB or eligible PHI business”, providing the society makes a claim.

91.Section 166 explains that an insurance company acquiring business other than life insurance business or PHI within “BLAGAB or eligible PHI business” from a friendly society exempted under section 164 or 165 is exempt from corporation tax on the profits from that business. A friendly society converting to an insurance company is likewise exempt. Such business comprises a separate business in the insurance company. Section 166 also provides for regulations to be made to modify the rules in the section.

92.Section 167 explains what happens when business is transferred between friendly societies and sections 164 or 165 previously applied to the transferor. Business other than life insurance business or PHI within “BLAGAB or eligible PHI business” which was exempt in the transferor remains exempt in the transferee.

93.Section 168 allows the HMRC Commissioners to make a direction withdrawing a registered or incorporated society’s qualifying status in certain circumstances.

94.Section 169 sets out the circumstances in which a payment by a non-qualifying society to a member is treated as a qualifying distribution.

95.Where a registered friendly society becomes incorporated, Section 170 provides that assets of a branch of the society which are identified under section 6(5) of the Friendly Societies Act 1992 as not transferred to the new company are nonetheless to be treated as assets of the company for tax purposes.

96.Section 171 provides, where a claim is made, for an exemption from corporation tax for unregistered and unincorporated friendly societies whose income does not exceed £160 a year.

97.Section 176 introduces Schedule 18, which contains consequential amendments arising from Part 3.

98.Section 177 introduces Schedule 19, which contains transitional provisions arising from Part 3.

99.Section 178 states that the provisions of this Part are to have effect for accounting periods beginning on or after 1 January 2013.

100.Section 179 ensures that all friendly societies will have an accounting period beginning on 1 January 2013 (even if that would not otherwise be the case).

Schedule 16

101.Schedule 16 contains minor and consequential amendments to other Acts that flow from this new legislation.

102.Paragraph 87 inserts a new section 213A into the Taxation of Capital Gains Act (TCGA) 1992. This provides a power for HM Treasury to make regulations to ensure that the new Controlled Foreign Companies rules in Schedule 20 of FB2012 interact appropriately with section 212 TCGA.

Schedule 17

103.Schedule 17 contains transitional provisions.

Schedule 17 Part 1

104.Paragraph 1 explains that Part 1 of Schedule 17 provides for deemed receipts or deemed expenses to arise on transition for the purposes of computing BLAGAB trade profits and non-BLAGAB long-term business profits. The general rule is that receipts and expenses are treated as arising over a 10-year period.

105.Paragraph 2 explains what is meant by “the 2012 balance sheet” and “the 2012 periodical return”.

106.Paragraphs 3 and 4 deem a balance sheet and/or periodical return to have been drawn up at 31 December 2012 if the company does not have an actual balance sheet and/or periodical return at that date.

107.Paragraph 5 requires the insurance company to calculate the total transitional difference by way of a comparison of the amount attributed to shareholders (that is, amounts which would have been recognised in profits if an accounts basis had always applied) as at 31 December 2012 with the cumulative taxed surplus at the same date (that is, surplus recognised in the regulatory return and taken into account when computing profits). The paragraph permits HM Treasury to prescribe by regulations adjustments to the method by which the amount attributed to shareholders is calculated.

108.Paragraph 6 requires the insurance company to identify the items which together make up the total transitional difference, and to allocate a positive or negative amount to each item. The paragraph permits HM Treasury to prescribe by regulations how the items are to be determined.

109.Paragraph 7 provides that the items making up the total transitional difference are “relevant computational items” unless they are “excluded items”. It specifies certain excluded items and gives HM Treasury power to specify others by regulations.

110.Paragraph 8 apportions the relevant computational items between the pre-transition categories of business, that is, BLAGAB, gross roll-up business (GRB) and PHI. Amounts apportioned to PHI are ignored in applying the rest of the transitional rules.

111.Paragraphs 9 and 10 explain that relevant computational items (or parts of them) allocated to BLAGAB or non-BLAGAB long-term business are treated as receipts or expenses in computing BLAGAB trade profits or profits of non-BLAGAB long term business for accounting periods commencing on or after 1 January 2013.

112.Paragraph 11 describes the 10-year period over which receipts and expenses are treated as arising. The 10-year period begins on 1 January 2013. It excludes receipts which are “relevant court-protected items” (see paragraph 12).

113.Paragraph 12 defines a relevant court-protected item, and provides that receipts arising from such items are treated as arising over a 10-year period beginning on the date the court order ceases to be in force or 1 January 2015, whichever is the earlier.

114.Paragraphs 13 and 14 explain how transitional receipts or expenses are to be treated where there is a subsequent transfer of insurance business.

115.Paragraph 15 deals with the treatment of transitional amounts where an insurance company ceases to carry on long-term business other than as a result of a transfer.

116.Paragraph 16 provides that where there is an unrelieved charge under the financing arrangement-funded transfer legislation in section 83YC of Finance Act 1989 that charge is to be treated as a negative ‘relevant computational amount’.

117.Paragraph 17 is an anti-avoidance provision. Where, on or after 21 March 2012, an insurance company enters into arrangements or does something in connection with the transitional rules, and its purpose is unallowable, an officer of Revenue and Customs may take steps to nullify any tax advantage. An unallowable purpose includes securing a tax advantage in connection with the transitional rules.

118.Paragraphs 18 and 19 set out the clearance procedure by which a company can seek confirmation from HMRC that paragraph 17 does not apply.

119.Paragraph 20 makes special provision for overseas life insurance companies in certain circumstances.

Schedule 17 Part 2

120.Paragraph 21 provides for a company to make an irrevocable election to treat certain contracts of insurance effected prior to 1 January 2013 as having been made on or after that date for the purposes of section 62

121.Paragraph 22 prevents an amount being taken into account in computing BLAGAB trade profits or non-BLAGAB long-term business profits where it was already taken into account in computing trade profits in a period before the transition.

122.Paragraph 23 prevents double relief where an expense appeared in the regulatory return of a pre-transition period and was spread forward into a post-transition period under current tax rules. If that same expense were charged to the profit loss account in a post-transition period, double relief would, but for this paragraph, arise.

123.Paragraph 24 applies to intangible fixed assets which were excluded from Part 8 of CTA 2009 under the old law, but which are brought within Part 8 by this legislation. Expenditure incurred before 1 January 2013 is to be ignored in determining amounts to be brought into account under Part 8.

124.Paragraph 25 makes clear that the transition of assets from the existing categories in section 440 ICTA to the new categories in sections 116 to 118 does not trigger a deemed disposal and reacquisition.

125.Paragraph 26 makes clear that the transition of assets from the existing holdings of securities in section 440A ICTA to the new holdings in sections 119 to 121 does not trigger a deemed disposal and reacquisition.

126.Paragraph 27 provides rules for the carry forward of the base cost of existing holdings of securities under section 440A ICTA into the new holdings under sections 119 to 121.

127.Paragraph 28 applies in situations where existing rules at section 210B Taxation of Capital Gains Act 1992 would have operated. It gives identification rules where there is a disposal and acquisition of securities around the transition date.

128.Paragraphs 29 to 32 describe the treatment of various losses and excess management expenses carried forward from an accounting period ending before 1 January 2013 into the new regime.

129.Paragraph 33 permits acquisition costs spread forward under section 86 FA1989 from a pre-transition period to be relieved in a post-transition period.

130.Paragraph 34 permits BLAGAB trade losses to be carried back to pre-transition accounting periods under section 37 CTA 2010.

131.Paragraph 35 states that assets previously treated as assets of the shareholder fund for the last period of account ending before 1 January 2013 are to be treated as fixed capital assets from 1 January 2013. The paragraph defines when an asset is to be regarded as having been an asset of the shareholder fund.

Schedule 17 Part 3

132.Paragraph 36 applies where Part 1 of this Act re-enacts an enactment that has been repealed by the legislation. It provides that any statutory instrument which was made under a provision repealed by this legislation and which has effect for accounting periods ending on 31 December 2012 has effect in relation to subsequent accounting periods as if it had been made under the corresponding provision in this legislation.

133.Paragraphs 37 and 38 give HM Treasury a power to make further transitional provisions by way of regulations.

Background Note

134.The EU Solvency II Directive, which is expected to have effect from 2014, will fundamentally change the regulatory reporting framework on which life insurance company taxation is currently based. As a result of the changes which will be introduced by the Directive, regulatory returns made by insurance companies to the Financial Services Authority will no longer provide the information on which the current basis of taxation relies.

135.A new regime for the taxation of life insurance companies is therefore being introduced, which will apply from 1 January 2013. It aims to simplify the unique and complex rules currently governing life company taxation by bringing them more in line with those which apply to companies generally, and aligning them more closely with the commercial realities of life insurance business. The changes being introduced are extensive; the main points are summarised below.

Section 180 Schedule 20: Controlled Foreign Companies and Foreign Permanent Establishments

Summary

1.Section 180 and Schedule 20 provide for a new regime for controlled foreign companies (CFC) to be inserted as Part 9A of the Taxation (International and Other Provisions) Act 2010 (TIOPA), and repeal the current CFC rules in Chapter 4 of Part 17 of the Income and Corporation Taxes Act 1988 (ICTA). The section and schedule also provide for the new regime to apply, with necessary adaptations, to the rules for foreign permanent establishments (PE) in Chapter 3A of Part 2 of the Corporation Tax Act 2009 (CTA 2009).

2.The new regime introduced by this section will have effect for accounting periods of CFCs beginning on or after 1 January 2013.

Details of the Section

3.Section 180 introduces Schedule 20 which makes provision for rules dealing with CFCs and PEs of UK companies.

Details of the Schedule

Part 1.Controlled Foreign Companies

4.Paragraph 1 of Schedule 20 inserts Part 9A after Part 9 of TIOPA.

Chapter 1 – Introduction

5.Chapter 1 provides an overview of Part 9A, describing what is contained in each chapter and stating that Part 9A is part of the Corporation Tax Acts.

6.New section 371AA(1) and (2) states that the CFC charge will be charged on UK resident companies which have certain interests in CFCs and that this charge will be by reference to the chargeable profits of CFCs (see section 371BA below).

7.New subsection (3) defines a CFC as a non-UK resident company which is controlled by a UK person or persons.

8.New subsection (4) outlines the content of Chapter 2, where the basic details of the CFC charge including the steps to be taken to calculate the charge are set out.

9.New subsections (5) to (10) outline the contents of the subsequent chapters. These include Chapter 3, which sets out how to determine which (if any) of Chapters 4 to 8 apply in relation to the CFC’s profits, and Chapters 4 to 8 which if applicable set out how to determine the CFC’s profits (if any) that pass through the CFC charge gateway.

10.New subsection (11) provides that nothing in Part 9A affects the liability to corporation tax of a non-resident company that is itself within the charge to corporation tax or of the determination of such a company’s chargeable profits under the relevant provisions of CTA 2009.

11.New subsection (12) confirms that Part 9A is part of the Corporation Tax Acts.

Chapter 2 – The CFC Charge

12.New section 371BA outlines the basis on which a CFC charge is to be applied to a UK resident company. The CFC charge is imposed in relation to a CFC’s accounting period only if the CFC has chargeable profits for that period and none of the entity level exemptions set out in Chapters 10 to 14 apply for that period.

13.New section 371BA(3) defines a CFC’s chargeable profits for an accounting period as its assumed taxable total profits (see Chapter 19) for that period, determined on the basis that:

14.New section 371BB(1) sets out the steps for determining the extent to which a CFC’s assumed total profits for an accounting period pass through the CFC charge gateway.

15.Step 1 is to determine under Chapter 3 which (if any) of Chapters 4 to 8 apply for that period. If none of those Chapters apply step 2 is not to be taken as none of the assumed total profits pass through the CFC charge gateway.

16.Step 2 is to apply Chapters 4 to 8 so far as required by Step 1 to determine how much (if any) of the CFC’s assumed total profits fall within those chapters for the accounting period and hence pass through the CFC charge gateway.

17.New section 371BB(2) provides that subsection (1) is subject to Chapter 9 (exemptions for profits from qualifying loan relationships) and new section 371JE, which provides for adjustments of profits which would otherwise pass through the gateway where the exempt period exemption in Chapter 10 applies.

18.New section 371BC provides that, where there are profits that pass through the CFC charge gateway, the CFC charge is determined in accordance with a series of steps. These are used to work out whether or not a charge arises and, if it does, which UK resident companies are chargeable. The detailed rules that explain how these steps are to be applied are provided by subsequent chapters of Part 9A.

19.New section 371BC(2) sets out the residence condition for step 1, which is met if a company is resident in the UK at a time during the accounting period when it has a relevant interest in the CFC.

20.New section 371BC(3) defines a number of terms for the purposes of taking Step 5 and charging the CFC charge in relation to a chargeable company.

21.New section 371BD(1) in effect provides the definition of a “chargeable company” where a company meets the residence condition (of section 371BC(2)). Such a company is a chargeable company if the percentage of the chargeable profits apportioned to it, together with the percentages of the chargeable profits (if any) apportioned to relevant persons connected or associated with it at any time during the accounting period, are at least 25 per cent of the total chargeable profits of the CFC. So if, following Step 3 of section 371BC(1), two UK resident companies which are members of the same group, respectively have 90 per cent and 10 per cent of the CFC’s chargeable profits apportioned to them, they are both chargeable companies. New section 371BD(1) is subject to the application of new section 371BE (companies which are managers of offshore funds) and new section 371BF (companies which are participants in offshore funds).

22.New section 371BE removes from charge, for the purposes of step 4 of section 371BC(1), companies which are managers of offshore funds and hold a relevant interest in a CFC by virtue of an investment made in order to “seed” a fund. Four conditions must be met. They are set out at new section 371BE(1) as follows:

(a)

the CFC is an offshore fund (as defined in section 355);

(b)

the genuine diversity of ownership condition set out in regulation 75 of the Offshore Funds (Tax) Regulations 2009 (S.I. 2009/3001) is met in relation to the fund;

(c)

the fund management condition is met; and

(d)

apart from this section, a sum of no more than £500,000 would be charged on C as a chargeable company at Step 5 in section 371BC(1).  This is reduced proportionately where the accounting period is less than 12 months.

23.The fund management condition at new section 371BE(3) itself comprises three conditions. At all times during the accounting period during which a company has a relevant interest in the offshore fund;

a.

the assets of the offshore fund must be managed by the company with a relevant interest or by a person connected with that company;

b.

either the company or the connected person must receive a fee for managing the assets; and

c.

the company’s relevant interests in the offshore fund must be held only or mainly for the purpose of attracting participants in the offshore fund not connected with the company. Participants are defined in section 362.

24.New section 371BF provides circumstances in which companies which are participants in offshore funds will not be chargeable companies. Difficulties can occur in identifying when a UK company with an interest in an offshore fund may fall to be a chargeable company when the relevant interest may be close to the 25 per cent threshold set at section 371BD. This is because the proportionate holding in an offshore fund may fluctuate as by their nature offshore funds acquire and lose investors over time.

25.New section 371BF(1) deems a company not to be a chargeable company for the purposes of Step 4 in section 371BC(1) if:

(a)

the CFC is an offshore fund (as defined in section 355);

(b)

at the relevant time and at all subsequent relevant times, the company reasonably believes that the requirement of section 371BD(1) will not be met in relation to it (the 25 per cent requirement); and

(c)

the meeting of the 25 per cent requirement in relation to the company is in no way attributable to any step:

(i)

which was taken by the company or any person connected or associated with the company, and

(ii)

which, at the time it was taken, could reasonably have been expected to cause the 25 per cent requirement to be met.

26.Thus where a CFC is an offshore fund, a company participating in the fund will not be a chargeable company provided that at particular points during the accounting period (see below) it reasonably believes that its interest does not exceed the 25 per cent requirement, and provided that if the 25 per cent requirement is exceeded the cause is not directly attributable to the participant company or any persons connected or associated with it.

27.New subsection (2) defines the “relevant time” at which the participant company must hold the reasonable belief regarding its interest. The relevant time is the beginning of the accounting period, or if the company has no relevant interests in the offshore fund at the beginning of the accounting period, the time when the company first has a relevant interest during the accounting period.

28.New subsection (3) determines that any “subsequent relevant time” for considering the reasonable belief of the participant company is any time during the accounting period at which there is an increase or some other change in the relevant interests of the company to which the section applies.

29.New section 371BG modifies the calculation of the CFC charge for the relevant corporation tax accounting period where the chargeable company has a relevant interest that is a direct or indirect shareholding in a CFC. The section applies if the chargeable company treats any increase in the value of those shares and any distributions received from them as income for the purposes of its charge to corporation tax.

30.New section 371BG(1) provides that new subsection (2) applies to a chargeable company that holds a relevant interest in a CFC if conditions A to C are met at all times during the CFC’s accounting period.

31.New subsections (2) and (3) modify the operation of Step 5 in section 371BC(1). The modification in effect omits as much of the amounts P% and Q% as reflects the relevant interest as described in section 371BG, without affecting any CFC charge that may arise from any other relevant interest.

32.P% and Q% in Step 5 refer respectively to the proportions of the CFC’s chargeable profits and its creditable tax that are taken into account in calculating the chargeable company’s CFC charge.

33.New subsection (4) sets out Condition A which is met if the relevant interest or the part of a relevant interest is held by way of a direct or indirect holding by the chargeable company of shares in the CFC.

34.New subsection (5) sets out Condition B which is met if any increase in the value of the shares mentioned in Condition A is brought into account in determining the income of the chargeable company for corporation tax purposes.

35.New subsection (6) sets out Condition C which is met if any dividend or other distribution received by the chargeable company directly or indirectly from the shares mentioned in Condition A is brought into account in determining its income for corporation tax purposes.

36.New subsections (7) and (8) provide that Conditions B and C are taken to be met if:

(a)

the chargeable company has the relevant interest mentioned in Condition A only by virtue of new section 371OB(3) (an interest held by an open-ended investment company) or new section 371OB(4) (an interest held by the trustees of an authorised unit trust);

(b)

the CFC is an offshore fund (within the definition of section 355) that does not meet the qualifying investments test in section 493 of CTA 2009 (i.e. it is a ‘bond fund’); and

(c)

Conditions B and C would be met if the offshore fund met the qualifying investments test.

37.New subsection (9) provides that section 371BG is subject to new section 371BH (companies carrying on basic life assurance and general annuity business), which has the effect of restoring the CFC charge if certain conditions are met.

38.New section 371BH modifies the application of Step 5 of new section 371BC(1) for companies that carry on basic life assurance and general annuity business (BLAGAB).

39.New section 371BH(1) sets out the conditions to be met if Step 5 at new section 371BC(1) is to be taken in line with new section 371BH(2) and (3). The conditions are:

(a)

the chargeable company carries on BLAGAB during the relevant corporation tax accounting period;

(b)

the life insurance I - E rules apply to the chargeable company for the relevant corporation tax accounting period; and

(c)

certain conditions set out in the section are met in relation to a relevant interest that the chargeable company holds in a CFC at all times during the CFC’s accounting period. Conditions D and G must both be met and at least one of Conditions E or F must be met for the section to apply.

40.New subsection (2) provides for additional sum to be charged on the chargeable company and step 5 in section 371BC(1) is to be taken on the basis set out in new subsection (3).

41.New subsection (3) in effects limits the additional sum charged in relation to the relevant interest of the chargeable company to the policyholders’ share of the BLAGAB component of the CFC’s apportioned profit (see subsection (11) below), which is charged at an ”appropriate rate”.

42.The appropriate rate is determined by reference to section 102 of the Finance Act 2012 (FA 2012), or an average rate where there is more than one such rate over the relevant corporation tax period. The CFC’s creditable tax to be apportioned to the chargeable company is calculated by reference to the proportion that the policyholders’ share of the BLAGAB component of the apportioned profit is of the whole of the apportioned profit.

43.New subsection (4) defines Condition D which is met if the relevant interest or the part of a relevant interest is held by way of a direct or indirect holding by the chargeable company of shares in the CFC.

44.New subsections (5) and (6) define Condition E which is met if no part of any increase in the value of the shares mentioned in Condition D is brought into account at step 1 in section 73 of FA 2012 in determining the income of the chargeable company for the purposes of the I-E profit computation for the relevant corporation tax accounting period.

45.New subsections (7) and (8) define Condition F which is met if no part of any dividend or other distribution received by the chargeable company directly or indirectly from the shares mentioned in Condition D is brought into account at step 1 in section 73 of FA 2012 in determining the income of the chargeable company for the purposes of the I-E profit computation for the relevant corporation tax accounting period.

46.New subsection (9) defines condition G which is met if any part of the shares mentioned in Condition D is held for the purposes of the chargeable company’s long term business.

47.New subsection (10) defines ‘the apportioned profit’ as the part of P% that is attributable to the relevant interest or the part of a relevant interest mentioned in Condition D (CC’s relevant interest).

48.New subsection (11) sets out the steps required to determine the “BLAGAB component” of the apportioned profit:

49.New subsection (12) explains that the “policyholders’ share” of the BLAGAB component is equal to the policyholders’ share of the I-E profit for the relevant corporation tax accounting period as determined by Chapter 5 of Part 2 of FA 2012.

Chapter 3 - The CFC charge gateway: determining which (if any) of Chapters 4 to 8 apply

49.Chapter 3 of Part 9A applies for the purposes of Step 1 of section 371BB in order to determine which (if any) of Chapters 4 to 8 need to be considered in determining whether any of a CFC’s profits pass through the CFC charge gateway. If Chapter 3 does not require any of Chapters 4 to 8 to be applied there will be no CFC charge.

50.New section 371CA provides that Chapter 4 (profits attributable to UK activities) will apply for a CFC’s accounting period unless any one of four conditions (A to D) is met.

51.Condition A at new section 371CA(2) is met if the CFC does not, at any time in the accounting period, hold assets or bear risks under an arrangement to which both new subsections (3) and (4) apply. These subsections apply where:

52.Condition B at new subsection (5) is met if the CFC has no UK managed assets and bears no UK managed risks at any time during the accounting period.

53.Condition C at new subsection (6) is met if the CFC has itself the capability throughout the accounting period to ensure that its business would be commercially effective if its UK managed assets and risks were to stop being UK managed.

54.New subsection (7) specifies that, for the purpose of Condition C, the required capability includes the CFC being able to select providers of goods and services from persons not connected with it and to manage its transactions with such persons.

55.New subsection (8) requires two assumptions to be made in determining whether Condition C is met at any time during the accounting period. The first assumption is that the CFC would continue to carry on the same business as it is actually carrying on at that time. The other assumption is that none of the relevant UK activities, by which any asset or risk was UK managed, would be replaced by activities carried on by any person connected with the CFC at any time, or in any other way which relied to any extent upon the CFCs receiving resources or other assistance from any person connected with the CFC at any time.

56.New subsection (9) determines that an asset or risk is “UK managed” if any of the functions specified in the subsection are managed or controlled to any significant extent through relevant UK activities.

57.New subsection (10) defines relevant UK activities as activities carried on in the UK either by the CFC itself (unless through a UK permanent establishment) or by companies connected with the CFC. In the latter case the meaning is limited to activities under arrangements which it is reasonable to suppose would not be entered into by companies that were independent of each other.

58.Condition D at new subsection (11) is that the CFC’s assumed total profits only consist of (one or both of):

59.New section 371CB(1) provides that Chapter 5 (non-trading finance profits) applies for a CFC’s accounting period only if the CFC has non-trading finance profits. This is subject to new sections 371CC and 371CD, which deal with incidental non-trading finance profits. The references to non-trading finance profits in the section and Chapter 5 exclude any profits that fall within Chapter 8 (solo consolidation) or within new section 371CB(3) or (4).

60.New section 371CB(3) excludes profits which arise from the investment of funds held for the purposes of a trade if that trade is carried on by a CFC and no profits of that trade for the accounting period pass through the CFC charge gateway

61.New subsection (4) excludes profits which arise from the investment of funds held by the CFC for the purposes of its UK or overseas property business.

62.New subsection (5) sets out a number of circumstances in which the exclusions in subsections (3) and (4) will not apply. Those exclusions will not apply to non-trading finance profits arising from funds held:

(“the relevant 12 month period” is defined in new subsection (7) as being 12 months after the end of the accounting period)

63.New subsection (8) provides that where a chargeable company makes a claim under Chapter 9 (exemptions for profits from qualifying loan relationships) its qualifying loan relationship profits are excluded from the references to non-trading finance profits in this section and in Chapter 5.

64.New section 371CC applies if one or both of the requirements of new section 371CC(1) is met. These are:

(a)

that the CFC has trading or property business profits (or both);

(b)

that the CFC has exempt distribution income and at all times during the accounting period a substantial part of its business of the CFC is the holding of shares or securities in companies which are its 51 per cent subsidiaries.

65.New section 371CC(2) provides that Chapter 5 will not apply for an accounting period if the CFC’s non-trading finance profits are not more than 5 per cent of the relevant amount, as defined in section 371CC(3).

66.New subsection (3) defines “the relevant amount” with reference to whether one or both of the requirements are met. If (a) is met then the relevant amount is the total of trading or property business profits, as calculated before any deduction for interest or any tax or duty. If (b) is met the amount is the total of the CFC’s exempt distribution income. If both (a) and (b) are met the amount is the sum of the two totals. New subsection (9) defines “exempt distribution income” as any dividends or other distributions which are excluded from the assumed total profits of the CFC because they would be exempt under Part 9A of CTA 2009.

67.New subsections (4) and (5) apply if requirement (b) is met and at any time during the accounting period a 51 per cent subsidiary of the CFC is also a CFC (“the CFC subsidiary”) which has relevant non-trading finance profits determined in accordance with new subsection (6) or (7). In that case the CFC subsidiary’s relevant non-trading finance profits are to be added in with the non-trading finance profits of the CFC for the purposes of testing the 5 per cent limit.

68.New subsections (6) and (7) define the CFC subsidiary’s “relevant non-trading finance profits” with reference to whether it has an accounting period that is the same as or falls wholly within that of the CFC, or if it has an accounting period which otherwise overlaps with that of the CFC.

69.Subsection (6) deals with a CFC subsidiary whose accounting period either matches or falls entirely within the accounting period of the holding company CFC, provided that by virtue of new sections 371CC or 371CD, Chapter 5 does not apply to the CFC subsidiary for the relevant period. The relevant non-trading finance profits of such a CFC are its non-trading finance profits for the relevant period.

70.Subsection (7) deals with a CFC subsidiary whose accounting period overlaps with the accounting period of the holding company CFC, again provided that by virtue of sections 371CC or 371CD, Chapter 5 does not apply to the CFC subsidiary for the relevant period. The relevant non-trade financing profits of such a CFC are a just and reasonable proportion of its non-trading finance profits for that period.

71.New subsection (8) excludes any trading profits that pass through the CFC charge gateway for the accounting period from trading profits for the purposes of this section.

72.New section 371CD applies where both the requirements of section 371CC(1)(a) and (b) are met but the CFC’s tested non-trading finance profits exceed 5 per cent of the relevant amount for the purposes of section 371CC(2). In that case new section 371CD(2) provides that Chapter 5 does not apply for the accounting period if the CFC’s adjusted non-trading finance profits do not exceed 5 per cent of the total of the CFC’s exempt distribution income.

73.New subsection (3) defines the CFC’s adjusted non-trading finance profits as all of its non-trading finance profits less those arising from the investment of funds held for the purposes of the CFC’s trade and/or property business within section 371CB(3) or (4).

74.New subsection (5) applies if a CFC subsidiary’s relevant non-trading profits are added to the CFC’s non-trading finance under section 371CC(5) for the purposes of the test at section 371CC(2). It specifies that the adjusted non-trading finance profits for the test in section 371CD(2) are also to include the CFC subsidiary’s relevant non-trading finance profits.

75.The effect of the further 5 per cent rule at section 371CD for a ‘mixed activity’ CFC not within the 5 per cent limit of section 371CC is that Chapter 5 will apply to any non-trading finance profits that are not incidental to its trade or property business, unless that amount is within 5 per cent of the CFC’s exempt distribution income.

76.New section 371CE provides that Chapter 6 (trading finance profits) applies for a CFC’s accounting period only if the CFC has trading finance profits and at any time during the accounting period the CFC has funds or other assets derived directly or indirectly from UK connected capital contributions.

77.New section 371CE(2) provides that Chapter 6 will not apply and that trading finance profits will be treated as if they were non-trading finance profits if the CFC is a group treasury company in the accounting period who has issued a notice to an Officer of HM Revenue & Customs requesting this treatment.

78.New section 371CE(3) provides that where a group treasury company issues a notice under section 371CE(2) then those profits will not be treated as non-trading finance profits falling within section 371CB(3) and (4). These subsections exclude non-trading finance profits from the application of Chapters 5 and 9 where they have arisen from the investment of funds held for the purposes of an exempt trade or property business. As a result a group treasury company who has issued a notice will also not be able to exclude any of its finance profits under the incidental non-trading finance profit rules in sections 371CC and 371CD.

79.New subsection (4) applies the definition of group treasury company at section 316.

80.The group treasury company notice provisions work in accordance with the worldwide debt cap rules at Part 7. Those rules do not apply to groups that are not large. New subsection (5) ensures that a group that is not large is able to issue a notice under section 371CE(2).

81.New subsections (6) to (8) set out the requirements for issuing a notice under this section, which must be within 20 months after the end of the accounting period or a longer period that an Officer of HM Revenue & Customs may allow.

82.New subsection (7) allows a company to issue a notice if it would be a chargeable company under section 371BC for the accounting period and the percentage of the CFC’s chargeable profits to be apportioned to it would be more than half of the percentage specified in subsection (9).

83.New subsection (8) allows two or more companies to issue a notice if they would be chargeable companies under section 371BC for the accounting period and the percentage of the CFC’s chargeable profits to be apportioned to them, taken together, would be more than half of the percentage specified in subsection (9).

84.New subsection (9) gives the percentage (X%) for the purposes of subsections (7) and (8) as the total percentage of the CFC’s chargeable profits which would be apportioned to chargeable companies if the CFC charge was charged for the accounting period.

85.New section 371CF provides that Chapter 7 (captive insurance business) applies for a CFC’s accounting period only if at any time in that period the main part of its business is insurance business and its assumed total profits include amounts derived from contracts of insurance as specified in new subsection 371CF(2). These are contracts entered into with:

86.New section 371CG provides that Chapter 8 (solo consolidation) only applies for a CFC’s accounting period if either of two conditions is met. The first condition is that at any time in the period the CFC is a subsidiary undertaking which is the subject of a solo consolidation waiver under section BIPRU 2.1 of the FSA Handbook, and the CFC’s parent undertaking in relation to that waiver is a UK resident company.

87.The second condition is that at any time in the period the CFC is controlled by a UK resident bank (alone or with other persons) which holds shares in the CFC, and any fall in the value of those shares would be (wholly or mainly) ignored for the purpose of determining whether the UK resident bank meets the requirements of the FSA Handbook in relation to it’s capital. This is limited to where the main purpose, or one of the main purposes, of the UK resident bank in holding the shares is to obtain a tax advantage for itself or any connected company.

88.Solo consolidation is an arrangement whereby the FSA allows a regulated financial company to treat an unregulated subsidiary for regulatory purposes as if it were a division of the regulated company. A company that wishes to solo consolidate must apply to the FSA for a waiver.

89.New section 371CG(4) provides definitions of the terms “FSA Handbook” and “UK resident bank” used in the section. Subsections (5) and (6) provide that the Treasury may by regulations amend the chapter, or Chapter 8, to take account of changes to or replacement of the relevant regulatory publications.

Chapter 4 - the CFC charge gateway: profits attributable to UK Activities

90.Chapter 4 applies subject to the conditions given in section 371CA. It determines whether any of a CFC’s assumed total profits pass through the CFC charge gateway (see section 371BB) because of UK activities that contribute to those profits. New section 371DB sets out the steps by which any profits falling within this chapter are calculated, but this is subject to the exclusions provided for in the rest of Chapter 4.

91.New section 371DA introduces the Chapter. New section 371DA(2) excludes non-trading finance profits and property business profits from the CFC’s assumed total profits for the purposes of the Chapter.

92.New subsection (3) defines, for the purposes of the Chapter, the following terms: “the OECD Report”, “the CFC group”, “the provisional Chapter 4 profits”, “the relevant assets and risks”, “SPF”, “UK SPF” and “non-UK SPF”. Subsection (3)(b) specifies that terms used which are also used in the OECD Report have the same meaning for the purposes of the Chapter as they have in that report.

93.New subsection (4) provides that the Treasury may by regulations amend Chapter 4 to take account of any “relevant document” published by the OECD. New subsection (5) defines “relevant document” as one which replaces, updates or supplements the OECD Report, or one that replaces, updates or supplements one which is itself a “relevant document”.

94.New section 371DB(1) sets out the steps to determine the Chapter 4 profits which are to be taken in accordance with the principles set out in the OECD Report so far as relevant.

95.New section 371DC provides for the exclusion of assets and risks at Step 6 in section 371DB(1) where most of the SPFs are not UK SPFs. New section 371DC(1) applies the exclusion to an asset or risk included in the relevant assets and risks where amount A is not more than 50 per cent of amount B. Amounts A and B are defined by subsections (2) and (3) respectively.

96.New subsection (2) defines amount A as the total of the gross amounts of the CFC’s income defined by subsection (2)(a) and additional expenses defined by subsection (2)(b).

97.The gross amounts of the CFC’s income are those that would not have become receivable during the accounting period if the CFC had not held the asset or borne the risk so far as it would be attributed to the permanent establishment mentioned at step 5 in section 371DB(1). An example of such a receipt is a royalty (or part royalty) that the CFC would not have received if it did not hold the relevant Intellectual Property (IP) (or did not hold the whole of it).

98.The additional expenses are those that the CFC would have incurred if it had not held the asset or borne the risk so far as it would be attributed to the permanent establishment mentioned at step 5. An example of such an expense would be a royalty for the use of IP that the CFC would have to pay if it did not hold the IP itself (or did not hold the whole of it).

99.New subsection (3) defines amount B as the total of the gross amounts of the CFC’s income defined by subsection (3)(a) and additional expenses defined by subsection (3)(b). The gross amounts of the CFC’s income are those that would not have become receivable during the accounting period if the CFC had not held the asset or borne the risk to any extent at all. The additional expenses are those that the CFC would have incurred if it had not held the asset or borne the risk to any extent at all.

100.The exclusion therefore applies if the attribution of assets or risks to UK SPFs required by Step 5 of section 371DB reduces gross income, or increase expenses by less than half of the amount that would follow if the assets or risks were not owned or borne by the CFC at all.

101.New subsections (4) and (5) provide for a bundle of assets or of risks to be treated as if it were a single asset or risk for the purposes of this section. Assets or risks are bundled in this way if it is not reasonably practicable to separate them for the purpose of identification of SPFs.

102.New section 371DD excludes amounts from the provisional Chapter 4 profits where substantial economic value, other than tax savings, arises from the CFC’s holding of assets or its bearing of risks.

103.New section 371DD(1) and (2) exclude amounts from its provisional Chapter 4 profits if:

104.New subsection (3) defines the term “net economic value” used in subsection (2). It excludes value directly or indirectly derived from the reduction or elimination of any person’s liability to tax or duty imposed under the law of any territory outside the United Kingdom.

105.New subsection (4) defines the term “relevant non-tax value” used in subsection (2). It is the part of the value which results from the CFC holding the asset or bearing the risk that does not derive from the reduction or elimination of any person’s UK tax or duty.

106.Overall therefore, non-tax value which results from the CFC holding the asset or bearing the risk is compared to the aggregate of non-tax value and value derived from the UK tax advantage. Foreign tax effects are wholly disregarded for the purposes of this comparison.

107.New subsections (5) and (6) provide for a bundle of assets or of risks to be treated as if it were a single asset or risk for the purposes of this section. Assets or risks are bundled in this way if it is not reasonably practicable to separate them for the purpose of identification of SPFs.

108.New section 371DE excludes amounts from the provisional Chapter 4 profits where they arise from arrangements that independent companies would have entered into.

109.New section 371DE(1) sets out the circumstances in which subsection (2) will apply.

110.New subsection (2) excludes the amount arising from the arrangements identified in subsection (1), if it is reasonable to suppose that if the UK SPFs were not carried out by companies connected with the CFC then the CFC would enter into arrangements with companies it was not connected with and that those arrangements would:

111.New subsections (3) and (4) provide for a bundle of assets or of risks to be treated as if it were a single asset or risk for the purposes of this section. Assets or risks are bundled in this way if it is not reasonably practicable to separate them for the purpose of identification of SPFs.

112.New section 371DF introduces an exclusion from Chapter 4 for trading profits. If all the conditions for the exclusion to apply are met, then all the trading profits of the CFC are excluded from the provisional Chapter 4 profits, and therefore exempt from a CFC charge.

113.With the exception of the management expenditure condition in new section 371DI, the conditions only apply on an entity basis, so that a CFC as a whole will either meet or fail the conditions. The conditions provide an alternative to consideration of the detailed SPF provisions in Chapter 4.

114.New section 371DF(1) sets out the conditions to be met. Those conditions are set out in subsequent sections, and relate to:

115.New section 371DF(2) also excludes trading profits from a CFC charge under Chapter 4 in accordance with the management expenditure condition in new section 371DI. The management expenditure condition can be applied to the whole of a CFC or to certain assets or risks of the CFC. This subsection allows for trading profits which arise from certain assets or risks to be excluded from a CFC charge.

116.New subsection (3) provides that the exclusion is subject to an anti-avoidance rule in section 371DL.

117.New section 371DG sets out the business premises condition. New section 371DG(2) requires the CFC to have premises with a degree of permanence in its territory of residence throughout the accounting period, and that those premises are the sole or main base from which the CFC’s activities in that territory are carried on.

118.New subsection (3) defines premises to include an office, factory, mine or oil well, and a building site where the work will last at least 12 months.

119.New section 371DH sets out the UK income condition. New section 371DH(2) requires that no more than 20 per cent of the CFC’s “relevant trading income” comes directly or indirectly from UK resident persons or UK permanent establishments.

120.New subsection (3) defines “relevant trading income” as the trading income of the CFC excluding any income from UK sales of goods produced in the CFC’s territory of residence.

121.New subsections (4) and (5) set out an alternative UK income condition for a CFC whose main business is banking business which is regulated in its territory of residence. The condition is that the “relevant UK trading income” is no more than 10 per cent of the CFC’s total trading income. For this purpose, new subsection (6) defines “relevant UK trading income” as trading income derived directly or indirectly from UK resident persons or UK permanent establishments, excluding interest received from UK resident companies which are connected or associated with the CFC.

122.New subsection (7) restricts the application of the trading income condition in relation to income from UK companies which have made an exemption election in relation to PEs. In such cases, income is disregarded if the corresponding expense is taken into account for the purposes of section 18A of CTA 2009.

123.New section 371DI sets out the management expenditure condition.

124.New section 371DI(2) and (3) limit “UK related management expenditure” to 20 per cent of “total related management expenditure”

125.New subsection (3) defines “total related management expenditure” as the total expenditure incurred by the CFC in relation to staff or other individuals who carry out “relevant management functions.” A relevant management function is defined in new subsection (5) as a function whereby a person manages or controls any of the relevant assets or risks of the CFC. Relevant assets or risks are defined at section 371DB(1) as assets and risks which give rise to profits.

126.The expenditure incurred by the CFC is categorised in subsection (3)(a) to (c) and covers expenditure incurred on staff or other individuals, and on the engagement of related companies. The related companies’ expenditure is itself limited to amounts which relate to the engagement of staff or other individuals.

127.Expenditure in relation to individuals who are not members of staff is included in related management expenditure if those individuals carry out relevant management functions as the result of an arrangement between the CFC or related company and that individual.

128.New subsection (4) defines “UK related management expenditure” as related management expenditure which relates to staff or other individuals who carry out relevant management functions in the UK.

129.New subsection (6) provides an example of a person carrying out relevant management functions, as a person who formulates plans or makes decisions in relation to the acquisition, creation, development or exploitation of assets, or the taking on or bearing of risks. This definition matches the definition of assets or risks that are “UK managed” which is provided by section 371CA(4) in Chapter 3, which determines whether Chapter 4 applies.

130.New subsections (7) to (9) apply in circumstances where the 20 per cent management expenditure condition in subsection (2) is not met, but all the other trading income safe harbour conditions are met. If, for any given asset or risk, the UK related management expenditure is not more than 50 per cent of the total related management expenditure for that asset or risk, then this 50 per cent condition is met and the trading profits which arise from that asset or risk are excluded from the provisional Chapter 4 profits (see Step 7 of section 371DB(1)).

131.New subsections (10) and (11) allow assets or risks which it is not reasonably practicable to separate for the purposes of the 50 per cent condition set out in subsections (7) to (9) to be considered together in the application of that condition.

132.New section 371DJ sets out the IP condition.

133.The condition is met unless IP has been transferred to the CFC from related parties in the UK within the previous six years and the transfer has had a significant impact on the profits of the CFC, the total IP held by the CFC, or the value of IP held by the transferor.

134.New section 371DJ(2)(a) defines “the exploited IP”. New section 371DJ(2)(b) then asks whether any of that exploited IP was transferred to the CFC by related parties at any time during the accounting period or the previous six years (see subsection (5)) or otherwise derived (directly or indirectly) out of or from IP held at times during that period by persons related to the CFC.

135.New subsection (2)(c) asks whether, as a result of those IP transfers, the value of IP held by the related party transferors is significantly less than it would otherwise have been.

136.New subsection (2)(d) then applies the significance condition in all cases where the transferred (or derived) IP is less than the total exploited IP held by the CFC. In cases where all of the exploited IP has been transferred to the CFC by related parties (or otherwise derived as mentioned in subsection (2)(b)), the significance condition does not apply.

137.New subsection (3) contains the significance condition, which is met if IP which has been transferred from the UK (or otherwise derived as mentioned in subsection (2)(b)) forms a significant part of the total exploited IP of the CFC, or if the transfer (or other derivation) of IP from the UK produces CFC profits which are significantly higher than they otherwise would have been. The part of the exploited IP transferred from the UK is referred to as “the UK derived IP”.

138.New subsection (4) limits the scope of the section in relation to transfers or holding of IP from non-UK resident related persons. Such transfers or holding of IP are relevant only if the IP was held for the purposes of a UK permanent establishment of the non-UK resident person.

139.New subsection (5) defines “the relevant period” as the period covering the accounting period and the previous six years.

Example of Application of IP Condition

140.A CFC holds IP (exploited IP). Some of this IP has been generated by the CFC’s own trading activity. The rest has been transferred to the CFC from a related company in the UK within the past six years.

141.Prior to transfer, the transferred IP was around 40 per cent of the total IP (by balance sheet value) held by the UK related company transferor. The UK derived IP constitutes 25 per cent of the exploited IP of the CFC (by balance sheet value).

142.As a result of the transfer the CFC’s assumed total profits are 30 per cent higher than they otherwise would have been. The assumed total profits of the CFC do include amounts arising from IP – section 371DJ(2)(a).

143.Parts of the exploited IP were transferred from persons related to the CFC during the relevant period – section 371 DJ(2)(b). The related person was a UK related person, so the limitation required by section 371DJ(4) does not apply.

144.As a result of the transfer, the value of IP held by the transferor has been significantly reduced – section 371DJ(2)(c).

145.As only part of the exploited IP has been so transferred, the significance condition has to be considered – section 371DJ(2)(d).

146.The UK derived IP (the transferred IP) is a significant part of the exploited IP, and the profits of the CFC are significantly higher as result of that transfer – section 371DJ(3)(a) and (b). Note that only one of these conditions has to be met in order for the significance condition to be met.

147.Application of section 371DJ in this case means that the IP condition is not met – and therefore the trading profits exclusion cannot apply.

148.New section 371DK provides that the export of goods condition is met if no more than 20 per cent of the total trading income of the CFC arises from goods exported from the UK. However, goods which are exported from the UK into the CFC’s territory of residence are disregarded.

149.New section 371DL provides an anti-avoidance measure for the trading profits exclusion. The section applies if it is reasonable to assume that the various conditions would not have been met in the absence of an arrangement. An arrangement falls within this section if one of the main purposes of an organisation or reorganisation of a significant part of the business of the CFC group is to ensure that one or more of the conditions are met. This includes the 50 per cent asset or risk management expenditure condition (for which see section 371DI).

Chapter 5 – The CFC charge gateway: non-trading finance profits

150.Chapter 5 is the charge gateway for non-trading finance profits within the main charging provision at new section 371BA(3)(a). Such profits are any non-trading finance profits that are included within the CFC’s assumed total profits for the accounting period, so far as they fall within one of more of new sections 371EB to 371EE. These sections apply where the CFC has non-trading finance profits derived from one or more of the following categories:

151.Non-trading finance profits are defined in new section 371VG(1) to (3). They are profits from loan relationships which would be chargeable to corporation tax under section 299 of CTA 2009 and non-exempt distributions within Part 9A of CTA 2009. Non-trading finance profits also include profits arising from a relevant finance lease as defined at new section 371VA.

152.Section 371CE(2) also provides for the trading finance profits of a group treasury company to be treated as non-trading finance profits where a notice is issued to an Officer of HM Revenue and Customs. This rule enables a group treasury company that has trading finance profits to access the non-trading finance profits rules at Chapter 5 (and the finance company exemptions within Chapter 9). Once a notice has been issued the deemed non-trading finance profits become chargeable profits of a CFC only if they fall within one or more of new sections 371EB to 371EE.

153.New section 371EB includes within Chapter 5 any non-trading finance profits that are attributable to UK activities. The profits are calculated by applying Steps 1 to 5 and 7 at section 371DB to the CFC’s non-trading finance profits. By excluding Step 6 of that section from the calculation, profits are brought into charge without the limitation imposed by section 371DC for cases where less than 50 per cent of the SPFs attributable to managing the asset or risk associated with the non-trading finance profits are UK SPFs.

154.New section 371EC includes within Chapter 5 any non-trading finance profits so far as they arise from the investment of “relevant UK funds or other assets”. For these purposes “UK funds” are monetary assets and “other assets” are non-monetary assets.

155.The calculation of the profits that pass through the CFC charge gateway by virtue of the profits falling within Chapter 5 takes account of any expenditure or deduction that would be taken into account in calculating the CFC’s assumed total profits. In arriving at the amount of non-trading finance profit that is attributable to capital investment from the UK new section 371EC(2) and (3) allow for an additional deduction that represents the difference (if any) between the arm’s length fund management fee that it is reasonable to suppose would be charged for managing the funds or assets and the management expenditure actually incurred in realising the non-trading finance profit.

156.New subsection (4) defines “relevant UK funds or other assets” as funds derived, directly or indirectly, from:

157.New subsection (6) defines “UK connected company” for the purposes of subsection (4) and includes the UK permanent establishment of a non-UK connected company.

158.New section 371ED includes non-trading finance profits to the extent that they arise from an arrangement, directly or indirectly with a UK resident company connected with the CFC, or to UK permanent establishments of non-UK companies connected with the CFC. An arrangement will typically be a loan to a UK resident company. An example of an indirect arrangement would be a loan from the CFC to a non-UK resident person, who then makes a loan to a UK resident company that is connected with the CFC.

159.Profits from such an arrangement are included in Chapter 5 if it is reasonable to suppose that the arrangement has been made as an alternative to making a dividend or other form of distribution, directly or indirectly, to the UK and that the main reason or one of the main reasons for adopting the alternative arrangement is a reason relating to any UK or non-UK tax liability. This test focuses on the reason why the arrangement was made rather than a dividend being paid (or any other distribution being made) to the UK. The section will therefore apply, for example, to profits arising from a loan made by the CFC to the UK to repatriate funds if a loan was made because a dividend paid to the UK would have attracted withholding tax.

160.New section 371EE includes non-trading finance profits within Chapter 5 where they arise from the direct or indirect relevant finance lease of an asset to a UK resident company or UK permanent establishment of a non-UK company that is connected to the CFC. The rule is limited to those cases where it is reasonable to suppose that the main reason or one of the main reasons for entering into the lease rather than directly or indirectly purchasing the asset is a UK or non-UK tax reason. This test focuses on the reason why a lease was entered into in preference to another means of obtaining the use of the asset.

Chapter 6 – The CFC charge gateway: trading finance profits

161.Chapter 6 determines the trading finance profits for the purpose of the CFC charge gateway. Profits are within this Chapter to the extent they derive from excess capital or in the case of an insurance business from excess free assets. Trading finance profits are defined by new section 371VG(4) and (5). They are profits from trading loan relationships (including amounts within Parts 6 and 7 of CTA 2009 that arise from relationships that are treated as loan relationships), distributions treated as trading income and trading profits from a relevant finance lease as defined at section 371VA.

162.New section 371FA(1) provides the basic rule for determining the profits that fall into this Chapter for an accounting period. There are three steps.

163.Step 1 is to determine if the CFC’s free capital is greater than what it is reasonable to suppose it would be if the CFC was a company which was not a 51 per cent subsidiary of any other company, but carrying on the same business with the same amount of funding. The test will take account therefore of any assets in the form of shareholdings held by the CFC in other companies. The amount of this excess free capital is limited to the extent it derives, directly or indirectly from “UK connected capital contributions” (which is defined in section 371VA).

164.So for example, a UK company A provides capital of 60 to a non-UK intermediate holding company B, which in turn provides capital of 60 to CFC C. Company B also provides, from its own reserves, additional capital of 40 to C, so that C’s total capital is 100. If C was not a 51 per cent subsidiary of A, it would have free capital of 20. C therefore has excess capital of 80, but as only 60 is provided by the UK the amount of excess free capital calculated by step 1 of subsection (1) is limited to 60.

165.Step 2 uses the same approach as step 1, but only applies if the CFC carries on insurance business (as defined in section 371VA). This test requires a comparison of the CFC’s actual level of free assets, against the amount of free assets it would be expected to have if the CFC was not a 51 per cent subsidiary of any other company but was carrying on the same insurance business. The amount of any excess free assets is limited to the extent it derives, directly or indirectly from UK connected capital contributions (which is defined in section 371VA).

166.Where there is either excess free capital as a result of performing step 1, or excess free assets as a result of performing step 2, step 3 determines the profits that fall into Chapter 6 as the amount of trading finance profits that it is reasonable to suppose arise from the use or investment of either or both amounts during the accounting period.

167.New section 371FA(2) defines free capital for the purpose of the test in step 1 as funding that does not give rise to debits that are brought into account in determining the non-trading finance profits or trading finance profits of the CFC. A CFC’s free capital is therefore any funding that does not give rise to a deduction that would be taken into account in calculating those profits.

168.New subsections (3) and (7) define free assets for the purpose of the test in step two as the amount by which the value of the CFC’s assets exceeds its loan capital. The value of an asset is the amount that it reasonable to suppose the CFC would obtain from an unconnected third party if it transferred all its rights in that asset to that person.

169.New subsections (5) and (6) provide for a reduction in the amount of the free assets for the purpose of the test in step 2 to the extent the CFC holds assets under certain circumstances. Those circumstances are that the insurance CFC, for regulatory reasons, is required to hold more assets than it otherwise would because it has provided a guarantee to another company connected with the CFC undertaking insurance business and that guarantee is required for regulatory reasons in order for the company connected with the CFC to carry on insurance business.

170.New section 371FB provides for the free capital or free assets to be increased by an amount of loan capital owed by the CFC to the extent that the profits of the lender (where the lender is a connected CFC) in respect of that loan capital, which is a qualifying loan relationship, are exempt under Chapter 9. New section 371FB(3) provides a calculation that determines if E% of the profits arising from the qualifying loan relationship are exempt for the lender. If so, E% of the qualifying loan relationship is added to the amount of free capital or free assets.

171.New subsection (4) explains what assumptions are to be made in calculating the amount of the profits arising from the qualifying loan relationship. This includes establishing the period over which the profits of the qualifying loan relationship should be tested in subsection (3). New subsection (5) provides the steps to be taken to establish what amount of those profits are exempt profits. Those steps are taken for each chargeable company that makes a claim under Chapter 9 that relates to the accounting period of the CFC that has lent the loan capital.

172.So for example if an insurance company receives a loan, which is a qualifying loan relationship, of 200, with the profits from that loan being 75 per cent exempt in the lender (which is a connected CFC), then the same proportion of the loan should be disregarded as loan capital, so that 150 is treated instead as being included in the free assets. If a bank were to receive the same loan, its free capital would be increased by 150. In both cases the effect would be to increase the amount being tested (free capital or free assets) by 150.

173.New section 371FC gives a similar result to section 371FB where the qualifying loan relationships are made by PEs within Chapter 3A of Part 2 of CTA 2009 to banking or insurance CFCs that are ultimate debtors. The result is that loans that are treated as qualifying loan relationships from PEs will therefore be counted as equity for Chapter 6 purposes in the same way as loans that are treated as qualifying loan relationships from CFCs.

174.New sections 371FD and FE confers a power on the HMRC Commissioners to make regulations setting out conditions under which the third step (and thus Chapter 6) will not apply in relation to the CFC’s trading finance profits to the extent they arise from the CFC’s insurance or banking business (which are defined in section 371VA). The regulations may specifically refer to a territory or to the banking or insurance regulatory requirements of a territory.

Chapter 7 – The CFC charge gateway - captive insurance business

175.Chapter 7 contains the rules that identify the profits of a captive insurance CFC that are within the scope of the CFC charge.

176.New section 371GA(1) outlines the basic rule for identifying a CFC’s profits that fall within Chapter 7. The basic rule charges both underwriting and investment profits arising from captive insurance business written with UK resident persons (whether connected to the CFC or not). The profits are captured under Chapter 7 and pass through the CFC charge gateway to the extent they are within the CFC’s assumed total profits and also arise from:

177.New subsection (2) limits the scope of Chapter 7 to UK persons or UK permanent establishments that enter into contracts of insurance with the CFC. Profits are captured to the extent they are derived directly (or indirectly) from a contract of insurance (which is defined in section 371VA) entered into by a UK resident company or a non-UK resident company acting through a UK permanent establishment, that are connected with the CFC. A contract of insurance between the CFC and a UK resident person (who need not be connected to the CFC) is also included where the insurance relates to the provision of goods or services to that person. It does not include a case where those services are provided as part of an insurance business.

178.Subsection (2)(b) is targeted at situations where the insurance contract relates to the provision of goods or services to the UK resident person. For example, a UK retail group may establish a captive insurance company offshore. It may then market warranty plans, written by the captive insurance company, to UK resident persons at the point of sale of its retail goods. The profits from such insurance are within the scope of Chapter 7.

179.Profits are indirectly derived from a contract of insurance where, for example, the insurance is provided through insurance fronting arrangements. A particular instance would be where company A (a UK resident company) wants to enter into an insurance contract with its connected company B (a captive insurance CFC). If A enters into a ‘fronting arrangement’ with an unconnected insurance group whereby A enters into an insurance contract with company C (a member of the unconnected insurance group), who then reinsures the risk to company B, then B’s profits are within the scope of Chapter 7.

180.New subsection (4) excludes from Chapter 7 premiums paid under a contract of insurance by a connected UK resident company which has made a PE election under section 18A of CTA 2009 and where the premium is wholly brought into account for the purposes of determining an exemption adjustment.

181.New subsection (5) outlines the extent to which reinsurance contracts fall within Chapter 7. Amounts arising from reinsurance contracts are captured where the original contract of insurance would have fallen within subsection (2)(a) if it had been written by the CFC. This extends to cases where there is a chain of reinsurance between the original contract of insurance and the final contract of reinsurance.

182.By new subsection (6), new subsection (7) applies to a captive insurance CFC that is resident in an EEA state, provided the profits do not arise from the activities of a permanent establishment that the CFC has in a non-EEA state. Where subsection (7) applies, profits from an EEA resident captive insurance CFC will fall within Chapter 7 where they are derived from either:

183.New subsection (8) defines UK non-tax reason for the purposes of subsection (7).

Chapter 8 -The CFC charge gateway: solo consolidation

184.Chapter 8 contains the rules that identify the profits which are within the scope of the CFC charge for a CFC that is the subject of a solo consolidation waiver. Solo consolidation is an arrangement whereby the FSA allows a regulated financial company to treat an unregulated subsidiary for regulatory purposes as if it were a division of the regulated company. A company that wishes to solo consolidate must apply to the FSA for a waiver.

185.New section 371HA(1) outlines the basic rule for identifying the profits that fall within Chapter 8 and that are included in the CFC charge gateway. The profits are any amounts in the CFC’s assumed total profits (as defined by section 371SB(9)) which are not also included in the “CFC’s relevant profits amount”. The effect of the rule is to bring into charge amounts that are included in the CFC’s assumed total profits, but are not included in its relevant profits amount.

186.New section 371HA(2) defines the CFC’s relevant profits amount by reference to section 18A(6) of CTA 2009. In doing so it deems the CFC to be a permanent establishment of the UK resident company mentioned in section 371CG(2)(b) or the UK resident bank mentioned in section 371CG(3) and deems the CFC’s accounting period to be a relevant accounting period for that UK resident company or bank.

Chapter 9 - Exemptions for profits from qualifying loan relationships

187.New section 371IA(1) introduces Chapter 9 which provides the rules for full and 75 per cent exemption of certain intra-group non-trading finance profits that would otherwise pass through the CFC charge gateway because they fall within Chapter 5. Chapter 9 applies only to profits that arise from qualifying loan relationships as defined at new section 371IG. The business premises condition at section 371DG must also be met.

188.A chargeable company must make a claim to an Officer of HM Revenue and Customs under new section 371IA(2) in order for Chapter 9 to apply. The effect of the claim, by new subsection (3), is that for the chargeable company only, non-trading finance profits pass through the CFC charge gateway only to the extent that they are not exempt under Chapter 9. Where a claim is made, the rules in Chapter 9 apply to all of the non-trading finance profits arising from qualifying loan relationships of the CFC for the accounting period by virtue of section 371CB(8). New section 371IA(9) excludes from Chapter 9, in the same way as they are excluded from Chapter 5, any non-trading finance profits where they:

189.The finance company full and 75 per cent exemptions are given by way of an adjustment that is made to a CFC’s chargeable profits and creditable tax for an accounting period at step 2 of section 371BB(1).

190.New subsection (5) provides that profits are exempted firstly by applying either the qualifying resources rule or the 75 per cent exemption rule at new sections 371IB and 371ID respectively and then by applying the matched interest rule at new section 371IE, if relevant.

191.New subsection (10) explains that a loan relationship for Chapter 9 purposes is limited to a loan relationship that is a money debt arising from a transaction for the lending of money as defined at section 302(1) of CTA 2009. It will not include any other arrangement treated as a loan relationship such that the associated credits and debits would otherwise fall to be dealt with under Part 5 of CTA of 2009.

192.New section 371IB sets out the rules to be applied to establish the extent to which profits from a qualifying loan relationship will be exempt where it is funded out of qualifying resources. The section will apply in respect of a loan relationship only if the company’s Chapter 9 claim states that it is to apply. It is not possible to make a claim under this section for full exemption in respect of part of a qualifying loan relationship and a claim under new section 371ID for 75 per cent exemption in respect of the remainder.

193.New section 371IB(2) provides that X per cent of the profits of a qualifying loan relationship are exempt if the chargeable company (C) is able to demonstrate that at least X per cent of the qualifying loan relationship was funded out of qualifying resources and that the ultimate debtor was resident in the same territory at all times during the relevant period. It is possible that the amount so funded may vary throughout that period.

194.For example, a £100m loan is funded at the beginning of an accounting period entirely out of qualifying resources and this loan is increased to £200m half way through the year with the balance of the loan being funded out of non qualifying resources. Throughout the relevant accounting period the percentage of the loan funded from qualifying resources is 100 per cent for the first 6 months and 50 per cent for the second 6 months so that over the year the percentage of profits that are exempt should be 75 per cent (assuming the loan is equally profitable at all times). C’s claim should therefore specify X to be 75 per cent. In the second accounting period if the loan remains at £200m throughout the accounting period C’s claim should specify X to be 50 per cent.

195.A relevant period is defined by new subsection (4) as the accounting period, or if a loan is only outstanding for part of that accounting period that shorter period.

196.Qualifying resources are a source of funds that place no demands on group resources outside the ultimate debtor’s territory of residence (the ‘relevant territory’). They are defined at new subsections (6) and (7) as:

197.Funds in all but the first of the above four categories may be derived directly or indirectly from the sources listed above, but must be received by the CFC in relation to shares it holds in, or shares it has issued to other group companies.

198.New subsections (8) and (9) limit sums that will be qualifying resources for Chapter 9 purposes where the associated qualifying loan relationship has been put in place as part of an arrangement under which a member of the CFC group takes on debt in the UK. These subsections are targeted at circumstances where the arrangement results in an increase in net debt or net interest expense in the UK group.

199.New subsection (10) gives definitions for the purposes of the section and new section 371IC. Subsection (10)(c) states that the relevant territory is the territory where the ultimate debtor (of the qualifying loan relationship) is resident. This means that to the extent they are qualifying resources by virtue of subsection (6)(a) or subsections (6)(b) and (7)(a) together, those qualifying resources have to be derived from the same territory in which the borrower (in respect of the qualifying loan relationship) is resident. Subsection (10)(d) and (e) provide further limitations to qualifying resources in those cases, so that:

200.New subsections (10)(a), (11) and (12) define “the CFC group”. This consists of the CFC together with companies that it is connected with from time to time. It also includes companies that existed before the CFC existed (or before it was part of the group), provided that they were at that time connected with all UK resident companies that now control the CFC.

201.The qualifying value of relevant pre-acquisition funds (if there are any) is determined by new section 371IC. This is the value of funds or other assets represented by the consideration given for shares in a company (referred to as the “target company”) acquired by a CFC from persons who are not members of the group. The acquisition must take place by way of shares issued in exchange to those persons who are not members of the group by the parent company in the group. Qualifying resources will include the distribution of pre-acquisition profits to the CFC or the repayment of share capital by the target company.

202.New section 371IC(4) provides that where the issue of shares by the parent company represents only part of the consideration given for the acquisition or the parent company pays a special dividend (or otherwise makes an extraordinary distribution) to the parent company’s shareholders as part of the arrangements then only that part of the value in the company acquired represented by the issue of shares will be qualifying value. New subsection (5) provides the formula that determines the amount of qualifying value where other such consideration has been given.

203.Where new debt is taken on in the UK as part of the arrangement that creates the qualifying resources then section 371IB(8) and (9) provide that the qualifying loan relationship will be treated as derived from non-qualifying resources in at least the amount of the new debt.

204.New section 371ID applies to a qualifying loan relationship where a claim has not been made under section 371IB that full exemption should apply to the profits from all or part of that qualifying loan relationship. It provides that 75 per cent of the profits of the qualifying loan relationship shall be exempt.

205.The matched interest rule in new section 371IE applies when:

The matched interest rule use terms from the worldwide debt cap rules in Part 7.

206.New section 371IE(2) provides that all of the leftover profits will be exempt if the tested income amount (TIA) exceeds the tested expense amount (TEA).

207.New subsection (3) provides that a percentage of the leftover profits will become exempt if the CFC charge causes the TIA to exceed the TEA. The excess is referred to in new subsection (4) as “E”.

208.The TIA may be increased by a CFC charge (“I”) or the TEA may be reduced by a CFC charge (“R”). The calculation to determine the exempt percentage is set out in new subsection (4) by reference to the amounts E, I and R.

209.New subsections (9) to (14) provide modifications to the worldwide debt cap rules in Part 7 for the purposes of applying this section. It requires that a calculation of TIA and TEA be made for a UK group, if one has not already been made. This includes banking and insurance groups and groups that are not large groups. Subsection (9) provides a limitation that excludes debits, credits and other amounts that arise from banking or insurance business in determining what the finance income amount would be for any company and what the TIA and TEA would be.

210.New section 371IF sets out the steps for calculating the CFC’s “qualifying loan relationship profits”. The section operates by applying the following steps to each qualifying loan relationship:

211.New section 371IG(1) sets out the conditions for a loan relationship of a CFC to be treated as a qualifying loan relationship. These are where in relation to the qualifying loan relationship:

212.New section 371IG(2) provides that the ultimate debtor is the immediate debtor in relation to a qualifying loan relationship unless new subsection (3) applies.

213.New subsections (3) to (6) establish who the ultimate debtor is where a loan is used (directly or indirectly) to fund another loan. They provide that the ultimate debtor will be a person (“P”) if:

214.For the purposes of the ultimate debtor rule a part of a loan is treated as a separate loan. This means that where a loan from a CFC to A is used partly for the purposes of A’s trade and partly to fund a loan to B then there will be 2 loans with 2 ultimate debtors, A and B.

215.New subsection (7) disapplies subsections (4) and (5) in respect of a loan to a CFC whose main business is banking or insurance, the loan is used in the ordinary course of that business and P is not a UK resident qualifying company. In that case the CFC is treated as the ultimate debtor.

216.New subsection (8) defines a qualifying company as a company which is connected with the CFC and is controlled by the UK resident person(s) who control the CFC.

217.New section 371IH(1) sets out the circumstances under which a loan cannot be a qualifying loan relationship where the ultimate debtor is a non-UK resident company. These are where some or all of the ultimate debtor’s debits are:

218.New section 371IH(2) provides that a loan cannot be a qualifying loan relationship where the ultimate debtor is a UK resident company unless all the company’s debits are taken into account for the purposes of determining the profits attributable to a PE of the ultimate debtor and an election is made under section 18A of CTA 2009 in relation to the ultimate debtor.

219.New subsection (3) provides that a loan relationship cannot be a qualifying loan relationship where:

220.New subsection (4) provides that the references to debits in subsections (1) to (3) are to the debits from the loan to the ultimate debtor, and where loan A is used wholly or partly to fund loan B (as provided for by section 371IG (4) and (5)) the debits are those of loan B.

221.New subsection (5) provides that a loan relationship cannot be a qualifying loan relationship where it is an arrangement, or connected to an arrangement, the main purpose or one of the main purposes of which is to provide, directly or indirectly, funding for a loan relationship or a quasi loan relationship to a person from the ultimate debtor. A quasi loan relationship is an arrangement intended to produce for any person a return by reference to the time value of money. For example, consider a case where a loan is made by the CFC to another non-UK resident company and that company, by an arrangement that is not limited by other parts of this section, arranges for a loan to be made (using the funds from the first loan) by another person to a UK resident company connected with the CFC. The main purpose of the arrangement is for the CFC to make a loan to the UK resident connected company. The loan by the CFC is not a qualifying loan relationship.

222.By virtue of new subsection (6), subsection (5) does not apply where the main business of the ultimate debtor is banking or insurance business and the funding for the loan or arrangement would be provided in the ordinary course of that business.

223.New subsection (7) provide that a creditor relationship of a CFC cannot be a qualifying loan relationship if:

224.New subsections (8) and (9) provide that a creditor relationship of a CFC cannot be a qualifying loan relationship where it is made to any extent (other than a negligible one):

225.New subsections (10) and (11) provide that a loan cannot be a qualifying loan relationship where third party debt of a non-UK group company is repaid (in whole or in part), and effectively replaced with new UK debt as part of an arrangement the main purpose or one of the main purposes of which is to obtain a tax advantage for any person. The section only applies where the relevant UK funds or other assets are funded by a loan made to a UK connected company by a UK resident person not connected with the UK company or by a non UK resident person. Consider for example a case where a UK group company A borrows £100m, which in turn is used to buy shares issued by a connected CFC B, which in turn makes a loan of £100m to an overseas group company C, which in turn repays existing external debt of £100m. The arrangement has created two loans where before there was only one, with the interest on one of the loans being sheltered by B. The arrangement has a main purpose of obtaining a tax advantage for UK company A and so the loan to company C is not a qualifying loan relationship.

226.New section 371II confers on HMRC Commissioners the power to make regulations to amend the definitions of qualifying loan relationship, ultimate debtor and qualifying resources.

227.New section 371IJ provides that a Chapter 9 claim must be made in the chargeable company’s tax return for the period and sets out the time limits for the claim and for varying or withdrawing that claim. A later claim may be made, varied or withdrawn if allowed by an Officer of HM Revenue and Customs. A claim may also be varied or withdrawn outside of the usual time limits where there are changes to the TIA and TEA, provided that claim is made within 12 months of such a change and the claim is made to take account of that change (and not for another purpose).

Chapter 10- The exempt period exemption

228.New section 371JA introduces Chapter 10 which provides for a temporary period of exemption for foreign subsidiaries which come under UK control.

229.New section 371JB(1) provides that the exemption applies for an accounting period if:

230.New subsection (2) sets out the subsequent period condition. This requires the CFC to continue as a CFC for at least one accounting period which begins after the exempt period and that there is no CFC charge in relation to the CFC’s first accounting period to begin after the end of the exempt period.

231.New subsection (3) provides that the chargeable company condition is met if the charging condition in new section 371JC is met and throughout the “relevant period” either a company which has a relevant interest in the CFC at the beginning of the exempt period, or another connected company, is a chargeable company. The effect of this is that the availability of the exempt period is not affected by a transfer of ownership of a CFC within a group if there is at least one connected UK company which would be subject to a CFC charge in respect of the CFC.

232.New subsection (4) provides the following definitions:

233.New subsection (5) provides that the exemption is subject to an anti-avoidance rule which is detailed at new section 371JF.

234.New section 371JC determines when an exempt period begins.

235.New subsection (1) provides that an exempt period begins at “the relevant time”, during an accounting period if:

236.New subsection (2) provides that the “initial condition” is met if:

237.New subsections (3) and (4) together set out the circumstances in which the “charging condition” is met. Broadly this is where a CFC has chargeable profits for an accounting period and there is at least one chargeable company in respect of those profits.

238.New subsection (5) defines the “relevant preceding period” as the 12 months immediately prior to the relevant time, but disregarding any part of that period before the company came into existence.

239.New section 371JD determines the length of the exempt period.

240.New subsection (1) sets out the basic rule that the exempt period will last for 12 months.

241.New subsections (2) to (5) introduce the ability for chargeable companies to apply for an extension to the 12 month exempt period. A notice must be given to an Officer of HM Revenue and Customs before the end of the exempt period. An Officer of HM Revenue and Customs can however extend the exempt period or, if necessary, further extend an extended exempt period. Notices under this section can only be given by companies which would be chargeable companies at that time.

242.New section 371JE deals with cases where a CFC’s accounting period includes part of an exempt period, but where the accounting period does not end during an exempt period. In these circumstances, the CFC rules will apply to the CFC’s accounting period, but any chargeable profits which arise will need to be adjusted on a just and reasonable basis to take account of profits which arise during the exempt period. The section is subject to the anti-avoidance rule in new section 371JF.

243.New section 371JF provides an anti-avoidance condition in relation to the exempt period exemption.

244.New subsection (1) determines that the exemption will not apply if either of two conditions, A or B, is met.

245.New subsection (2) sets out Condition A, which is that an arrangement:

This condition for example targets arrangements where groups seek to take advantage of the exempt period exemption by placing mobile, income generating assets within a CFC.

246.New subsection (3) sets out Condition B, which is that an arrangement:

247.New section 371JG deals with the amendment of company tax returns in relation to the exempt period exemption. This section extends the amendment time limit of any corporate tax return period in which falls, wholly or partly, a CFC’s exempt period. This is necessary because whether any chargeable profits arise to that CFC for that period can only be ascertained once the CFC’s position for the subsequent period is established. The effect of the section is to extend the amendment date for any chargeable company’s accounting period which includes any part of the exempt period to match the corporation tax return amendment date for the accounting period in which the CFC’s subsequent period ends.

Chapter 11 - The excluded territories exemption

248.Chapter 11, introduced by new section 371KA provides for the “excluded territories exemption” (ETE). If a company is resident and carries on business in one of the countries on the list made under the regulation-making power conferred by Chapter 11, and meets the other conditions of the ETE, then the CFC is excluded from the CFC charge.

249.New section 371KB(1) sets out the four conditions that need to be met for the ETE to apply for a CFC’s accounting period. These are that:

250.The categories A to D of income are explained in detail below. In essence there is a limitation on the amount of certain classes of income which the CFC can accrue if it is to qualify for the ETE. This threshold is set by virtue of new section 371KD at 10 per cent of the CFC’s accounting profits excluding transfer pricing adjustments for the accounting period in question, or £50,000 if greater. If income falls into more than one category then it is counted only once for the purposes of the test.

251.New subsection (3) confers a power on HM Revenue and Customs Commissioners to make regulations in connection with requirements of the ETE. The income category and IP conditions may for example be switched off or modified in respect of certain territories in the regulations. Further requirements may also be specified as having to be met for the ETE to apply.

252.To be exempt under the ETE a CFC must have a territory of residence. New section 371KC explains that the rules in Chapter 20 dealing with residency more generally should apply with one exception. This is where it has not been possible to establish a territory of residence under the general rules in Chapter 20 and instead the CFC is treated as resident either in the country in which it is incorporated or, if the CFC is UK incorporated but treated as not resident in the UK under double taxation arrangements, it is treated as resident in the territory of the other party to the relevant arrangements. In these circumstances the CFC will only be eligible for exemption under the ETE if, at all times during the accounting period, the CFC or persons with interests in the CFC are liable to tax under the law of the territory in question on the CFC’s income.

253.New section 371KE provides the basic rules covering Category A income. This category is concerned with income which is either exempt from tax in the territory or subject to a reduced tax rate in specified circumstances which include a tax holiday or other investment incentive and tax repayment schemes.