Chapter 19 - Assumed taxable total profits, assumed total profits and the corporation tax assumptions
358.Chapter 19 explains the meaning of a number of terms used in Part 9A: “the corporation tax assumptions”, “assumed taxable total profits” and “assumed total profits”.
359.New section 371SB(1) defines a CFC’s “assumed taxable total profits” for an accounting period as what would be the CFC’s taxable total profits of the accounting period for corporation tax purposes applying the corporation tax assumptions.
360.New subsection (2) states that “taxable total profits” has the meaning given by section 4(2) of CTA 2010 which is that they are the profits of a company of an accounting period on which corporation tax is chargeable.
361.For this purpose new subsections (3) to (6) provide as follows for establishing taxable total profits: chargeable gains should be ignored; accrued income of a settlement (apportioned on a just and reasonable basis if there is more than one settlor or beneficiary) should be added in where the CFC is a settlor or beneficiary of the settlement; and, if the CFC has received an actual dividend or distribution from the settlement, this is excluded to prevent double counting. New subsection (8) also prevents settlement income being added in to chargeable profits of a settlor where it has already been charged on a CFC who is a beneficiary.
362.New subsection (9) defines a CFC’s “assumed total profits” for an accounting period to be its assumed taxable total profits for the period before taking step 2 in section 4(2) of CTA 2010 i.e. before deducting any reliefs against total profits.
363.New section 371SC introduces the corporation tax assumptions.
364.New section 371SD provides that for the purposes of Part 9A, the CFC is assumed to be resident in the UK from the beginning of the CFC’s first accounting period until the company ceases to be a CFC. By virtue of new subsection (6), the first accounting period of a CFC begins when the CFC becomes subject to the rules in Part 9A. The residence assumption has the effect that the CFC is, has been and will continue to be within the charge to corporation tax, and that its accounting periods are accounting periods for corporation tax purposes.
365.New subsection (2) provides that new subsection (1) does not also require it to be assumed that there is any change in the location in which the CFC carries on its activities. This means that for the UK tax computation of profits the CFC will be treated as undertaking its trading or business activities outside the UK to the extent that it does so. The subsection also requires that it be assumed that the CFC does not get the benefit of section 1279 of CTA 2009 (which provides an exemption for profits from securities free of tax to residents abroad – i.e. FOTRA securities).
366.New subsection (3) provides that where the CFC is actually UK resident immediately before the beginning of its first accounting period the assumption of UK residence does not, as a consequence, mean that there is a continuous period of UK residence running from the preceding period. This is ensured by making the additional assumption that the CFC’s UK residence from the beginning of the CFC’s first accounting period is not continuous with its (actual) UK residence before the beginning of that accounting period.
367.New subsection (4) assumes that a determination of the CFC’s assumed taxable total profits has been made for all previous accounting periods back to (and including) the CFC’s first accounting period for the purposes of Part 9A. New subsection (5) explains that the assumption in subsection (4) is made in particular for the purposes of applying any relief which is relevant to two or more accounting periods.
368.New section 371SE applies so that the CFC is assumed not to be a close company.
369.New section 371SF(1) assumes that any beneficial claims or elections have been made that would, on the assumption of UK residence, have been available in relation to any relief under the Corporation Tax Acts to the maximum amount that would be available under that provision, and to have been made within any applicable time limit.
370.New subsection (2) restricts the application of subsection (1) so that it does not cover a claim or election under section 18A of CTA 2009 (exemption for profits or losses of foreign PEs), section 1275 of CTA 2009 (relief for unremittable income), section 9A of CTA 2010 (designated currency of a UK resident investment company), or regulations made under paragraph 16 of Schedule 8 to Finance Act 2006 (election for a lease to be treated as a long funding lease). An election under section 9A of CTA 2010 is however possible provided a notice is given to an officer of Revenue and Customs to that effect and the requirements with respect to the form of notice and time limits have been complied with (new section 371SH).
371.New subsection (3) requires (by reference to new section 371SK(5)) an assumption that a rollover in respect of a reinvestment relief claim for intangible fixed assets has not been made nor will be made by the CFC.
372.New section 371SG allows a chargeable company on provision of a notice to disapply part or all of the claims and election assumptions for an accounting period.
373.New subsection (1) applies so that if a notice is given to an officer of Revenue and Customs within given time limits and in the required form it can be assumed that the CFC:
has not made for the accounting period a specified claim or election otherwise assumed automatically by the corporation tax assumptions at section 371SF(1),
has instead have made for the accounting period a specified claim or election, being different from one assumed by the corporation tax assumptions at section 371SF(1) but being one which (subject to compliance with any applicable time limit) could have been made by a company within the charge to corporation tax, or
has disclaimed or required the postponement, in whole or in part, of a specified allowance for the relevant accounting period if (subject to compliance with any applicable time limit) a company within the charge to corporation tax could have disclaimed the allowance or required such a postponement.
374.New subsections (2) and (3) require the CFC’s assumed total profits and the amounts to be relieved against those profits at step 2 in section 4(2) of CTA 2010 and creditable tax to be adjusted by applying the assumption set out in the notice, so far as relevant, and disapplying the assumption set out at section 371SF(1) to the extent necessary as a consequence.
375.New subsection (4) provides that notice under section 371SG(1)(b) can include a claim to rollover relief in respect of intangible fixed assets (see section 371SF(2)(b)) or a claim in respect of relief for unremittable income under section 1275 of CTA 2009 (see section 371SK(5)).
376.New subsections (5) to (7) provide a time limit for a notice under subsection (1) and that the notice may only be given by a company or companies that either alone or together would have more than 50 per cent of the chargeable profits of the CFC apportioned to them were the CFC charge to be applied.
377.New section 371SH sets out the assumptions that are treated as being made where a notice is given requesting that the CFC is assumed to have made an election under section 9A CTA2010 (designated currency of a UK resident investment company).
378.New subsection (3) ensures that when applying the corporation tax assumptions in Chapter 19 in relation to a designated currency election under section 9A CTA 2010, any revocation of such an election is taken into account provided that the revocation is made within the prescribed time limits.
379.New section 371SI applies if, in accordance with section 371SH, a CFC is assumed to have made an election under section 9A of CTA 2010, but section 6 or 7 of CTA 2010 cannot apply because the CFC does not prepare its accounts in accordance with GAAP. The effect is to apply sections 6 and 7 to the CFC such that it is required to calculate its profits or losses in accordance with GAAP.
380.New section 371SJ assumes that a long funding lease election has been made (or withdrawn) by the CFC where a notice is given to an officer of Revenue and Customs in the correct form, within the required time limits and by the company or companies eligible to deliver such a notice as above. Where such a notice is made the assumed taxable total profits of the CFC are calculated taking into account regulation 2(5) of the Long Funding Lease (Elections) Regulations 2007 (S.I. 2007/304). New section 371SJ(8) reserves a Treasury power to amend this section in order to take account of any regulations made under paragraph 16 of Schedule 8 to FA 2006 (election for leases to be treated as long funding leases).
381.New section 371SK requires an assumption that any intangible fixed asset created or acquired by the CFC before the first accounting period in which it becomes subject to Part 9A should be brought into account in the CFC’s first accounting period at its value as recognised for accounting purposes at that time. For these purposes there is a requirement to assume that rollover relief has not been claimed nor will be claimed by the CFC in respect of the identified intangible fixed asset.
382.New section 371SL(1) assumes that the CFC is neither a member of a group of companies nor a member of a consortium for the purposes of any provision of the Tax Acts. The main effect of the assumption is to prevent the group loss relief provisions from applying.
383.New subsections (2) and (3) provide that any relief potentially deductible is to be ignored in determining the CFC’s assumed taxable total profits for the relevant accounting period where under Part 5 of CTA 2010 (group relief) the CFC actually surrenders losses to another UK company by way of group relief (for example from the CFC’s loss-making UK permanent establishment), but in applying the corporation tax assumptions the losses would reduce the CFC’s assumed taxable total profits for the relevant accounting period. These sections have the effect of restricting relief for losses in the CFC’s taxable total profits computation where they have arisen to a UK permanent establishment of the CFC and have been actually group relieved in the UK thereby preventing the losses from being effectively relieved twice.
384.New section 371SM(1) applies if the CFC incurred any capital expenditure on the provision of plant or machinery for the purposes of its trade before the first accounting period in which it becomes subject to Part 9A.
385.New subsection (2) assumes that for the purposes of Part 2 of CAA 2001 (plant and machinery allowances) the plant or machinery was provided for purposes wholly other than those of the trade, and was not brought into use for the purposes of the trade until the beginning of the CFC’s first accounting period, and that section 13 of CAA 2001 (use for qualifying activity of plant or machinery provided for other purposes) applies accordingly. This has the effect of bringing in a value equal to the market value of the plant and machinery employed in the trade at the beginning of the CFC’s first accounting period.
386.New section 371SN prevents overseas income from being excluded from the assumed taxable total profits of a CFC on the basis that it is unremittable unless it is not possible to remit it either to the UK or to any of the territories overseas in which the CFC is resident. It follows that income arising in a territory of residence of the CFC can never be excluded from the taxable profits calculation even if it is not possible to remit it to the UK.
387.New section 371SO(1) ensures that where the application of the Corporation Tax Acts is dependent upon a purpose test which considers whether a purpose of an arrangement or other conduct is to obtain a tax advantage within the meaning given to it at section 1139(2)(a) to (d) of CTA 2010, the provisions also apply where the arrangement or other conduct has as one of its main purposes the avoidance or reduction of a CFC charge (section 1139(da) of CTA 2010).
388.New subsection (2) states that so far as they would not otherwise do so the Corporation Tax Acts are assumed to apply to the arrangement or other conduct in the same way as they would if the purpose of obtaining the tax advantage under section 1139(2)(da) were the same as obtaining an advantage within the meaning of an actual tax advantage under section 1139(2)(a) to (d). This links the reduction or prevention of a CFC charge to the definition of “tax advantage” arising to a UK company for the purposes of computing the CFC’s assumed taxable total profits.
389.New section 371SP ensures that references to a tax advantage at section 1139(2)(da) include any tax advantage arising under section 486D(4) of CTA 2009 as a consequence of the CFC being party to an arrangement that falls within the disguised interest rules in Chapter 2A of Part 6 of CTA 2009.
390.New section 371SQ ensures that references to a tax advantage at section 1139(2)(da) include any tax advantage arising under section 521E(4) of CTA 2009 as a consequence of the CFC being party to an arrangement that falls within the rules for shares accounted for as liabilities at section 521C of CTA 2009.
391.New section 371SR ensures that the double tax relief anti avoidance provisions within section 82 of TIOPA apply in computing the creditable tax of a CFC. These rules ordinarily require a notice to be issued by an officer of Revenue and Customs and so the rule applies by assuming in effect that such a notice has been issued.