Income and Corporation Taxes Act 1988

PART XI CLOSE COMPANIES

CHAPTER I INTERPRETATIVE PROVISIONS

414 Close companies

(1) For the purposes of the Tax Acts, a “close company” is one which is under the control of five or fewer participators, or of participators who are directors, except that the expression does not apply—

(a) to a company not resident in the United Kingdom;

(b) to a registered industrial and provident society within the meaning of section 486(12) or to a building society;

(c) to a company controlled by or on behalf of the Crown, and not otherwise a close company; or

(d) to a company falling within section 415 or subsection (5) below.

(2) Subject to section 415 and subsection (5) below, a company resident in the United Kingdom (but not falling within subsection (1)(b) above) is also a close company if—

(a) on the assumption that it is so, or

(b) on the assumption that it and any other such company or companies are so,

more than half of any amount falling to be apportioned under section 423 in the case of the company (including any sum which has been apportioned to it, or could on either of those assumptions be apportioned to it, under that section) could be apportioned among five or fewer participators, or among participators who are directors.

(3) In ascertaining under subsection (2) above whether any amount could be apportioned among five or fewer participators or among participators who are directors, account shall, in cases where an original apportionment and any sub-apportionment are involved, be taken only of persons among whom that amount could finally be apportioned as the result of the whole process of original apportionment and sub-apportionment and those persons shall be treated as participators or directors if they are participators or directors of any company in the case of which either an original apportionment or any sub-apportionment could be made.

(4) For the purposes of this section—

(a) a company is to be treated as controlled by or on behalf of the Crown if, but only if, it is under the control of the Crown or of persons acting on behalf of the Crown, independently of any other person, and

(b) where a company is so controlled, it shall not be treated as being otherwise a close company unless it can be treated as a close company as being under the control of persons acting independently of the Crown.

(5) A company is not to be treated as a close company—

(a) if—

(i) it is controlled by a company which is not a close company, or by two or more companies none of which is a close company; and

(ii) it cannot be treated as a close company except by taking as one of the five or fewer participators requisite for its being so treated a company which is not a close company;

(b) if it cannot be treated as a close company except by virtue of paragraph (c) of section 416(2) and it would not be a close company if the reference in that paragraph to participators did not include loan creditors who are companies other than close companies.

(6) References in subsection (5) above to a close company shall be treated as applying to any company which, if resident in the United Kingdom, would be a close company.

(7) If shares in any company (“the first company”) are held on trust for an exempt approved scheme as defined in section 592, then, unless the scheme is established wholly or mainly for the benefit of persons who are, or are dependants of, directors or employees or past directors or employees of—

(a) the first company; or

(b) an associated company of the first company; or

(c) a company which is under the control of any director or associate of a director of the first company or of two or more persons each of whom is such a director or associate; or

(d) a close company;

the persons holding the shares shall, for the purposes of subsection (5) above, be deemed to be the beneficial owners of the shares and, in that capacity, to be a company which is not a close company.

415 Certain quoted companies not to be close companies

(1) Subject to the following provisions of this section, a company is not to be treated as being at any time a close company if—

(a) shares in the company carrying not less than 35 per cent. of the voting power in the company (and not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits) have been allotted unconditionally to, or acquired unconditionally by, and are at that time beneficially held by, the public, and

(b) any such shares have within the preceding 12 months been the subject of dealings on a recognised stock exchange, and the shares have within those 12 months been quoted in the official list of a recognised stock exchange.

(2) Subsection (1) above shall not apply to a company at any time when the total percentage of the voting power in the company possessed by all of the company’s principal members exceeds 85 per cent.

(3) For the purposes of subsection (1) above shares in a company shall be deemed to be beneficially held by the public if, and only if, they—

(a) fall within subsection (4) below, and

(b) are not within the exceptions in subsection (5) below,

and a corresponding construction shall be given to the reference to shares which have been allotted unconditionally to, or acquired unconditionally by, the public.

(4) Shares shall fall within this subsection (as being beneficially held by the public)—

(a) if beneficially held by a company resident in the United Kingdom which is not a close company, or by a company not so resident which would not be a close company if it were so resident, or

(b) if held on trust for an exempt approved scheme as defined in section 592, or

(c) if they are not comprised in a principal member’s holding.

(5) Shares shall not be deemed to be held by the public if they are held—

(a) by any director or associate of a director of the company, or

(b) by any company which is under the control of any such director or associate, or of two or more persons each of whom is such a director or associate, or

(c) by any associated company of the company, or

(d) as part of any fund the capital or income of which is applicable or applied wholly or mainly for the benefit of, or of the dependants of, the employees or directors, or past employees or directors, of the company, or of any company within paragraph (b) or (c) above.

References in this subsection to shares held by any person include references to any shares the rights or powers attached to which could, for the purposes of section 416, be attributed to that person under subsection (5) of that section.

(6) For the purposes of this section—

(a) a person is a principal member of a company if he possesses a percentage of the voting power in the company of more than 5 per cent. and, where there are more than five such persons, if he is one of the five persons who possess the greatest percentages or if, because two or more persons possess equal percentages of the voting power in the company, there are no such five persons, he is one of the six or more persons (so as to include those two or more who possess equal percentages) who possess the greatest percentages, and

(b) a principal member’s holding consists of the shares which carry the voting power possessed by him.

(7) In arriving at the voting power which a person possesses, there shall be attributed to him any voting power which, for the purposes of section 416, would be attributed to him under subsection (5) or (6) of that section.

(8) In this section “shares” include stock.

416 Meaning of “associated company” and “control”

(1) For the purposes of this Part, except paragraphs 2 and 9(1)(a), (2)(a) and (3)(a) of Schedule 19, a company is to be treated as another’s “associated company” at a given time if, at that time or at any other time within one year previously, one of the two has control of the other, or both are under the control of the same person or persons.

(2) For the purposes of this Part, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company’s affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire—

(a) the greater part of the share capital or issued share capital of the company or of the voting power in the company; or

(b) such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive the greater part of the amount so distributed; or

(c) such rights as would, in the event of the winding-up of the company or in any other circumstances, entitle him to receive the greater part of the assets of the company which would then be available for distribution among the participators.

(3) Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company.

(4) For the purposes of subsection (2) above a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date, or will at a future date be entitled to acquire.

(5) For the purposes of subsections (2) and (3) above, there shall be attributed to any person any rights or powers of a nominee for him, that is to say, any rights or powers which another person possesses on his behalf or may be required to exercise on his direction or behalf.

(6) For the purposes of subsections (2) and (3) above, there may also be attributed to any person all the rights and powers of any company of which he has, or he and associates of his have, control or any two or more such companies, or of any associate of his or of any two or more associates of his, including those attributed to a company or associate under subsection (5) above, but not those attributed to an associate under this subsection; and such attributions shall be made under this subsection as will result in the company being treated as under the control of five or fewer participators if it can be so treated.

417 Meaning of “participator”, “associate”, “director” and “loan creditor”

(1) For the purposes of this Part, a “participator” is, in relation to any company, a person having a share or interest in the capital or income of the company, and, without prejudice to the generality of the preceding words, includes—

(a) any person who possesses, or is entitled to acquire, share capital or voting rights in the company;

(b) any loan creditor of the company;

(c) any person who possesses, or is entitled to acquire, a right to receive or participate in distributions of the company (construing “distributions” without regard to section 418) or any amounts payable by the company (in cash or in kind) to loan creditors by way of premium on redemption; and

(d) any person who is entitled to secure that income or assets (whether present or future) of the company will be applied directly or indirectly for his benefit.

In this subsection references to being entitled to do anything apply where a person is presently entitled to do it at a future date, or will at a future date be entitled to do it.

(2) The provisions of subsection (1) above are without prejudice to any particular provision of this Part requiring a participator in one company to be treated as being also a participator in another company.

(3) For the purposes of this Part “associate” means, in relation to a participator—

(a) any relative or partner of the participator;

(b) the trustee or trustees of any settlement in relation to which the participator is, or any relative of his (living or dead) is or was, a settlor (“settlement” and “settlor” having here the same meaning as in section 681(4)); and

(c) where the participator is interested in any shares or obligations of the company which are subject to any trust, or are part of the estate of a deceased person—

(i) the trustee or trustees of the settlement concerned or, as the case may be, the personal representatives of the deceased; and

(ii) if the participator is a company, any other company interested in those shares or obligations;

and has a corresponding meaning in relation to a person other than a participator.

(4) In subsection (3) above “relative” means husband or wife, parent or remoter forebear, child or remoter issue, or brother or sister.

(5) For the purposes of this Part “director” includes any person occupying the position of director by whatever name called, any person in accordance with whose directions or instructions the directors are accustomed to act, and any person who—

(a) is a manager of the company or otherwise concerned in the management of the company’s trade or business, and

(b) is, either on his own or with one or more associates, the beneficial owner of, or able, directly or through the medium of other companies or by any other indirect means, to control 20 per cent. or over of the ordinary share capital of the company.

(6) In subsection (5)(b) above the expression “either on his own or with one or more associates” requires a person to be treated as owning or, as the case may be, controlling what any associate owns or controls, even if he does not own or control share capital on his own.

(7) Subject to subsection (9) below, for the purposes of this Part “loan creditor”, in relation to a company, means a creditor in respect of any debt incurred by the company—

(a) for any money borrowed or capital assets acquired by the company; or

(b) for any right to receive income created in favour of the company; or

(c) for consideration the value of which to the company was (at the time when the debt was incurred) substantially less than the amount of the debt (including any premium thereon);

or in respect of any redeemable loan capital issued by the company.

(8) Subject to subsection (9) below, a person who is not the creditor in respect of any debt or loan capital to which subsection (7) above applies but nevertheless has a beneficial interest therein shall, to the extent of that interest, be treated for the purposes of this Part as a loan creditor in respect of that debt or loan capital.

(9) A person carrying on a business of banking shall not be deemed to be a loan creditor in respect of any loan capital or debt issued or incurred by the company for money lent by him to the company in the ordinary course of that business.

Additional matters to be treated as distributions

418 “Distribution” to include certain expenses of close companies

(1) Subject to such exceptions as are mentioned in section 209(1), in the Corporation Tax Acts “distribution”, in relation to a close company, includes, unless otherwise stated, any such amount as is required to be treated as a distribution by subsection (2) below.

(2) Subject to subsection (3) below, where a close company incurs expense in or in connection with the provision for any participator of living or other accommodation, of entertainment, of domestic or other services, or of other benefits or facilities of whatever nature, the company shall be treated as making a distribution to him of an amount equal to so much of that expense as is not made good to the company by the participator.

(3) Subsection (2) above shall not apply to expense incurred in or in connection with the provision—

(a) for a person employed in director’s or higher-paid employment (within the meaning of section 167) of such benefits as are mentioned in any of sections 154 to 165; or

(b) of living accommodation for any person if the accommodation is (within the meaning of section 145) provided by reason of his employment; or

(c) for the spouse, children or dependants of a person employed by the company of any pension, annuity, lump sum, gratuity or other like benefit to be given on that person’s death or retirement.

(4) The amount of the expense to be taken into account under subsection (2) above as a distribution shall be the same as would under Chapter II of Part V be the cash equivalent of the resultant benefit to the participator.

(5) Subsection (2) above shall not apply if the company and the participator are both resident in the United Kingdom and—

(a) one is a subsidiary of the other or both are subsidiaries of a third company also so resident, and

(b) the benefit to the participator arises on or in connection with a transfer of assets or liabilities by the company to him, or to the company by him.

(6) The question whether one body corporate is a subsidiary of another for the purposes of subsection (5) above shall be determined as a question whether it is a 51 per cent. subsidiary of that other, except that that other shall be treated as not being the owner—

(a) of any share capital which it owns directly in a body corporate if a profit on a sale of the shares would be treated as a trading receipt of its trade; or

(b) of any share capital which it owns indirectly, and which is owned directly by a body corporate for which a profit on a sale of the shares would be a trading receipt; or

(c) of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom.

(7) Where each of two or more close companies makes a payment to a person who is not a participator in that company, but is a participator in another of those companies, and the companies are acting in concert or under arrangements made by any person, then each of those companies and any participator in it shall be treated as if the payment made to him had been made by that company.

This subsection shall apply, with any necessary adaptations, in relation to the giving of any consideration, and to the provision of any facilities, as it applies in relation to the making of a payment.

(8) For the purposes of this section any reference to a participator includes an associate of a participator, and any participator in a company which controls another company shall be treated as being also a participator in that other company.

CHAPTER II CHARGES TO TAX IN CONNECTION WITH LOANS

419 Loans to participators etc

(1) Subject to the following provisions of this section and section 420, where a close company, otherwise than in the ordinary course of a business carried on by it which includes the lending of money, makes any loan or advances any money to an individual who is a participator in the company or an associate of a participator, there shall be assessed on and recoverable from the company, as if it were an amount of corporation tax chargeable on the company for the accounting period in which the loan or advance is made, an amount equal to such proportion of the amount of the loan or advance as corresponds to the rate of advance corporation tax in force for the financial year in which the loan or advance is made.

In relation to a loan or advance made in an accounting period ending after the day, not being earlier than 31st March 1992, appointed by order by the Treasury for the purpose of this provision, this subsection shall have effect with the substitution for “assessed on and recoverable” of “due”.

(2) For the purposes of this section the cases in which a close company is to be regarded as making a loan to any person include a case where—

(a) that person incurs a debt to the close company; or

(b) a debt due from that person to a third party is assigned to the close company;

and then the close company shall be regarded as making a loan of an amount equal to the debt.

(3) Tax shall be assessable by virtue of this section whether or not the whole or any part of the loan or advance in question has been repaid at the time of the assessment; and tax assessed by virtue of this section shall, subject to any appeal against the assessment, be due within 14 days after the issue of the notice of assessment.

The preceding provisions of this subsection shall not apply in relation to a loan or advance made in an accounting period ending after the day, not being earlier than 31st March 1992, appointed by order by the Treasury for the purpose of this provision, but in relation to any such loan or advance tax due by virtue of this section shall be due and payable within 14 days after the end of the accounting period in which the loan or advance was made.

(4) Where a close company has made a loan or advance which gave rise to a charge to tax on the company under subsection (1) above and the loan or advance or any part of it is repaid to the company, relief shall be given from that tax, or a proportionate part of it, by discharge or repayment.

Relief under this subsection shall be given on a claim, which must be made within six years from the end of the financial year in which the repayment is made.

(5) Where, under arrangements made by any person otherwise than in the ordinary course of a business carried on by him—

(a) a close company makes a loan or advance which, apart from this subsection, does not give rise to any charge on the company under subsection (1) above, and

(b) some person other than the close company makes a payment or transfers property to, or releases or satisfies (in whole or in part) a liability of, an individual who is a participator in the company or an associate of a participator,

then, unless in respect of the matter referred to in paragraph (b) above there falls to be included in the total income of the participator or associate an amount not less than the loan or advance, this section shall apply as if the loan or advance had been made to him.

(6) In subsections (1) and (5)(b) above the references to an individual shall apply also to a company receiving the loan or advance in a fiduciary or representative capacity, and to a company not resident in the United Kingdom.

(7) For the purposes of this section any participator in a company which controls another company shall be treated as being also a participator in that other company.

420 Exceptions from section 419

(1) Section 419(2)(a) shall not apply to a debt incurred for the supply by the close company of goods or services in the ordinary course of its trade or business unless the credit given exceeds six months or is longer than that normally given to the company’s customers.

(2) Section 419(1) shall not apply to a loan made to a director or employee of a close company, or of an associated company of the close company, if—

(a) neither the amount of the loan, nor that amount when taken together with any other outstanding loans which—

(i) were made by the close company or any of its associated companies to the borrower or the wife or husband of the borrower; and

(ii) if made before 31st March 1971, were made for the purpose of purchasing a dwelling which was or was to be the borrower’s only or main residence;

exceeds £15,000 and the outstanding loans falling within sub-paragraph (ii) above do not together exceed £10,000; and

(b) the borrower works full-time for the close company or any of its associated companies; and

(c) the borrower does not have a material interest in the close company or in any associated company of the close company;

but if the borrower acquires such a material interest at a time when the whole or part of any such loan made after 30th March 1971 remains outstanding the close company shall be regarded as making to him at that time a loan of an amount equal to the sum outstanding.

Section 168(11) shall apply for the purpose of determining whether a person has, for the purpose of this subsection, a material interest in a company, but with the omission of the words following “417(3)”.

421 Taxation of borrower when loan under section 419 released etc

(1) Subject to the following provisions of this section, where a company is assessed or liable to be assessed under section 419 in respect of a loan or advance and releases or writes off the whole or part of the debt in respect of it, then—

(a) for the purpose of computing the total income of the person to whom the loan or advance was made, a sum equal to the amount so released or written off shall be treated as income received by him after deduction of income tax from a corresponding gross amount;

(b) no repayment of income tax shall be made in respect of that income and no assessment shall be made on him in respect of income tax at the basic rate on that income;

(c) the income included by virtue of paragraph (a) above in his total income shall, notwithstanding that paragraph, be treated for the purposes of sections 348 and 349(1) as not brought into charge to income tax;

(d) for the purpose of determining whether any or what amount of tax is, by virtue of paragraph (a) above, to be taken into account as having been deducted from a gross amount in the case of an individual whose total income is reduced by any deductions so much only of that gross amount shall be taken into account as is part of his total income as so reduced.

(2) If the loan or advance referred to in subsection (1) above was made to a person who has since died, or to trustees of a trust which has come to an end, this section, instead of applying to the person to whom it was made, shall apply to the person from whom the debt is due at the time of release or writing off (and if it is due from him as personal representative, within the meaning of Part XVI, the amount treated as received by him shall accordingly be included for the purposes of that Part in the aggregate income of the estate) and subsection (1) above shall apply accordingly with the necessary modifications.

(3) This section shall not have effect in relation to a loan or advance made to a person if any sum falls in respect of the loan or advance to be included in his income by virtue of section 677, except so far as the amount released or written off exceeds the sums previously falling to be so included (without the addition for income tax provided for by subsection (6) of that section).

(4) This section shall be construed as one with section 419.

422 Extension of section 419 to loans by companies controlled by close companies

(1) Subject to subsection (4) below, where a company which is controlled by a close company makes a loan which, apart from this section, does not give rise to a charge under subsection (1) of section 419, that section and section 420 shall apply as if the loan had been made by the close company.

(2) Subject to subsection (4) below, where a company which is not controlled by a close company makes a loan which, apart from this section, does not give rise to a charge under subsection (1) of section 419 and a close company subsequently acquires control of it, that section and section 420 shall apply as if the loan had been made by the close company immediately after the time when it acquired control.

(3) Where two or more close companies together control the company that makes or has made the loan, subsections (1) and (2) above shall have effect—

(a) as if each of them controlled that company; and

(b) as if the loan had been made by each of those close companies,

but the loan shall be apportioned between those close companies in such proportion as may be appropriate having regard to the nature and amount of their respective interests in the company that makes or has made the loan.

(4) Subsections (1) and (2) above do not apply if it is shown that no person has made any arrangements (otherwise than in the ordinary course of a business carried on by him) as a result of which there is a connection—

(a) between the making of the loan and the acquisition of control; or

(b) between the making of the loan and the provision by the close company of funds for the company making the loan;

and the close company shall be regarded as providing funds for the company making the loan if it directly or indirectly makes any payment or transfers any property to, or releases or satisfies (in whole or in part) a liability of, the company making the loan.

(5) Where, by virtue of this section, sections 419 and 420 have effect as if a loan made by one company had been made by another, any question under those sections or section 421 whether—

(a) the company making the loan did so otherwise than in the ordinary course of a business carried on by it which includes the lending of money;

(b) the loan or any part of it has been repaid to the company;

(c) the company has released or written off the whole or part of the debt in respect of the loan,

shall be determined by reference to the company that makes the loan.

(6) This section shall be construed as one with section 419 and section 420 and in this section—

(a) “loan” includes advance; and

(b) references to a company making a loan include references to cases in which the company is, or if it were a close company would be, regarded as making a loan by virtue of section 419(2).

CHAPTER III APPORTIONMENT OF UNDISTRIBUTED INCOME ETC.

423 Apportionment of certain income, deductions and interest

(1) Subject to section 424, there shall, for the purposes of this Chapter, be apportioned by the inspector among the participators in a close company—

(a) the income of the company for any accounting period; and

(b) as if it were the income of the company for an accounting period, any amount—

(i) which was deducted in respect of annual payments made by the company in arriving at its distributable income for that period, and

(ii) which in the case of an individual would not have been deductible or would (apart from section 683(3)) have been treated as his income in computing his total income; and

(c) as if it were the income of the company for an accounting period, any interest paid by the company in that period.

(2) Any amount apportionable under any paragraph of subsection (1) above shall be in addition to the amount (if any) which may be apportioned under any other provision of that subsection.

(3) Any amount apportioned to a close company under this section, or by one or more sub-apportionments under this subsection, shall be further apportioned among the participators in that company.

(4) If any amount of interest apportionable by virtue of paragraph (c) of subsection (1) above is interest paid to a participator in the close company or is (apart from that paragraph) treated for the purposes of income tax as the income of such a participator, the amount so apportionable to that participator shall be reduced by the first-mentioned amount (and without requiring the reduction to be reflected in the amount apportioned to any other person).

(5) In determining for the purposes of this Chapter the person to whom any amount is to be apportionable by virtue of subsection (1)(c) above, any interest which any person possesses as a loan creditor shall be disregarded (but without prejudice to the making of an apportionment to him in any other capacity).

(6) Subject to paragraph 10 of Schedule 19, this section shall, notwithstanding the winding up of a company, or the passing of any resolution or the making of any order or anything else done for the purpose of winding up a company, continue to apply as if the company were not being wound up.

(7) Schedule 19, which makes provision for determining the relevant income and distributions of a company for an accounting period and whether there is any such excess as is mentioned in section 424(1), shall have effect for the purpose of supplementing this Chapter.

424 Exclusions from section 423

(1) Subject to the following provisions of this Chapter, an apportionment shall not be made under subsection (1)(a) of section 423 of any relevant income of a company unless—

(a) its relevant income for the accounting period exceeds its distributions for that period; and

(b) if the company is a trading company or a member of a trading group by virtue of paragraph 7(2)(a) of Schedule 19, that excess is more than £1,000;

and the amount apportioned shall be the amount of that excess.

(2) Subject to paragraphs 10(5) and 11(2) of Schedule 19, there may be apportioned under section 423(1)(a), if the inspector sees reason for it, the whole of the relevant income for an accounting period of a close company which is not a trading company whether or not there is any such excess as is mentioned in subsection (1) above.

(3) Subsection (1)(b) of section 423 does not apply to annual payments which consist of interest or are made wholly and exclusively for the purposes of the company’s trade.

(4) Subsection (1)(c) of section 423 does not apply to a company—

(a) if it is a trading company, or

(b) if it is a member of a trading group, or

(c) if more than 75 per cent. of its income is of one or more of the following descriptions, that is—

(i) estate or trading income;

(ii) interest, and dividends or other distributions, received from a 51 per cent. subsidiary of it (both companies being bodies corporate) if the subsidiary is itself within paragraph (a) or (b) above or this paragraph;

and for the purposes of paragraph (c) above no account shall be taken of any deduction from the company’s profits for charges on income, expenses of management or other amounts which can be deducted from or set off against or treated as reducing profits of more than one description.

(5) In determining for the purposes of subsection (4)(c)(ii) above whether one body corporate is a 51 per cent. subsidiary of another, that other shall be treated as not being the owner—

(a) of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom, or

(b) of any share capital which it owns indirectly and which is owned directly by a body corporate for which a profit on the sale of the shares would be a trading receipt.

(6) Subsection (1)(c) of section 423 shall not apply to interest which—

(a) would be eligible for relief under section 353 if paid by an individual; or

(b) is money wholly and exclusively laid out or expended for the purposes of a trade carried on by the company.

425 Manner of apportionment

(1) Subject to the provisions of this section, any apportionment under section 423, including any sub-apportionment of an amount directly or indirectly apportioned to a company, shall be made according to the respective interests in the company in question of the participators.

(2) In determining for the purposes of this section the respective interests of the participators, the inspector may, if it seems proper to him to do so, attribute to each participator an interest corresponding to his interest in the assets of the company available for distribution among the participators in the event of a winding up or in any other circumstances.

(3) Where income of a company which is not a trading company is apportioned under section 423, the inspector may, if it seems proper to him to do so, treat a loan creditor as having an interest for the purposes of this section to the extent to which the income to be apportioned, or assets representing it, has or have been expended or applied, or is or are available to be expended or applied, in redemption, repayment or discharge of the loan capital or debt (including any premium thereon) in respect of which he is a loan creditor.

426 Charge to income tax where apportionment is to an individual

(1) Where a sum has been apportioned under section 423 to an individual (whether by an original apportionment or a sub-apportionment), income tax shall be assessed and charged in respect of that sum in accordance with the following provisions of this section and sections 427 and 428.

(2) Where a sum has been so apportioned to an individual—

(a) it shall be treated for the purpose of computing his total income as income received by him at the end of the accounting period to which the apportionment relates and, subject to section 833(3), shall be deemed to be the highest part of his total income;

(b) no assessment shall be made on the individual in respect of income tax at the basic rate on that sum (nor, in the case mentioned in section 427(1), in respect of income tax at any other rate) but he shall be treated as having paid income tax at the basic rate on that sum or, if his total income is reduced by any deductions, on so much of that sum as is part of his total income as so reduced;

(c) no repayment shall be made of the income tax treated by virtue of paragraph (b) above as having been paid; and

(d) the sum so apportioned shall be treated for the purposes of sections 348 and 349(1) as not brought into charge to income tax.

(3) Where a sum is so apportioned to the personal representatives of a deceased person it shall be treated, in ascertaining the aggregate income of the estate for the purposes of Part XVI, as having been received as mentioned in paragraph (a) of subsection (2) above, and paragraphs (b) to (d) of that subsection shall apply accordingly with the necessary modifications.

427 Reduction of charge under section 426 in certain cases

(1) No individual shall be assessed to income tax by virtue of any apportionment unless the sum or, where there is a sub-apportionment, the aggregate sum on which he is so assessable amounts at least to—

(a) £1,000; or

(b) 5 per cent. of the amount apportioned;

whichever is the less.

(2) Where an apportionment is made by virtue of section 424(2), an individual shall not be charged to tax on a sum treated in consequence of the apportionment or any sub-apportionment as being his income except in so far as it exceeds the amount which, apart from the apportionment, falls in respect of distributions made by the company for the accounting period to be included in his total income.

(3) Where as a result of a company or companies making covenanted payments to charity a sum or sums are apportioned by virtue of section 423(1)(b) and form part of the total income of an individual for any year of assessment, then, except in so far as any such sum is referable to a payment which, if made by the individual, would be treated by virtue of section 683(1) as the income of the individual for the purposes of excess liability, his total income for that year and the total amount assessable for that year in respect of that sum or those sums shall be reduced by the amount of that sum or those sums.

In this subsection “covenanted payments to charity” has the same meaning as in section 683.

(4) Where the income of a company for any accounting period has been apportioned under section 423 of this Act or 296 of the 1970 Act and the distributions of the company for a later accounting period for which it is a close company—

(a) consist of or include a distribution of all or any of the apportioned income; and

(b) exceed the company’s relevant income for that later period,

then, if any individual who was charged to tax under section 426 or section 297 of the 1970 Act in respect of any of the apportioned income is entitled to any of that income on that subsequent distribution, there shall be deemed not to form part of his income for the purposes of excess liability an amount of the income subsequently distributed (or of the excess mentioned in paragraph (b) above if it is less) equal to such fraction as corresponds to—

(i) the fraction of the apportioned income in respect of which he was charged to tax; or

(ii) the fraction to which he is entitled of the subsequent distribution of that income,

whichever is the smaller.

(5) In this section “excess liability” means the excess of liability to income tax over what it would be if all income tax were chargeable at the basic rate to the exclusion of any higher rate.

428 Increase of apportioned sum etc. by reference to ACT

(1) For the purposes of sections 426 and 427—

(a) the sum apportioned to any person;

(b) the amount mentioned in section 427(1)(b); and

(c) the amount to be excluded from a person’s income in accordance with section 427(4),

shall respectively be taken to consist of the aggregate of that sum or amount and such proportion of it as corresponds to the appropriate rate of advance corporation tax; but paragraphs (a) and (b) above shall not apply in the case of any apportionment so far as made by virtue of section 423(1)(b) or (c).

(2) For the purposes of paragraphs (a) and (b) of subsection (1) above, the appropriate rate of advance corporation tax is the rate applicable to a distribution made at the end of the accounting period to which the apportionment relates, and for the purposes of paragraph (c) of that subsection the appropriate rate of advance corporation tax is the rate applicable to the distribution mentioned in section 427(4)(a).

429 Payment and collection of income tax

(1) Any income tax chargeable under section 426 in respect of a sum apportioned to a participator shall be assessed on the participator and, subject to the provisions of this section, all the provisions of the Income Tax Acts relating to assessment and the collection and recovery of tax shall with any necessary modifications apply to tax chargeable under that section.

(2) If the whole or any part of the tax assessed on the participator is not paid within 30 days from the date on which the assessment became final and conclusive or by 1st December in the year next following the year of assessment, whichever is the later, a notice of liability to tax under this section may be served on the company and the tax or the part remaining unpaid, as the case may be, shall be payable by the company upon service of the notice.

(3) Where a notice of liability is served under subsection (2) above, any interest due on the tax assessed on the participator and not paid by him, and any interest accruing due on that tax after the date of service, shall be payable by the company.

(4) Where a notice of liability is served on the company and the relevant tax and any interest payable by the company under subsection (3) above is not paid by the company before the expiry of three months from the date of service, that tax and interest may, without prejudice to the right of recovery from the company, be recovered from the participator.

(5) Where, in consequence of a sub-apportionment, subsections (1) to (4) above apply in relation to a participator in a company other than the company in relation to which the original apportionment was made, references in those subsections to the company shall be taken as references to the company in relation to which the original apportionment was made.

430 Consequences of apportionment: ACT

(1) This section has effect where the income of a company is apportioned under section 423(1)(a); and in this section “the apportioned amount” means the aggregate of the amount of that income which is so apportioned (subject to subsection (2) below) and such proportion of the amount as corresponds to the rate of advance corporation tax applicable to a distribution made at the end of the accounting period to which the apportionment relates (“the relevant period”).

(2) Where a company issues to a close company any share capital to which section 249 applies, the amount of the company’s income apportioned under section 423(1)(a) shall, for the purposes of the definition of “apportioned amount” in subsection (1) above, be treated as reduced by an amount equal to the appropriate amount in cash (within the meaning of section 251(2)).

(3) If in the relevant period the company has a surplus of franked investment income, the surplus (so far as not already reduced in consequence of a claim under section 242 or 243 or of being used to frank distributions made by the company in a subsequent accounting period) shall be treated for all purposes as reduced by a sum equal to the apportioned amount or, if that is greater, as extinguished.

(4) If in the relevant period the company has no such surplus (so far as not already reduced as mentioned in subsection (3) above) or the apportioned amount exceeds that surplus (so far as not already so reduced), subsections (5) to (7) below shall have effect in relation to a sum equal to the advance corporation tax comprised in a franked payment made at the end of the relevant period of an amount equal to the apportioned amount or to that excess, as the case may be.

(5) If, apart from this section, surplus advance corporation tax of a later accounting period could by virtue of subsection (3) of section 239 be set against the company’s liability to corporation tax for the relevant period, that advance corporation tax shall not be so set except to such extent, if any, as would be possible if the sum mentioned in subsection (4) above had been advance corporation tax available to be so set against that liability for the relevant period and had, so far as permitted by that section, already been set against that liability.

(6) If the sum mentioned in subsection (4) above exceeds the amount that could, if it were advance corporation tax available for the purpose, be set as mentioned in subsection (5) above against the company’s liability for the relevant period—

(a) there shall be deducted from the excess an amount equal to the advance corporation tax, if any, that could by virtue of subsection (3) of section 239 be set against the company’s liability to corporation tax for earlier accounting periods after taking into account advance corporation tax so set in consequence of a claim already made under that subsection; and

(b) if no such claim has already been made, advance corporation tax shall not by virtue of any such claim be set against the company’s liability to corporation tax for any such earlier accounting periods except to such extent, if any, as would be possible if an amount equal to any deduction under paragraph (a) above had been advance corporation tax available to be so set and had, so far as permitted by section 239, already been set against that liability.

(7) Any excess of the sum mentioned in subsection (4) above remaining after the deduction mentioned in subsection (6)(a) above—

(a) shall be assessed on and recoverable from the company as if it were advance corporation tax payable by the company in respect of a distribution made by it at the end of the relevant period; and

(b) shall carry interest as if it were advance corporation tax so payable; and

(c) shall be treated as surplus advance corporation tax of the relevant period falling to be dealt with in accordance with section 239(4).

(8) Tax assessed by virtue of subsection (7)(a) above shall, subject to any appeal against the assessment, be due within 14 days after the issue of the notice of assessment.

(9) Subsection (7)(c) above shall not be construed as authorising any sum to be carried forward to a later accounting period in any case in which section 245 would prevent the carry-forward of advance corporation tax.

(10) Section 238 shall apply for the interpretation of this section as it applies for the interpretation of Chapter V of Part VI.