xmlns:atom="http://www.w3.org/2005/Atom"

Part 1Introduction

1Overview of Act

(1)Part 2 of this Act contains basic provisions about the charge to corporation tax including—

(a)the imposition of the charge to corporation tax on the income and chargeable gains of companies (referred to collectively as “profits”), (see section 2),

(b)the exclusion of income and chargeable gains subject to corporation tax from income tax and capital gains tax (see sections 3 and 4),

(c)provision about the territorial scope of the charge to corporation tax (see section 5 and Chapter 4),

(d)provision about how corporation tax is charged and assessed, in particular its charging and assessment by reference to accounting periods (see section 8),

(e)provision about accounting periods (see Chapter 2), and

(f)rules for determining the residence of companies (see Chapter 3).

(2)Under section 2(4) the charge to corporation tax on income has effect in accordance with the provisions of the Corporation Tax Acts that deal with its application, the main provisions of this Act that do so being—

(a)Part 3 (trading income),

(b)Part 4 (property income),

(c)Parts 5 and 6 (profits arising from loan relationships),

(d)Part 7 (profits arising from derivative contracts),

(e)Part 8 (gains in respect of intangible fixed assets),

(f)Part 9 (profits arising from disposals of know-how and sales of patent rights), and

(g)Part 10 (miscellaneous income).

(3)Part 7 also applies the charge to corporation tax on chargeable gains to certain profits arising from derivative contracts.

(4)Parts 5 to 8 also deal with how deficits or losses arising from, or in respect of, the matters to which they relate are brought into account for corporation tax purposes.

(5)The following Parts provide relief for particular types of expenditure—

(a)Part 11 (relief for particular employee share acquisition schemes),

(b)Part 12 (other relief for employee share acquisitions),

(c)Part 13 (additional relief for expenditure on research and development),

(d)Part 14 (remediation of contaminated land), and

(e)Part 15 (film production).

(6)The following Parts contain special rules for particular cases—

(a)Part 15 (film production),

(b)Part 16 (companies with investment business),

(c)Part 17 (partnerships), and

(d)Part 18 (unremittable income).

(7)The following Parts contain provisions of general application—

(a)Part 19 (general exemptions),

(b)Part 20 (general calculation rules), and

(c)Part 21 (other general provisions, including definitions for the purposes of the Act).

(8)For abbreviations and defined expressions used in this Act, see section 1312 and Schedule 4.

Part 2Charge to corporation tax: basic provisions

Chapter 1The charge to corporation tax

Charge to tax on profits

2Charge to corporation tax

(1)Corporation tax is charged on profits of companies for any financial year for which an Act so provides.

(2)In this Part “profits” means income and chargeable gains, except in so far as the context otherwise requires.

(3)In this Act “the charge to corporation tax on income” means the charge under subsection (1) so far as relating to income.

(4)The charge to corporation tax on income has effect in accordance with the provisions of the Corporation Tax Acts that deal with its application.

3Exclusion of charge to income tax

(1)The provisions of the Income Tax Acts relating to the charge to income tax do not apply to income of a company if—

(a)the company is UK resident, or

(b)the company is not UK resident and the income is within its chargeable profits as defined by section 19.

(2)Subsection (1) does not apply to income accruing to a company in a fiduciary or representative capacity.

4Exclusion of charge to capital gains tax

Capital gains tax is not charged on gains accruing to a company in respect of which the company is chargeable to corporation tax, or would be so chargeable but for an exemption.

General scheme of corporation tax

5Territorial scope of charge

(1)A UK resident company is chargeable to corporation tax on all its profits wherever arising.

(2)A non-UK resident company is within the charge to corporation tax only if it carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom.

(3)A non-UK resident company which carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom is chargeable to corporation tax on all its profits wherever arising that are chargeable profits as defined in section 19 (profits attributable to its permanent establishment in the United Kingdom).

(4)Subsections (1) and (3) are subject to any exceptions provided for by the Corporation Tax Acts.

6Profits accruing in fiduciary or representative capacity

(1)A company is not chargeable to corporation tax on profits which accrue to it in a fiduciary or representative capacity except as respects its own beneficial interest (if any) in the profits.

(2)The exception under subsection (1) from chargeability does not apply to profits arising in the winding up of the company.

7Profits accruing under trusts

Profits that accrue for the benefit of a company under a trust are treated for the purposes of the charge to corporation tax under section 2(1) as accruing directly to the company.

8How tax is charged and assessed

(1)Corporation tax for a financial year is charged on profits arising in the year.

(2)Corporation tax is calculated and chargeable, and assessments to corporation tax are made, by reference to accounting periods.

(3)Corporation tax which is assessed and charged for an accounting period of a company is assessed and charged on the full amount of profits arising in the accounting period.

(4)Subsection (3) is subject to any contrary provision in the Corporation Tax Acts.

(5)If a company’s accounting period falls within more than one financial year, the amount of the profits arising in the accounting period that is chargeable to corporation tax must be apportioned between the financial years in which the accounting period falls.

Chapter 2Accounting periods

9Beginning of accounting period

(1)An accounting period of a company begins—

(a)when the company comes within the charge to corporation tax, or

(b)immediately after the end of the previous accounting period of the company, if the company is still within the charge to corporation tax.

(2)For the purposes of this section a UK resident company is treated as coming within the charge to corporation tax when it starts to carry on business, if it would not otherwise be within the charge to corporation tax.

(3)If a chargeable gain or allowable loss accrues to a company at a time which is not (ignoring this subsection) within an accounting period of the company—

(a)an accounting period of the company begins at that time, and

(b)the gain or loss accrues in that accounting period.

(4)This section does not apply if section 12 (companies being wound up) applies.

(5)This section is subject to any provision of the Corporation Tax Acts which provides for an accounting period of a company to which this section applies to begin at a different time.

10End of accounting period

(1)An accounting period of a company comes to an end on the first occurrence of any of the following—

(a)the ending of 12 months from the beginning of the accounting period,

(b)an accounting date of the company,

(c)if there is a period for which the company does not make up accounts, the end of that period,

(d)the company starting or ceasing to trade,

(e)if the company carries on only one trade, coming, or ceasing to be, within the charge to corporation tax in respect of that trade,

(f)if the company carries on more than one trade, coming, or ceasing to be, within the charge to corporation tax in respect of all the trades it carries on,

(g)the company becoming, or ceasing to be, UK resident,

(h)the company ceasing to be within the charge to corporation tax,

(i)the company entering administration, and

(j)the company ceasing to be in administration.

(2)If subsection (1)(i) applies, the accounting period is treated as having ended immediately before the day on which the company enters administration.

(3)For the purposes of this section a company enters administration—

(a)when it enters administration under Schedule B1 to the Insolvency Act 1986 (c. 45), or

(b)when it is subject to a corresponding procedure, other than one under that Act.

(4)For the purposes of this section a company ceases to be in administration—

(a)when it ceases to be in administration under Schedule B1 to the Insolvency Act 1986, or

(b)when a corresponding event occurs, other than under that Act.

(5)This section does not apply if section 12 (companies being wound up) applies.

(6)This section is subject to any provision of the Corporation Tax Acts which provides for an accounting period of a company to which this section applies to end at a different time.

11Companies with more than one accounting date

(1)This section applies if a company carrying on more than one trade—

(a)does not have the same accounting date for each of the trades, and

(b)does not make up general accounts for the whole of the company’s activities.

(2)The company may choose which of the accounting dates for the trades is to be used for the purpose of section 10(1)(b).

(3)But if an officer of Revenue and Customs thinks, on reasonable grounds, that the date chosen by the company is inappropriate, the officer may give notice to the company directing one of the other accounting dates to be used for that purpose instead.

12Companies being wound up

(1)This section applies if a company is being wound up.

(2)An accounting period of the company ends immediately before the winding up starts.

(3)An accounting period of the company begins when the winding up starts.

(4)After the winding up starts, an accounting period of the company ends—

(a)at the end of the period of 12 months beginning on the first day of the accounting period, or

(b)if earlier, when the winding up is completed.

(5)After the winding up starts, an accounting period of the company begins immediately after the end of the previous accounting period of the company, if the winding up has not been completed.

(6)This section is subject to any provision of the Corporation Tax Acts which provides for an accounting period of a company to which this section applies to begin or end at a different time.

(7)For the purposes of this section a winding up of a company starts—

(a)when the company passes a resolution for the winding up of the company,

(b)when a petition for the winding up of the company is presented, if the company has not already passed such a resolution and a winding up order is made on the petition, or

(c)when an act is done in relation to the company for a similar purpose, if the winding up is not under the Insolvency Act 1986 (c. 45).

Chapter 3Company residence

13Overview of Chapter

(1)This Chapter contains rules for determining the residence of companies.

(2)Section 14 gives the main rule for companies incorporated in the United Kingdom (including SEs and SCEs incorporated in the United Kingdom).

(3)Section 15 deals with companies which have been UK resident under the rules of common law and provides for their continued residence when certain circumstances arise.

(4)Sections 16 and 17 deal with SEs and SCEs which transfer their registered office to the United Kingdom.

(5)Section 18 contains a special rule for companies treated as non-UK resident under double taxation arrangements.

14Companies incorporated in the United Kingdom

(1)A company which is incorporated in the United Kingdom is UK resident for the purposes of the Corporation Tax Acts.

(2)Accordingly, even if a different place of residence is given by a rule of law, the company is not resident in that place for the purposes of the Corporation Tax Acts.

15Continuation of residence established under common law

(1)This section applies to a company which is neither—

(a)incorporated in the United Kingdom, nor

(b)resident in the United Kingdom by virtue of section 16 or 17.

(2)If the company—

(a)is no longer carrying on a business, and

(b)was UK resident for the purposes of the Corporation Tax Acts immediately before it ceased to carry on business,

the company continues to be UK resident for the purposes of the Corporation Tax Acts.

(3)If the company—

(a)is being wound up outside the United Kingdom, and

(b)was UK resident for the purposes of the Corporation Tax Acts immediately before any of its activities came under the control of a foreign liquidator,

the company continues to be UK resident for the purposes of the Corporation Tax Acts.

(4)In subsection (3) “foreign liquidator” means a person exercising functions which, in the United Kingdom, would be exercisable by a liquidator.

16SEs which transfer registered office to the United Kingdom

(1)This section applies to an SE which transfers its registered office to the United Kingdom in accordance with Article 8 of Council Regulation (EC) No 2157/2001 on the Statute for a European company (Societas Europaea).

(2)The SE is UK resident for the purposes of the Corporation Tax Acts from the time of its registration in the United Kingdom.

(3)Accordingly, even if a different place of residence is given by a rule of law, the SE is not resident in that place for the purposes of the Corporation Tax Acts.

(4)The SE does not cease to be UK resident merely because it later transfers its registered office from the United Kingdom.

17SCEs which transfer registered office to the United Kingdom

(1)This section applies to an SCE which transfers its registered office to the United Kingdom in accordance with Article 7 of Council Regulation (EC) No 1435/2003 on the Statute for a European Cooperative Society (SCE).

(2)The SCE is UK resident for the purposes of the Corporation Tax Acts from the time of its registration in the United Kingdom.

(3)Accordingly, even if a different place of residence is given by a rule of law, the SCE is not resident in that place for the purposes of the Corporation Tax Acts.

(4)The SCE does not cease to be UK resident merely because it later transfers its registered office from the United Kingdom.

18Companies treated as non-UK resident under double taxation arrangements

(1)This section applies to a company which is treated as—

(a)resident in a territory outside the United Kingdom, and

(b)non-UK resident,

for the purposes of any double taxation arrangements.

(2)For the purposes of the Corporation Tax Acts the company is—

(a)resident outside the United Kingdom, and

(b)non-UK resident.

(3)Subsection (2) applies even if the company would otherwise be UK resident for the purposes of the Corporation Tax Acts by virtue of section 14, 15, 16 or 17 or another rule of law.

(4)To decide whether a company is treated as mentioned in subsection (1)(a) and (b) for the purposes of any double taxation arrangements, assume that—

(a)the company has made a claim for relief under the arrangements, and

(b)in consequence of the claim it falls to be decided whether the company is to be treated as mentioned in subsection (1)(a) and (b) for the purposes of the arrangements.

Chapter 4Non-UK resident companies: chargeable profits

Chargeable profits

19Chargeable profits

(1)This section applies if a non-UK resident company carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom.

(2)The company’s chargeable profits are its profits that are—

(a)of a type mentioned in subsection (3), and

(b)attributable to the permanent establishment in accordance with sections 20 to 32.

(3)The types of profits referred to in subsection (2)(a) are—

(a)trading income arising directly or indirectly through or from the establishment,

(b)income from property or rights used by, or held by or for, the establishment, and

(c)chargeable gains falling within section 10B of TCGA 1992 (non-resident company with United Kingdom permanent establishment)—

(i)as a result of assets being used in or for the purposes of the trade carried on by the company through the establishment, or

(ii)as a result of assets being used or held for the purposes of the establishment or being acquired for use by or for the purposes of the establishment.

20Profits attributable to permanent establishment: introduction

(1)Sections 21 to 32 apply for the purpose of determining the amount of profits of a non-UK resident company that are attributable to a permanent establishment of the company in the United Kingdom.

(2)Sections 21 to 28 contain provision about the separate enterprise principle.

(3)See also paragraph 5A of Schedule 26 to FA 2003 (non-resident companies: transactions through broker, investment manager or Lloyd’s agent), which provides for profits of certain investment transactions to be disregarded in determining the amount of profits attributable to a permanent establishment.

The separate enterprise principle

21The separate enterprise principle

(1)The profits of the non-UK resident company that are attributable to the permanent establishment are those that the establishment would have made if it were a distinct and separate enterprise which—

(a)engaged in the same or similar activities under the same or similar conditions, and

(b)dealt wholly independently with the non-UK resident company.

(2)In applying subsection (1) assume that—

(a)the permanent establishment has the same credit rating as the non-UK resident company, and

(b)the permanent establishment has such equity and loan capital as it could reasonably be expected to have in the circumstances specified in that subsection.

(3)In sections 22 to 28 the principle in subsection (1) (read with subsection (2)) is called “the separate enterprise principle”.

22Transactions treated as being on arm’s length terms

In accordance with the separate enterprise principle, transactions between the permanent establishment and any other part of the non-UK resident company are treated as taking place on such terms as would have been agreed between parties dealing at arm’s length.

23Provision of goods or services for permanent establishment

(1)This section applies if the non-UK resident company provides the permanent establishment with goods or services.

(2)If the goods or services are of a kind that the company supplies, in the ordinary course of its business, to third parties dealing with it at arm’s length, the matter is dealt with as a transaction to which the separate enterprise principle applies.

(3)If not, the matter is dealt with as an expense incurred by the non-UK resident company for the purposes of the permanent establishment (see section 29).

24Application to insurance companies

(1)The Commissioners for Her Majesty’s Revenue and Customs may by regulations make provision about the application of section 21(1) to insurance companies.

(2)The regulations may, in particular, make provision in place of section 21(2)(b) as to the basis on which, in the case of insurance companies, capital is to be attributed to a permanent establishment in the United Kingdom.

(3)In this section “insurance company” has the meaning given by section 431(2) of ICTA.

The separate enterprise principle: application to non-UK resident banks

25Non-UK resident banks: introduction

(1)Sections 26 to 28 contain provision in relation to the application of the separate enterprise principle if the non-UK resident company is a bank.

(2)Nothing in sections 26 to 28 is to be read as preventing similar principles to those provided for in those sections from applying when the separate enterprise principle is applied to a non-UK resident company that is not a bank.

(3)In this section and those sections “bank” has the meaning given by section 840A of ICTA.

26Transfer of financial assets

(1)This section applies if—

(a)the non-UK resident company is a bank, and

(b)there is a transfer of a loan or other financial asset between the permanent establishment and any other part of the company.

(2)In accordance with the separate enterprise principle, the transfer is recognised only if it would have taken place between independent enterprises.

(3)The transfer is not recognised if it cannot reasonably be considered that it is carried out for valid commercial reasons.

(4)For this purpose the obtaining of a tax advantage is not a valid commercial reason.

27Loans: attribution of financial assets and profits arising

(1)This section applies if the non-UK resident company—

(a)is a bank, and

(b)makes a loan or has another financial asset.

(2)In accordance with the separate enterprise principle, the loan or other financial asset, and profits arising from it, are attributed to the permanent establishment so far as they can reasonably be regarded as having been generated by the activities of the permanent establishment.

(3)For the purposes of subsection (2), particular account is to be taken of the extent to which the permanent establishment is responsible for—

(a)obtaining the offer of new business,

(b)establishing the potential borrower’s credit rating and the risk involved in providing credit,

(c)negotiating the terms of the loan with the borrower, and

(d)deciding whether, and if so on what conditions, to make or extend the loan.

(4)For those purposes, account may also be taken of the extent to which the permanent establishment is responsible for—

(a)concluding the loan agreement and disbursing the proceeds of the loan, and

(b)administering the loan (including handling and monitoring the service of it) and holding and controlling any securities pledged.

(5)References in this section to a financial asset include any financial risk in relation to a loan, or potential loan, if—

(a)the financial risk is capable of giving rise to fees or other receipts, and

(b)the holding of capital is required for the financial risk (or would be required if the transaction were between parties at arm’s length).

28Borrowing: permanent establishment acting as agent or intermediary

(1)This section applies if—

(a)the non-UK resident company is a bank, and

(b)the permanent establishment borrows funds for the purposes of another part of the company and (in relation to that borrowing) acts only as an agent or intermediary.

(2)In accordance with the separate enterprise principle—

(a)the profits attributable to the permanent establishment, and

(b)the capital attributable to the permanent establishment under section 21(2)(b),

are to be those appropriate in the case of an agent acting at arm’s length, taking into account the risks and costs borne by the establishment.

Rules about deductions

29Allowable deductions

(1)A deduction is allowed for any allowable expenses incurred for the purposes of the permanent establishment.

(2)Expenses incurred for the purposes of the permanent establishment include executive and general administrative expenses so incurred, whether in the United Kingdom or elsewhere.

(3)It does not matter whether the expenses are incurred by, or reimbursed by, the permanent establishment.

(4)The amount of expenses to be taken into account under subsection (1) is the actual cost to the non-UK resident company.

(5)“Allowable expenses” means expenses of a kind in respect of which a deduction would be allowed for corporation tax purposes if incurred by a UK resident company.

30Restriction on deductions: costs

No deduction is allowed for costs in excess of those which would have been incurred on the assumptions in section 21(2).

31Restriction on deductions: payments in respect of intangible assets

(1)No deduction is allowed for royalties paid, or other similar payments made, by the permanent establishment to any other part of the non-UK resident company in respect of the use of intangible assets held by the company.

(2)This does not prevent a deduction for any contribution by the permanent establishment to the costs of creation of an intangible asset.

(3)In this section “intangible asset” has the meaning it has for accounting purposes, and includes any intellectual property (as defined in section 712(3)).

32Restriction on deductions: interest or other financing costs

(1)No deduction is allowed for payments of interest or other financing costs by the permanent establishment to any other part of the non-UK resident company.

(2)But the restriction in subsection (1) does not apply to interest or other financing costs that are payable in respect of borrowing by the permanent establishment in the ordinary course of a financial business carried on by it.

(3)In subsection (2) “financial business” means any of the following—

(a)banking, deposit-taking, money-lending or debt-factoring, or a business similar to any of those, and

(b)dealing in commodity or financial futures.

Chapter 5Supplementary

33Trade includes office

In this Part, except in so far as the context otherwise requires—

(a)references to a trade include an office, and

(b)references to carrying on a trade include holding an office.

Part 3Trading income

Chapter 1Introduction

34Overview of Part

(1)This Part applies the charge to corporation tax on income to—

(a)the profits of a trade (see Chapter 2), and

(b)post-cessation receipts arising from a trade (see Chapter 15).

(2)Chapters 3 to 14 contain rules relevant to tax under this Part.

(3)Chapter 16 contains rules that give priority to provisions outside this Part in relation to certain matters that fall within it.

(4)This Part needs to be read with Parts 19 (general exemptions) and 20 (general calculation rules).

Chapter 2Income taxed as trade profits

Charge to tax on trade profits

35Charge to tax on trade profits

The charge to corporation tax on income applies to the profits of a trade.

Trades and trade profits

36Farming and market gardening

(1)Farming or market gardening in the United Kingdom is treated for corporation tax purposes as the carrying on of a trade or part of a trade (whether or not the land is managed on a commercial basis and with a view to the realisation of profits).

(2)All farming in the United Kingdom carried on by a company, other than farming carried on as part of another trade, is treated for corporation tax purposes as one trade.

(3)This section does not apply to farming or market gardening by an insurance company on land which is an asset of the company’s long-term insurance fund.

(4)In the case of farming carried on by a company as a member of a firm, this rule is explained by section 1270(1).

37Commercial occupation of woodlands

(1)The commercial occupation of woodlands in the United Kingdom is not a trade or part of a trade for any corporation tax purpose.

(2)For this purpose the occupation of woodlands is commercial if the woodlands are managed—

(a)on a commercial basis, and

(b)with a view to the realisation of profits.

(3)See also sections 208 and 980 (which, when read with this section, secure that profits or losses from the commercial occupation of woodlands in the United Kingdom are ignored for corporation tax purposes).

38Commercial occupation of land other than woodlands

(1)The commercial occupation of land in the United Kingdom is treated for corporation tax purposes as the carrying on of a trade or part of a trade.

(2)For this purpose the occupation of land is commercial if the land is managed—

(a)on a commercial basis, and

(b)with a view to the realisation of profits.

(3)This section does not apply—

(a)to farming or market gardening (which is dealt with by section 36),

(b)if the land is being prepared for forestry purposes,

(c)if the land comprises woodlands (which is dealt with by section 37), or

(d)to the occupation by an insurance company of land which is an asset of the company’s long-term insurance fund.

39Profits of mines, quarries and other concerns

(1)Profits or losses arising out of land in the case of a concern to which this section applies are calculated as if the concern were a trade.

(2)Any profits arising out of the land are treated for the purposes of clause 35 as profits of a trade.

(3)Any losses arising out of the land are treated for the purposes of Chapters 2 and 4 of Part 10 of ICTA (loss relief and group relief) as losses of a trade carried on in the United Kingdom.

(4)The concerns to which this section applies are—

(a)mines and quarries (including gravel pits, sand pits and brickfields),

(b)ironworks, gasworks, salt springs or works, alum mines or works, waterworks and streams of water,

(c)canals, inland navigation, docks and drains or levels,

(d)rights of fishing,

(e)rights of markets and fairs, tolls, bridges and ferries,

(f)railways and other kinds of way, and

(g)a concern of the same kind as one specified in paragraph (b), (c), (d) or (e).

(5)But this section does not apply to a concern—

(a)if it is carried on by an insurance company on land which is an asset of the company’s long-term insurance fund, or

(b)if section 38 (commercial occupation of land other than woodlands) applies to the occupation of the land out of which the profits or losses arise.

40Credit unions

(1)If a credit union—

(a)makes loans to its members, or

(b)invests its surplus funds (by placing them on deposit or otherwise),

that is not treated, in calculating the credit union’s income, as the carrying on of a trade or part of a trade.

(2)In this section “surplus funds” means funds not immediately required for the credit union’s purposes.

Starting and ceasing to trade

41Effect of company starting or ceasing to be within charge to corporation tax

(1)This section applies if a company starts or ceases to be within the charge to corporation tax in respect of a trade.

(2)The company is treated for the purposes of this Part—

(a)as starting to carry on the trade when it starts to be within the charge, or

(b)as ceasing to carry on the trade when it ceases to be within the charge.

Trading income and property income

42Tied premises

(1)This section applies if —

(a)in the course of carrying on a trade a company (“the trader”) supplies, or is concerned in the supply of, goods sold or used on premises occupied by another person,

(b)the trader has an estate or interest in the premises,

(c)the estate or interest is dealt with as property employed for the purposes of the trade, and

(d)receipts and expenses in connection with the premises would otherwise be brought into account in calculating the profits of a property business of the trader.

(2)Both the receipts and the expenses are instead brought into account in calculating the profits of the trade.

(3)Any apportionment of receipts or expenses that is necessary because—

(a)the receipts or expenses do not relate only to the premises, or

(b)the above conditions are met only in relation to part of the premises,

is to be made on a just and reasonable basis.

43Caravan sites where trade carried on

(1)This section applies if—

(a)a company (“the trader”) carries on material activities connected with the operation of a caravan site,

(b)the activities are, or are part of, a trade, and

(c)receipts from, and expenses of, lettings of caravans or pitches for caravans on the site would otherwise be brought into account in calculating the profits of a property business of the trader.

(2)The trader may instead bring both the receipts and the expenses into account in calculating the profits of the trade.

(3)But if the conditions in subsection (1)(a) and (b) are met for only part of an accounting period of the trader, subsection (2) applies only to the receipts and expenses that would otherwise be brought into account in calculating the profits of the property business for that part of the accounting period.

(4)In this section—

44Surplus business accommodation

(1)This section applies if—

(a)a company (“the trader”) carrying on a trade obtains receipts from a letting of business accommodation that is temporarily surplus to requirements (see subsections (3) and (4)),

(b)the accommodation is not held as trading stock,

(c)the receipts are in respect of part of a building of which another part is used to carry on the trade,

(d)the receipts are relatively small, and

(e)the receipts, and the expenses of the letting, would otherwise be brought into account in calculating the profits of a property business of the trader.

(2)The trader may instead bring both the receipts and the expenses into account in calculating the profits of the trade.

(3)Accommodation is temporarily surplus to requirements only if—

(a)it has been used within the last 3 years to carry on the trade or acquired within the last 3 years,

(b)the trader intends to use it to carry on the trade at a later date, and

(c)the letting is for a term of not more than 3 years.

(4)If accommodation is temporarily surplus to requirements at the beginning of an accounting period, it continues to be temporarily surplus to requirements until the end of that period.

(5)If under this section any of the receipts from and expenses of a letting are brought into account in calculating the profits of the trade, all subsequent receipts from and expenses of the letting must be dealt with in the same way (but only so long as this section continues to apply).

(6)In this section “letting” includes a licence to occupy.

45Payments for wayleaves

(1)This section applies if—

(a)a company (“the trader”) carries on a trade on some or all of the land to which a wayleave relates,

(b)rent is receivable, or expenses are incurred, by the trader in respect of the wayleave, and

(c)apart from any rent or expenses in respect of a wayleave, no other receipts or expenses in respect of any of the land are brought into account in calculating the profits of any property business of the trader.

(2)If—

(a)the trader would otherwise be liable to tax under Chapter 8 of Part 4 in respect of the rent for the wayleave (rent receivable for UK electric-line wayleaves), or

(b)expenses incurred by the trader in respect of the wayleave would otherwise be brought into account in calculating profits charged under that Chapter,

the trader may instead bring both the rent and the expenses into account in calculating the profits of the trade.

(3)If—

(a)rent for the wayleave would otherwise be brought into account in calculating the profits of a property business of the trader, or

(b)expenses incurred by the trader in respect of the wayleave would otherwise be so brought into account,

the trader may instead bring both the rent and the expenses into account in calculating the profits of the trade.

(4)In this section “rent” includes—

(a)a receipt mentioned in section 207(3), and

(b)any other receipt in the nature of rent.

(5)In this section “wayleave” means an easement, servitude or right in or over land which is enjoyed in connection with—

(a)an electric, telegraph or telephone wire or cable,

(b)a pipe for the conveyance of any thing, or

(c)any apparatus used in connection with such a pipe.

(6)The reference to the enjoyment of an easement, servitude or right in connection with an electric, telegraph or telephone wire or cable includes (in particular) its enjoyment in connection with—

(a)a pole or pylon supporting such a wire or cable, or

(b)apparatus used in connection with such a wire or cable.

Chapter 3Trade profits: basic rules

46Generally accepted accounting practice

(1)The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for corporation tax purposes.

(2)This does not—

(a)require a company to comply with the requirements of the Companies Act 2006 (c. 46) or subordinate legislation made under that Act except as to the basis of calculation, or

(b)impose any requirements as to audit or disclosure.

(3)This section does not affect any provisions of the Corporation Tax Acts—

(a)relating to the calculation of the profits of—

(i)Lloyd’s underwriters, or

(ii)the life assurance business of insurance companies, or

(b)otherwise laying down special rules for the calculation of the profits of a particular description of business.

47Losses calculated on same basis as profits

(1)The same rules apply for corporation tax purposes in calculating losses of a trade as apply in calculating profits.

(2)This is subject to any express provision to the contrary.

48Receipts and expenses

(1)In the Corporation Tax Acts, in the context of the calculation of the profits of a trade, references to receipts and expenses are to any items brought into account as credits or debits in calculating the profits.

(2)It follows that references in that context to receipts or expenses do not imply that an amount has actually been received or paid.

(3)This section is subject to any express provision to the contrary.

49Items treated as receipts and expenses

The rules for calculating the profits of a trade need to be read with—

(a)the provisions of CAA 2001 which treat allowances as expenses of a trade,

(b)the provisions of CAA 2001 which treat charges as receipts of a trade,

(c)section 297 (credits and debits in respect of a loan relationship to which a company is a party for the purposes of a trade it carries on treated as receipts and expenses of the trade),

(d)section 573 (credits and debits in respect of a derivative contract to which a company is a party for the purposes of a trade it carries on treated as receipts and expenses of the trade),

(e)section 747 (credits and debits in respect of an intangible fixed asset held by a company for the purposes of a trade it carries on treated as receipts and expenses of the trade), and

(f)section 749 (credits and debits in respect of an intangible fixed asset held by a company for the purposes of a section 39(4) concern which it carries on treated as receipts and expenses of the concern).

50Animals kept for trade purposes

(1)Animals or other living creatures kept for the purposes of a trade are treated as trading stock if they are not kept wholly or mainly—

(a)for the work they do in connection with the carrying on of the trade,

(b)for public exhibition, or

(c)for racing or other competitive purposes.

(2)But they are not treated as trading stock if they are part of a herd in relation to which a herd basis election has effect (see Chapter 8).

(3)This section applies to shares in animals or other living creatures as it applies to the creatures themselves.

51Relationship between rules prohibiting and allowing deductions

(1)Any relevant permissive rule in this Part—

(a)has priority over any relevant prohibitive rule, but

(b)is subject to—

(i)section 56 (car or motor cycle hire),

(ii)section 1288 (unpaid remuneration),

(iii)section 1290 (employee benefit contributions),

(iv)section 1304 (crime-related payments).

(2)In this section “any relevant permissive rule in this Part” means any provision of—

(a)Chapter 5 (trade profits: rules allowing deductions), apart from sections 62 to 67,

(b)Chapter 7 (trade profits: gifts to charities etc),

(c)Chapter 9 (trade profits: other specific trades), or

(d)Chapter 12 (deductions from profits: unremittable amounts),

which allows a deduction in calculating the profits of a trade.

(3)In this section “any relevant prohibitive rule”, in relation to any deduction, means any provision of this Part or Chapter 1 of Part 20 (apart from those mentioned in subsection (1)(b)) which might otherwise be read as—

(a)prohibiting or deferring the deduction, or

(b)restricting the amount of the deduction.

52Apportionment etc of profits and losses to accounting period

(1)This section applies if a period of account of a trade does not coincide with an accounting period.

(2)Any of the following steps may be taken if they are necessary in order to arrive at the profits or losses of the accounting period—

(a)apportioning the profits or losses of a period of account to the parts of that period falling in different accounting periods, and

(b)adding the profits or losses of a period of account (or part of a period) to profits or losses of other periods of account (or parts).

(3)The steps must be taken by reference to the number of days in the periods concerned.

Chapter 4Trade profits: rules restricting deductions

53Capital expenditure

(1)In calculating the profits of a trade, no deduction is allowed for items of a capital nature.

(2)Subsection (1) is subject to provision to the contrary in the Corporation Tax Acts.

54Expenses not wholly and exclusively for trade and unconnected losses

(1)In calculating the profits of a trade, no deduction is allowed for—

(a)expenses not incurred wholly and exclusively for the purposes of the trade, or

(b)losses not connected with or arising out of the trade.

(2)If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade.

55Bad debts

(1)This section applies to non-money debts to which neither Part 7 (derivative contracts) nor Part 8 (intangible fixed assets) applies.

(2)In calculating the profits of a company’s trade, no deduction is allowed in respect of a non-money debt owed to the company, except—

(a)by way of impairment loss, or

(b)so far as the debt is released wholly and exclusively for the purposes of the trade as part of a statutory insolvency arrangement.

(3)In this section “non-money debt” means a debt which is not a money debt for the purposes of Part 5 (loan relationships).

56Car or motor cycle hire

(1)Subsection (2) applies if, in calculating the profits of a trade, a deduction is allowed for expenses incurred on the hiring of a car or motor cycle—

(a)which is not a qualifying hire car or motor cycle (see section 57(2)), and

(b)the retail price of which when new exceeds £12,000.

(2)The amount of the deduction which would otherwise be allowable is reduced by multiplying the amount by the fraction—

where RP is the retail price of the car or motor cycle when new.

(3)Subsection (4) applies if a deduction is reduced as a result of subsection (2), or a corresponding provision, and subsequently—

(a)there is a rebate (however described) of the hire charges, or

(b)a debt in respect of any of the hire charges is released otherwise than as part of a statutory insolvency arrangement.

(4)The amount that, as a result of the rebate or release—

(a)is brought into account as a receipt of the trade, or

(b)is treated as a post-cessation receipt under section 193 (debts released after cessation),

is reduced by multiplying it by the fraction in subsection (2).

(5)In this section “corresponding provision” means—

(a)section 1251(2) (car or motor cycle hire: expenses of management),

(b)section 48(2) of ITTOIA 2005 (car or motor cycle hire: trade profits and property income), or

(c)section 76ZN(2) of ICTA (car or motor cycle hire: expenses of insurance companies).

(6)The power under section 74(4) of CAA 2001 to increase or further increase the sums of money specified in Chapter 8 of Part 2 of CAA 2001 includes the power to increase or further increase the sum of money specified in subsection (1)(b) or (2).

57Car or motor cycle hire: supplementary

(1)In section 56 “car or motor cycle” means a mechanically propelled road vehicle other than one—

(a)of a construction primarily suited for the conveyance of goods or burden of any description, or

(b)of a type not commonly used as a private vehicle and unsuitable for such use.

(2)In section 56 “a qualifying hire car or motor cycle” means a car or motor cycle which—

(a)is hired under a hire-purchase agreement (see subsection (3)) under which there is no option to purchase,

(b)is hired under a hire-purchase agreement under which there is an option to purchase exercisable on the payment of a sum equal to not more than 1% of the retail price of the car or motor cycle when new, or

(c)is a qualifying hire car for the purposes of Part 2 of CAA 2001 (under section 82 of CAA 2001).

(3)For this purpose “hire-purchase agreement” means an agreement under which—

(a)goods are bailed (or in Scotland hired) in return for periodical payments by the person to whom they are bailed or hired, and

(b)the property in the goods will pass to that person if the terms of the agreement are complied with and one or more of the following events occurs,

but does not include a conditional sale agreement (see subsection (5)).

(4)The events are—

(a)the exercise of an option to purchase by that person,

(b)the doing of any other specified act by any party to the agreement, and

(c)the happening of any other specified event.

(5)A “conditional sale agreement” means an agreement for the sale of goods under which—

(a)the purchase price or part of it is payable by instalments, and

(b)the goods are to remain the property of the seller (even though they are to be in the possession of the buyer) until specified conditions as to the payment of instalments or otherwise are met.

(6)In this section and section 56 “new” means unused and not second-hand.

58Hiring cars (but not motor cycles) with low CO2 emissions before 1 April 2013

(1)Section 56 does not apply to expenses incurred on the hiring of—

(a)a car with low CO2 emissions, or

(b)an electrically-propelled car,

if the period of hire began before 1 April 2013 under a contract entered into before that date.

(2)For this purpose—

59Patent royalties

In calculating the profits of a trade, no deduction is allowed for royalties or other sums paid for the use of patents.

60Expenditure on integral features

Section 33A(3) of CAA 2001 provides that no deduction is allowed in respect of certain expenditure on an integral feature of a building or structure (within the meaning of that section).

Chapter 5Trade profits: rules allowing deductions

Pre-trading expenses

61Pre-trading expenses

(1)This section applies if a company incurs expenses for the purposes of a trade before (but not more than 7 years before) the date on which the company starts to carry on the trade (“the start date”).

(2)If, in calculating the profits of the trade—

(a)no deduction would otherwise be allowed for the expenses, but

(b)a deduction would be allowed for them if they were incurred on the start date,

the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them).

(3)This section does not apply to any expenses in relation to which—

(a)any debit falls, or

(b)any debit would fall but for section 330 (loan relationships: debits in respect of pre-trading expenditure),

to be brought into account for the purposes of Part 5 (loan relationships).

Tenants under taxed leases

62Tenants under taxed leases: introduction

(1)Sections 63 to 67 apply if land used in connection with a trade is subject to a taxed lease.

(2)Section 63 (tenants occupying land for purposes of trade treated as incurring expenses) applies in calculating the profits of a trade carried on by the tenant under the taxed lease for the purpose of making deductions for the expenses of the trade.

(3)But any deduction for an expense under section 63 is subject to the application of any provision of Chapter 4 of this Part.

(4)In this section and sections 63 to 67 the following expressions have the same meaning as in Chapter 4 of Part 4 (profits of property businesses: lease premiums etc)—

(5)Section 230(3) and (4) (unreduced amount of taxed receipt under section 217 as a result of section 218) applies for the purposes of sections 63 to 67.

(6)In the application of sections 66 and 67 to Scotland—

(a)references to a lease being granted out of a taxed lease are to the grant of a sublease of land subject to the taxed lease, and

(b)references to the lease so granted are to be read as references to the sublease.

63Tenants occupying land for purposes of trade treated as incurring expenses

(1)The tenant under the taxed lease is treated as incurring an expense of a revenue nature in respect of the land subject to the taxed lease for each qualifying day.

(2)If there is more than one taxed receipt, this section applies separately in relation to each of them.

(3)A day is a “qualifying day”, in relation to a taxed receipt, if it is a day—

(a)that falls within the receipt period of the taxed receipt, and

(b)on which the tenant occupies the whole or part of the land subject to the taxed lease for the purposes of carrying on a trade.

(4)If on the qualifying day the tenant occupies the whole of the land subject to the taxed lease for the purposes of the trade, the amount of the expense for the qualifying day by reference to the taxed receipt is given by the formula—

where—

  • A is the unreduced amount of the taxed receipt, and

  • TRP is the number of days in the receipt period of the taxed receipt.

(5)If on the qualifying day the tenant occupies part of the land subject to the taxed lease for the purposes of the trade, the amount of the expense for the qualifying day by reference to the taxed receipt is given by the formula—

where—

  • F is the fraction of the land that is so occupied calculated on a just and reasonable basis, and

  • A and TRP have the same meaning as in subsection (4).

(6)This section is subject to section 64 (limit on deductions if tenant entitled to mineral extraction allowance).

64Limit on deductions if tenant entitled to mineral extraction allowance

(1)This section applies if the tenant under the taxed lease has become entitled, in respect of expenditure on the acquisition of an interest in the land subject to the taxed lease, to an allowance for an accounting period under Part 5 of CAA 2001 (mineral extraction allowances) in respect of expenditure falling within section 403 of that Act (qualifying expenditure on acquiring a mineral asset).

(2)If the allowance is in respect of the whole of the expenditure, no deduction is allowed for expenses under section 63 for a qualifying day falling within that or a later accounting period.

(3)If the allowance is in respect of only part of the expenditure (“the allowable part”) the amount of the deduction for expenses under section 63 for a qualifying day falling within that or a later accounting period is calculated by multiplying the amount that, apart from this section, would be the amount of the deduction for the qualifying day by—

where—

  • WE is the whole of the expenditure, and

  • AP is the allowable part of the expenditure.

65Tenants dealing with land as property employed for purposes of trade

(1)This section applies if the tenant under the taxed lease—

(a)does not occupy the land subject to the taxed lease, or a part of it, but

(b)deals with its interest in the land, or the part of it, as property employed for the purposes of carrying on a trade.

(2)Section 63 applies as if the land or the part of it were occupied by the tenant for the purposes of the trade.

(3)But the tenant is not treated as incurring an expense in respect of the land for a qualifying day as a result of this section so far as the tenant is treated as incurring an expense under section 232 (tenants under taxed leases treated as incurring expenses) in respect of the land for the day in calculating the profits of the tenant’s property business.

(4)This section is subject to sections 66 and 67 (restrictions on section 63 expenses where the additional calculation rule is relevant).

66Restrictions on section 63 expenses: lease premium receipts

(1)This section applies if a lease has been granted out of the taxed lease and—

(a)in calculating the amount of a receipt of a property business under Chapter 4 of Part 4 (profits of property businesses: lease premiums etc) in respect of the lease, there is a reduction under section 228 (the additional calculation rule) by reference to the taxed receipt, or

(b)in calculating the amount of a receipt of a property business under Chapter 4 of Part 3 of ITTOIA 2005 (profits of property businesses: lease premiums etc) in respect of the lease, there is a reduction under section 288 of that Act (the additional calculation rule) by reference to the taxed receipt.

In this section and section 67 the receipt that is so reduced is referred to as a “lease premium receipt”.

(2)Subsections (3) to (5) provide for the application of section 63 as a result of section 65 for a qualifying day that falls within the receipt period of the lease premium receipt.

(3)The tenant under the taxed lease is treated as incurring an expense under section 63 as a result of section 65 for the qualifying day by reference to the taxed receipt only if the daily amount of the taxed receipt exceeds the daily reduction of the lease premium receipt.

(4)If the condition in subsection (3) is met, the amount of that expense for the qualifying day by reference to the taxed receipt is equal to that excess.

(5)If the qualifying day falls within the receipt period of more than one lease premium receipt, the reference in subsection (3) to the daily reduction of the lease premium receipt is to be read as a reference to the total of the daily reductions of each of the lease premium receipts whose receipt period includes the qualifying day.

(6)In this section—

(7)In this section references to a reduction under section 228 below or section 288 of ITTOIA 2005 by reference to a taxed receipt have the same meaning as in Chapter 4 of Part 4 (see section 230(6)).

(8)Section 67 explains how this section operates if the lease does not extend to the whole of the premises subject to the taxed lease.

67Restrictions on section 63 expenses: lease of part of premises

(1)This section applies if—

(a)section 66 applies, and

(b)the lease granted out of the taxed lease does not extend to the whole of the premises subject to the taxed lease.

(2)Subsections (3) to (5) apply for a qualifying day that falls within the receipt period of the lease premium receipt.

(3)Sections 63, 65 and 66 apply separately in relation to the part of the premises subject to the lease and to the remainder of the premises.

(4)If—

(a)more than one lease that does not extend to the whole of the premises subject to the taxed lease has been granted out of the taxed lease, and

(b)the qualifying day falls within the receipt period of two or more lease premium receipts that relate to different leases,

sections 63, 65 and 66 apply separately in relation to each part of the premises subject to a lease to which such a lease premium receipt relates and to the remainder of the premises.

(5)Where sections 63, 65 and 66 apply in relation to a part of the premises, A becomes the amount calculated by multiplying the unreduced amount of the taxed receipt by the fraction of the premises constituted by the part.

(6)This fraction is calculated on a just and reasonable basis.

Renewals

68Replacement and alteration of trade tools

(1)This section applies if—

(a)expenses are incurred on replacing or altering any tool used for the purposes of a trade, and

(b)a deduction for the expenses would not otherwise be allowable in calculating the profits of the trade because (and only because) they are items of a capital nature.

(2)In calculating the profits of the trade, a deduction is allowed for the expenses.

(3)In this section “tool” means any implement, utensil or article.

Payments for restrictive undertakings

69Payments for restrictive undertakings

(1)In calculating the profits of a trade, a deduction is allowed for a payment—

(a)which is treated as earnings of an employee by virtue of section 225 of ITEPA 2003 (payments for restrictive undertakings), and

(b)which is made, or treated as made for the purposes of section 226 of that Act (valuable consideration given for restrictive undertakings), by the company carrying on the trade.

(2)The deduction is allowed for the accounting period in which the payment—

(a)is made, or

(b)is treated as made for the purposes of section 226 of ITEPA 2003.

Seconded employees

70Employees seconded to charities and educational establishments

(1)This section applies if a company carrying on a trade (“the employer”) makes the services of a person employed for the purposes of the trade available to—

(a)a charity, or

(b)an educational establishment,

on a basis that is stated and intended to be temporary.

(2)In calculating the profits of the trade, a deduction is allowed for expenses of the employer that are attributable to the employee’s employment during the period of the secondment.

(3)In this section—

71Educational establishments

(1)A body in England and Wales is an educational establishment for the purposes of section 70 if it is—

(a)a local education authority,

(b)an educational institution maintained or otherwise supported by a local education authority,

(c)an independent school within the meaning of the Education Act 1996 (c. 56) registered under section 161 of the Education Act 2002 (c. 32), or

(d)an institution within the further education sector, or the higher education sector, within the meaning of the Further and Higher Education Act 1992 (c. 13).

(2)A body in Scotland is an educational establishment for the purposes of section 70 if it is—

(a)an education authority within the meaning of the Education (Scotland) Act 1980 (c. 44),

(b)an educational establishment within the meaning of the Education (Scotland) Act 1980 managed by an education authority within the meaning of that Act,

(c)a public or grant-aided school within the meaning of the Education (Scotland) Act 1980,

(d)an independent school within the meaning of the Education (Scotland) Act 1980,

(e)a central institution within the meaning of the Education (Scotland) Act 1980 (c. 44),

(f)an institution within the higher education sector within the meaning of section 56(2) of the Further and Higher Education (Scotland) Act 1992 (c. 37), or

(g)a college of further education within the meaning of section 36(1) of the Further and Higher Education (Scotland) Act 1992.

(3)A body in Northern Ireland is an educational establishment for the purposes of section 70 if it is—

(a)an education and library board within the meaning of the Education and Libraries (Northern Ireland) Order 1986 (S.I. 1986/594 (N.I. 3)),

(b)a college of education, a grant-aided school or an independent school within the meaning of the Education and Libraries (Northern Ireland) Order 1986, or

(c)an institution of further education within the meaning of the Further Education (Northern Ireland) Order 1997 (S.I. 1997/1772 (N.I. 15)).

Contributions to agents' expenses

72Payroll deduction schemes: contributions to agents' expenses

(1)This section applies if—

(a)a company carrying on a trade (“the employer”) is liable to make payments to an individual,

(b)income tax falls to be deducted from those payments as a result of PAYE regulations, and

(c)the employer withholds sums from those payments in accordance with an approved scheme and pays the sums to an approved agent.

(2)In calculating the profits of the employer’s trade, a deduction is allowed for expenses incurred by the employer in making a payment to the agent for expenses which—

(a)have been incurred, or

(b)are to be incurred,

by the agent in connection with the agent’s functions under the scheme.

(3)In this section “approved agent” and “approved scheme” have the same meaning as in section 714 of ITEPA 2003.

Counselling and retraining expenses

73Counselling and other outplacement services

(1)In calculating the profits of a trade, a deduction is allowed for counselling expenses if—

(a)the company carrying on the trade (“the employer”) incurs the expenses,

(b)the expenses are incurred in relation to a person (“the employee”) who holds or has held an office or employment under the employer for the purposes of the trade, and

(c)the relevant conditions are met.

(2)In this section “counselling expenses” means expenses incurred—

(a)in the provision of services to the employee in connection with the cessation of the office or employment,

(b)in the payment or reimbursement of fees for such provision, or

(c)in the payment or reimbursement of travelling expenses in connection with such provision.

(3)In this section “the relevant conditions” means—

(a)conditions A to D for the purposes of section 310 of ITEPA 2003 (employment income exemptions: counselling and other outplacement services), and

(b)in the case of travel expenses, condition E for those purposes.

74Retraining courses

(1)In calculating the profits of a trade, a deduction is allowed for retraining course expenses if—

(a)the company carrying on the trade (“the employer”) incurs the expenses,

(b)they are incurred in relation to a person (“the employee”) who holds or has held an office or employment under the employer for the purposes of the trade, and

(c)the relevant conditions are met.

(2)In this section—

75Retraining courses: recovery of tax

(1)This section applies if—

(a)an employer’s liability to corporation tax for an accounting period is determined on the assumption that a deduction for expenditure is allowed under section 74, and

(b)the deduction would not otherwise have been allowed.

(2)If, subsequently—

(a)the condition in section 311(4)(a) of ITEPA 2003 is not met because of the employee’s failure to begin the course within the period of one year after ceasing to be employed, or

(b)the condition in section 311(4)(b) of ITEPA 2003 is not met because of the employee’s continued employment or re-employment,

an assessment of an amount or further amount of corporation tax due as a result of the condition not being met may be made under paragraph 41 of Schedule 18 to FA 1998.

(3)Such an assessment must be made before the end of the period of 6 years immediately following the end of the accounting period in which the failure to meet the condition occurred.

(4)If subsection (2) applies, the employer must give an officer of Revenue and Customs a notice containing particulars of—

(a)the employee’s failure to begin the course,

(b)the employee’s continued employment, or

(c)the employee’s re-employment,

within 60 days of coming to know of it.

(5)If an officer of Revenue and Customs has reason to believe that the employer has failed to give such a notice, the officer may by notice require the employer to provide such information as the officer may reasonably require for the purposes of this section about—

(a)the failure to begin the course,

(b)the continued employment, or

(c)the re-employment.

(6)A notice under subsection (5) may specify a time (not less than 60 days) within which the required information must be provided.

Redundancy payments etc

76Redundancy payments and approved contractual payments

(1)Sections 77 to 79 apply if—

(a)a company (“the employer”) makes a redundancy payment or an approved contractual payment to another person (“the employee”), and

(b)the payment is in respect of the employee’s employment wholly in the employer’s trade or partly in the employer’s trade and partly in one or more other capacities.

(2)For the purposes of this section and sections 77 to 81 “redundancy payment” means a redundancy payment payable under—

(a)Part 11 of the Employment Rights Act 1996 (c. 18), or

(b)Part 12 of the Employment Rights (Northern Ireland) Order 1996 (S.I. 1996/1919 (N.I. 16)).

(3)For the purposes of this section and those sections—

77Payments in respect of employment wholly in employer’s trade

(1)This section applies if—

(a)the payment is in respect of the employee’s employment wholly in the employer’s trade, and

(b)no deduction would otherwise be allowable for the payment.

(2)In calculating the profits of the trade, a deduction is allowed under this section for the payment.

(3)The deduction under this section for an approved contractual payment must not exceed the amount which would have been due to the employee if a redundancy payment had been payable.

(4)If the payment is made after the employer has permanently ceased to carry on the trade, it is treated as made on the last day on which the employer carried on the trade.

(5)If there is a partnership change, subsection (4) does not apply so long as a company carrying on the trade in partnership immediately before the change continues to carry it on in partnership after the change.

(6)The reference in subsection (5) to a partnership change is to a change in the persons carrying on the trade in circumstances where the trade is carried on by persons in partnership immediately before or immediately after the change (or at both those times).

(7)The deduction under this section is allowed for the accounting period in which the payment is made (or treated under subsection (4) as made).

78Payments in respect of employment in more than one capacity

(1)This section applies if the payment is in respect of the employee’s employment with the employer—

(a)partly in the employer’s trade, and

(b)partly in one or more other capacities.

(2)The amount of the redundancy payment, or the amount which would have been due if a redundancy payment had been payable, is to be apportioned on a just and reasonable basis between—

(a)the employment in the trade, and

(b)the employment in the other capacities.

(3)The part of the payment apportioned to the employment in the trade is treated as a payment in respect of the employee’s employment wholly in the trade for the purposes of section 77.

79Additional payments

(1)This section applies if the employer permanently ceases to carry on a trade or part of a trade and makes a payment to the employee in addition to—

(a)the redundancy payment, or

(b)if an approved contractual payment is made, the amount that would have been due if a redundancy payment had been payable.

(2)If, in calculating the profits of the trade—

(a)no deduction would otherwise be allowable for the additional payment, but

(b)a deduction would be allowable for it if the employer had not permanently ceased to carry on the trade or the part of the trade,

a deduction is allowed under this section for the additional payment.

(3)The deduction under this section is limited to 3 times the amount of—

(a)the redundancy payment, or

(b)if an approved contractual payment is made, the amount that would have been due if a redundancy payment had been payable.

(4)If the payment is made after the employer has permanently ceased to carry on the trade or the part of the trade, it is treated as made on the last day on which the employer carried on the trade or the part of the trade.

(5)The deduction under this section is allowed for the accounting period in which the payment is made (or treated under subsection (4) as made).

80Application of section 79 in cases involving partnerships

(1)This section deals with the application of section 79 in circumstances where—

(a)there is a change in the persons carrying on a trade, and

(b)the trade is carried on by persons in partnership before or after the change (or at both those times).

(2)The employer is treated for the purposes of section 79 as permanently ceasing to carry on the trade unless a company carrying on the trade in partnership immediately before the change continues to carry it on in partnership after the change.

81Payments made by the Government

(1)This section applies if, in respect of a redundancy payment or an approved contractual payment payable by an employer—

(a)the Secretary of State makes a payment under section 167 of the Employment Rights Act 1996 (c. 18), or

(b)the Department for Employment and Learning makes a payment under Article 202 of the Employment Rights (Northern Ireland) Order 1996 (S.I. 1996/1919 (N.I. 16)).

(2)So far as the employer reimburses the Secretary of State or Department for the payment, sections 77 to 80 apply as if the payment were—

(a)a redundancy payment, or

(b)an approved contractual payment,

made by the employer.

Contributions to local enterprise organisations or urban regeneration companies

82Contributions to local enterprise organisations or urban regeneration companies

(1)This section applies if a company carrying on a trade (“the contributor”) incurs expenses in making a contribution (whether in cash or in kind)—

(a)to a local enterprise organisation (see section 83), or

(b)to an urban regeneration company (see section 86),

and a deduction would not otherwise be allowable for the expenses in calculating the profits of the trade.

(2)In calculating the profits of the trade, a deduction is allowed under this section for the expenses.

(3)But if, in connection with the making of the contribution, the contributor or a connected person—

(a)receives a disqualifying benefit of any kind, or

(b)is entitled to receive such a benefit,

the amount of the deduction is restricted to the amount of the expenses less the value of the benefit.

(4)For this purpose it does not matter whether a person receives, or is entitled to receive, the benefit—

(a)from the local enterprise organisation or urban regeneration company concerned, or

(b)from anyone else.

(5)Subsection (6) applies if—

(a)a deduction has been made under this section, and

(b)the contributor or a connected person receives a disqualifying benefit that is in any way attributable to the contribution.

(6)An amount equal to the value of the benefit (so far as not brought into account in determining the amount of the deduction)—

(a)is brought into account in calculating the profits of the trade, as a receipt arising in the accounting period in which the benefit is received, or

(b)if the contributor has permanently ceased to carry on the trade before the benefit is received, is treated as a post-cessation receipt (see Chapter 15).

(7)In this section “disqualifying benefit” means a benefit the expenses of obtaining which, if incurred by the contributor directly in a transaction at arm’s length, would not be allowable as a deduction in calculating the profits of the trade.

83Meaning of “local enterprise organisation”

(1)For the purposes of section 82 “local enterprise organisation” means—

(a)a local enterprise agency,

(b)a training and enterprise council,

(c)a Scottish local enterprise company, or

(d)a business link organisation.

(2)“Local enterprise agency” means a body for the time being approved as a local enterprise agency for the purposes of section 82 by the relevant national authority, that is to say by—

(a)the Secretary of State (in relation to England or Northern Ireland),

(b)the Scottish Ministers (in relation to Scotland), or

(c)the Welsh Ministers (in relation to Wales).

For further provision about approvals by the relevant national authority, see sections 84 and 85.

(3)“Training and enterprise council” means a body with which the Secretary of State has an agreement under which the body is to carry out the functions of a training and enterprise council.

(4)“Scottish local enterprise company” means a company with which—

(a)Scottish Enterprise, or

(b)Highlands and Islands Enterprise,

has an agreement under which the company is to carry out the functions of a local enterprise company.

(5)“Business link organisation” means a person authorised by or on behalf of the Secretary of State to use a trade mark designated by the Secretary of State for the purposes of this subsection.

84Approval of local enterprise agencies

(1)The relevant national authority may approve a body as a local enterprise agency for the purposes of section 82 only if conditions A and B are met.

(2)But if those conditions are met, the body may be approved—

(a)whatever its status or structure, and

(b)even if it is not described as a local enterprise agency.

(3)Condition A is that the relevant national authority is satisfied—

(a)that the body’s sole aim is the promotion or encouragement of local enterprise, or

(b)that one of the body’s main aims is the promotion or encouragement of local enterprise and that it has or is about to have a separate fund for the sole purpose of pursuing that aim.

(4)For this purpose “local enterprise” means industrial and commercial activity or enterprise in a particular area in the United Kingdom, with particular reference to encouraging the formation and development of small businesses.

(5)Condition B is that the body is precluded from paying or transferring any of its income or profit directly or indirectly—

(a)to any of its members, or

(b)to any person charged with the control and direction of its affairs.

(6)The payment of—

(a)reasonable remuneration for goods, labour or power supplied or for services provided,

(b)reasonable interest on money lent, or

(c)reasonable rent for premises,

does not count as a payment or transfer of income or profit for the purposes of subsection (5).

85Supplementary provisions with respect to approvals

(1)This section applies for the purposes of section 84.

(2)The relevant national authority may give a body approval that is conditional on its compliance with such requirements as to—

(a)accounts,

(b)provision of information, and

(c)other matters,

as the relevant national authority considers appropriate.

(3)If the relevant national authority approves a body on the basis that it has or is about to have a separate fund (see section 84(3)(b))—

(a)the approval must specify the fund, and

(b)section 82 applies only to a contribution to the body made wholly to or for the purposes of the fund.

(4)The relevant national authority must withdraw the approval of a body as a local enterprise agency if—

(a)condition A or B in section 84 is no longer met, or

(b)the body is failing to comply with a requirement imposed as a condition of its approval.

(5)The relevant national authority must give notice of withdrawal to the body concerned, specifying the date from which the withdrawal takes effect (which may be earlier than the date on which the notice is given).

86Meaning of “urban regeneration company”

(1)For the purposes of section 82 “urban regeneration company” means any body of persons which the Treasury by order designates as an urban regeneration company for the purposes of that section.

(2)A body may be so designated only if—

(a)its sole or main function is to co-ordinate the regeneration of a specific urban area in the United Kingdom,

(b)it is expected to seek to perform that function by creating a plan for the development of that area and trying to secure that the plan is carried into effect, and

(c)in co-ordinating the regeneration of that area, it is expected to work together with some or all local or other public authorities which exercise functions in relation to the whole or part of that area.

(3)An order under this section may be framed so as to take effect on a date earlier than the making of the order, but not earlier than 3 months before the date on which the order is made.

Scientific research

87Expenses of research and development

(1)If a company carrying on a trade incurs expenses of a revenue nature on research and development—

(a)related to the trade, and

(b)directly undertaken by or on behalf of the company,

a deduction is allowed for the expenses in calculating the profits of the trade.

(2)For this purpose expenses incurred on research and development—

(a)do not include expenses incurred in the acquisition of rights in, or arising out of, research and development, but

(b)subject to that, include all expenses incurred in carrying out, or providing facilities for carrying out, research and development.

(3)The reference in this section to research and development related to a trade includes—

(a)research and development which may lead to or facilitate an extension of the trade, and

(b)research and development of a medical nature which has a special relation to the welfare of workers employed in the trade.

(4)The same expenses may not be brought into account under this section in relation to more than one trade.

(5)In this section “research and development” has the meaning given by section 837A of ICTA and includes oil and gas exploration and appraisal.

88Payments to research associations, universities etc

(1)If a company carrying on a trade—

(a)pays any sum to an Association in the case of which exemption may be claimed under section 508 of ICTA and which has as its object the undertaking of research and development which may lead to or facilitate an extension of the appropriate class of trade, or

(b)pays to an approved university, college, research institute or other similar institution any sum to be used for scientific research related to the appropriate class of trade,

a deduction is allowed for the sum in calculating the profits of the trade.

(2)The deduction is allowed for the accounting period in which the payment is made.

(3)In this section—

(a)“the appropriate class of trade” means the class of trade to which the trade carried on by the company belongs, and

(b)“scientific research” means any activities in the fields of natural or applied science for the extension of knowledge.

(4)For the purposes of this section a university, college research institute or other similar institution is approved if it is for the time being approved for the purposes of this section by the Secretary of State.

(5)The reference in subsection (1)(b) to scientific research related to the appropriate class of trade includes—

(a)scientific research which may lead to or facilitate an extension of trades of the appropriate class, and

(b)scientific research of a medical nature which has a special relation to the welfare of workers employed in trades of the appropriate class.

(6)If a question arises as to—

(a)whether, or

(b)to what extent,

any activities constitute or constituted scientific research, an officer of Revenue and Customs must refer the question for decision to the Secretary of State, whose decision is final.

(7)The same expenses may not be brought into account under this section in relation to more than one trade.

Expenses connected with patents, designs and trade marks

89Expenses connected with patents

In calculating the profits of a trade, a deduction is allowed for expenses incurred—

(a)in obtaining for the purposes of the trade the grant of a patent or the extension of a patent’s term, or

(b)in connection with a rejected or abandoned application for a patent made for the purposes of the trade.

90Expenses connected with designs or trade marks

In calculating the profits of a trade, a deduction is allowed for expenses incurred in obtaining for the purposes of the trade—

(a)the registration of a design or trade mark,

(b)the extension of a period for which the right in a registered design subsists, or

(c)the renewal of registration of a trade mark.

Export Credits Guarantee Department

91Payments to Export Credits Guarantee Department

In calculating the profits of a trade, a deduction is allowed for a sum payable by the company carrying on the trade to the Export Credits Guarantee Department—

(a)under an agreement entered into as a result of arrangements made under section 2 of the Export and Investment Guarantees Act 1991 (c. 67) (insurance in connection with overseas investment), or

(b)with a view to entering into such an agreement.

Levies under FISMA 2000

92Levies etc under FISMA 2000

(1)In calculating the profits of a trade carried on by a company, a deduction is allowed for any sum—

(a)spent by the company in paying a levy, or

(b)paid by the company as a result of an award of costs under costs rules,

so far as it is not otherwise allowable.

(2)For the purposes of this section “costs rules” means—

(a)rules made under section 230 of FISMA 2000, or

(b)provision relating to costs contained in the standard terms fixed under paragraph 18 of Schedule 17 to FISMA 2000.

(3)For the purposes of this section “levy” means—

(a)a payment required under rules made under section 136(2) of FISMA 2000,

(b)a levy imposed under the Financial Services Compensation Scheme,

(c)a payment required under rules made under section 234 of FISMA 2000,

(d)a payment required under the rules referred to in paragraph 14(1) of Schedule 17 to FISMA 2000 in accordance with paragraph 15(1) of that Schedule, or

(e)a payment required in accordance with the standard terms fixed under paragraph 18 of that Schedule (other than a sum paid as a result of an award of costs under costs rules).

Chapter 6Trade profits: receipts

Capital receipts

93Capital receipts

(1)Items of a capital nature must not be brought into account as receipts in calculating the profits of a trade.

(2)But this does not apply to items which, as a result of any provision of the Corporation Tax Acts, are brought into account as receipts in calculating the profits of the trade.

Debts released

94Debts incurred and later released

(1)This section applies if—

(a)in calculating the profits of a trade, a deduction is allowed for the expense giving rise to a debt owed by the company carrying on the trade,

(b)all or part of the debt is released, and

(c)the release is not part of a statutory insolvency arrangement.

(2)The amount released—

(a)is brought into account as a receipt in calculating the profits of the trade, and

(b)is treated as arising in the accounting period in which the release is effected.

Amounts received following earlier cessation

95Acquisition of trade: receipts from transferor’s trade

(1)This section applies if —

(a)a person (“the transferor”) permanently ceased to carry on a trade at any time,

(b)at that time the transferor transferred to another person (“the transferee”) the right to receive sums arising from the carrying on of the trade, and

(c)the transferee subsequently carries on the transferor’s trade.

(2)Sums—

(a)which the transferee receives as a result of the transfer, and

(b)which are not brought into account in calculating the profits of the transferor’s trade for corporation or income tax purposes of any period before the cessation,

are brought into account in calculating the profits of the transferee’s trade in the accounting period in which they are received.

(3)Any sums mentioned in subsection (1)(b) which are received after the transferor has permanently ceased to carry on the trade are not post-cessation receipts (see Chapter 15).

Reverse premiums

96Reverse premiums

(1)For the purposes of sections 98 and 99 a payment or other benefit is a reverse premium if—

(a)conditions A, B and C are met, and

(b)it is not excluded by section 97.

(2)Condition A is that a company (“the recipient”) receives the payment or other benefit by way of inducement in connection with a transaction being entered into by—

(a)the recipient, or

(b)a person connected with the recipient.

(3)Condition B is that the transaction (the “property transaction”) is one under which—

(a)the recipient, or

(b)the person connected with the recipient,

becomes entitled to an estate, interest or right in or over land.

(4)Condition C is that the payment or other benefit is paid or provided by—

(a)the person (“the grantor”) by whom the estate, interest or right is granted or was granted at an earlier time,

(b)a person connected with the grantor, or

(c)a nominee of, or a person acting on the directions of, the grantor or a person connected with the grantor.

97Excluded cases

(1)A payment or other benefit is not a reverse premium so far as it is brought into account under section 532 of CAA 2001 (the general rule excluding contributions) to reduce the recipient’s expenditure qualifying for capital allowances.

(2)A payment or other benefit received in connection with a property transaction is not a reverse premium if—

(a)the person entering into the transaction is an individual, and

(b)the transaction relates to premises occupied or to be occupied by the individual as the individual’s only or main residence.

(3)A payment or other benefit is not a reverse premium so far as it is consideration for the transfer of an estate or interest in land which constitutes the sale in a sale and leaseback arrangement.

(4)A “sale and leaseback arrangement” means any such arrangement as is described in section 779(1) or (2) or 780(1) of ICTA.

98Tax treatment of reverse premiums

(1)A reverse premium is treated for corporation tax purposes as a receipt of a revenue nature.

(2)If the recipient enters into the property transaction for the purposes of a trade carried on (or to be carried on) by the recipient, the reverse premium is brought into account in calculating the profits of the trade.

(3)If subsection (2) does not apply, the reverse premium is charged to corporation tax in accordance with section 250 (reverse premium taxed as property business receipt).

99Arrangements not at arm’s length

(1)This section applies if—

(a)two or more of the parties to the property arrangements are connected persons, and

(b)the terms of those arrangements are not such as would reasonably have been expected if those persons had been dealing at arm’s length.

(2)The terms of the property arrangements meet the condition in subsection (1)(b) if they differ to a significant extent from the terms which, at the time the arrangements were entered into, would be regarded as normal and reasonable—

(a)in the market conditions then prevailing, and

(b)between persons dealing with each other at arm’s length in the open market.

(3)The whole amount or value of the reverse premium brought into account under section 98 is brought into account in the first relevant period of account.

(4)“The first relevant period of account” means the period of account in which the property transaction is entered into.

(5)However if the recipient enters into the property transaction for the purposes of a trade—

(a)which is not then carried on by the recipient, but

(b)which the recipient subsequently starts to carry on,

“the first relevant period of account” means the first period of account in which the recipient carries on the trade.

100Connected persons and property arrangements

For the purposes of this section and sections 96 to 99—

(a)persons are treated as connected with each other if they are connected at any time during the period when the property arrangements are entered into, and

(b)“the property arrangements” means the property transaction and any arrangements entered into in connection with it (whether before it, at the same time as it or after it).

Other receipts

101Distribution of assets of mutual concerns

(1)This section applies if—

(a)a deduction has been made in calculating the profits of a trade for a payment to a mutual concern for the purposes of its mutual business,

(b)the concern is being or has been wound up or dissolved,

(c)a company (“the recipient”) which is carrying on the trade, or was doing so at the time of the payment, receives money or money’s worth representing the concern’s assets, and

(d)the assets in question represent profits of the mutual business conducted by the concern.

(2)If the recipient is carrying on the trade at the time the money or money’s worth is received, the amount or value of the money or money’s worth is brought into account as a receipt in calculating the profits of the trade.

(3)If the recipient—

(a)is not carrying on the trade at the time the money or money’s worth is received, but

(b)was doing so at the time of the payment to the mutual concern,

the amount or value of the money or money’s worth is treated as a post-cessation receipt (see Chapter 15).

(4)For the purposes of this section money or money’s worth represents assets of a mutual concern if it—

(a)forms part of the assets of the concern,

(b)forms part of the consideration for the transfer of the assets of the concern as part of a scheme of amalgamation or reconstruction which involves its winding up, or

(c)consists of the consideration for a transfer or surrender of a right to receive anything falling within paragraph (a) or (b) and does not give rise to a charge to corporation tax on the company receiving it otherwise than as a result of this section.

(5)If a transfer or surrender of a right to receive anything which—

(a)forms part of the assets of a mutual concern, or

(b)forms part of the consideration for the transfer of the assets of a mutual concern,

is not at arm’s length, the company making the transfer or surrender is treated as receiving consideration equal to the value of the right.

(6)In this section references to a mutual concern are to a body corporate which has at any time carried on a trade which consists of or includes the conduct of mutual business (whether or not confined to the members of the body corporate).

(7)For the purposes of this section a trade does not consist of or include the conduct of mutual business if all the profits of the trade are chargeable to corporation or income tax.

102Industrial development grants

(1)This section applies if a company carrying on a trade receives a payment by way of a grant under—

(a)section 7 or 8 of the Industrial Development Act 1982 (c. 52), or

(b)Article 7, 9 or 30 of the Industrial Development (Northern Ireland) Order 1982 (S.I. 1982/1083 (N.I. 15)).

(2)The payment is brought into account as a receipt in calculating the profits of the trade unless—

(a)the grant is designated as made towards the cost of specified capital expenditure,

(b)the grant is designated as compensation for the loss of capital assets, or

(c)the grant is for all or part of a corporation tax liability (including one that has already been met).

103Sums recovered under insurance policies etc

(1)This section applies if—

(a)a deduction has been made for a loss or expense in calculating the profits of a trade,

(b)a company carrying on the trade recovers a sum under an insurance policy or a contract of indemnity in respect of the loss or expense, and

(c)the sum is not of a revenue nature.

(2)The sum is brought into account as a receipt in calculating the profits of the trade (but only up to the amount of the deduction).

104Repayments under FISMA 2000

(1)This section applies if—

(a)a company carries on a trade, and

(b)a payment is made to the company as a result of a repayment provision.

(2)The payment is brought into account as a receipt in calculating the profits of the trade.

(3)For the purposes of this section “repayment provision” means—

(a)any provision made by virtue of section 136(7) or 214(1)(e) of FISMA 2000, or

(b)any provision made by scheme rules for fees to be refunded in specified circumstances.

(4)In this section “scheme rules” means the rules referred to in paragraph 14(1) of Schedule 17 to FISMA 2000.

Chapter 7Trade profits: gifts to charities etc

Relief for certain gifts

105Gifts of trading stock to charities etc

(1)This section applies if a company carrying on a trade (“the donor”) gives an article for the purposes of—

(a)a charity, a registered club or a body listed in subsection (4), or

(b)a designated educational establishment (see section 106),

and the article is one manufactured, or of a class or description sold, by the donor in the course of the trade.

(2)In calculating the profits of the trade, no amount is required to be brought into account as a receipt in consequence of the disposal of the article.

(3)In this section “registered club” has the meaning given by paragraph 1 of Schedule 18 to FA 2002 (relief for community amateur sports clubs).

(4)The bodies referred to in subsection (1)(a) are—

(a)the Trustees of the National Heritage Memorial Fund,

(b)the Historic Buildings and Monuments Commission for England, and

(c)the National Endowment for Science, Technology and the Arts.

(5)This section needs to be read with section 108 (receipt of benefits by donor or connected person).

106Meaning of “designated educational establishment”

(1)For the purposes of section 105 “designated educational establishment” means an educational establishment designated, or within a category designated, in regulations made—

(a)for England and Scotland, by the Secretary of State,

(b)for Wales, by the Welsh Ministers, and

(c)for Northern Ireland, by the Department of Education.

(2)The regulations may make different provision for different areas.

(3)If any question arises as to whether an educational establishment is within a category designated in the regulations, an officer of Revenue and Customs must refer the question for decision—

(a)in the case of an establishment in England or Scotland, to the Secretary of State,

(b)in the case of an establishment in Wales, to the Welsh Ministers, and

(c)in the case of an establishment in Northern Ireland, to the Department of Education.

(4)The power of the Secretary of State or the Welsh Ministers to make regulations under this section is exercisable by statutory instrument.

(5)A statutory instrument containing any regulations made by the Secretary of State under this section is subject to annulment in pursuance of a resolution of the House of Commons.

(6)A statutory instrument containing any regulations made by the Welsh Ministers under this section is subject to annulment in pursuance of a resolution of the National Assembly for Wales.

(7)Regulations made under this section by the Department of Education—

(a)are a statutory rule for the purposes of the Statutory Rules (Northern Ireland) Order 1979 (S.I. 1979/1573 (N.I. 12)), and

(b)are subject to negative resolution within the meaning of section 41(6) of the Interpretation Act (Northern Ireland) 1954 (c. 33 (N.I.)).

107Gifts of medical supplies and equipment

(1)This section applies if—

(a)a company carrying on a trade makes a gift from trading stock of medical supplies or medical equipment,

(b)it makes the gift for humanitarian purposes, and

(c)the supplies or equipment are for human use.

(2)In calculating the profits of the trade, no amount is required to be brought into account as a receipt in consequence of the gift.

(3)In calculating the profits of the trade, a deduction is allowed for any costs of transportation, delivery or distribution incurred by the company in making the gift.

(4)The deduction is allowed for the accounting period in which the costs are incurred.

(5)The Treasury may by order provide that this section is not to have effect in relation to medical supplies or medical equipment of any description specified in the order.

(6)This section needs to be read with section 108 (receipt of benefits by donor or connected person).

Benefits associated with gifts

108Receipt of benefits by donor or connected person

(1)This section applies if a company carrying on a trade makes a gift in relation to which relief is given under—

(a)section 105,

(b)section 107(2), or

(c)section 63(2) of CAA 2001 (gifts to charities etc of plant or machinery used in the trade),

and the company, or a person connected with the company, receives a benefit which is in any way attributable to the making of the gift.

(2)This section also applies if—

(a)relief is given under section 107(3) for costs of transportation, delivery or distribution incurred by a company carrying on a trade, and

(b)the company, or a person connected with the company, receives a benefit which is in any way attributable to the company’s incurring of those costs.

(3)An amount equal to the value of the benefit—

(a)is brought into account in calculating the profits of the trade, as a receipt of the trade arising in the accounting period in which the benefit is received, or

(b)if the company has permanently ceased to carry on the trade before the benefit is received, is treated as a post-cessation receipt (see Chapter 15).

Chapter 8Trade profits: herd basis rules

Introduction

109Election for application of herd basis rules

(1)A company, or a firm of which a company is a member, which keeps or has kept a production herd for the purposes of a trade may make an election under this Chapter (a “herd basis election”).

(2)In calculating the profits of the trade, animals which are part of a production herd in relation to which a herd basis election has effect—

(a)are not treated as trading stock (see section 50), but

(b)are treated instead in accordance with sections 112 to 121 (“the herd basis rules”).

(3)This Chapter is expressed in terms of farmers but applies to any company, or firm of which a company is a member, which keeps or has kept a production herd for the purposes of a trade, whether or not the trade is farming.

(4)References in this Chapter to keeping a production herd are to keeping it for the purposes of the trade.

110Meaning of “animal”, “herd”, “production herd” etc

(1)In this Chapter—

(a)“animal” means any animal or other living creature,

(b)“herd” includes a flock and any other collection of animals (however named), and

(c)“production herd” means, in relation to a farmer, a herd of animals of the same species (irrespective of breed) kept by the farmer wholly or mainly for the products obtainable from the living animal which the animals produce for the farmer to sell.

(2)For this purpose “the products obtainable from the living animal” means—

(a)the young of the animal, or

(b)any other product obtainable from the animal without slaughtering it.

(3)For the purposes of this Chapter the general rule is that immature animals kept in a production herd are not part of the herd.

(4)There is an exception to this rule if—

(a)the nature of the land on which the herd is kept means that animals which die or cease to be part of the herd can be replaced only by animals bred and reared on the land,

(b)the immature animals in question are bred in the herd and are maintained in the herd for the purpose of replacing other animals, and

(c)it is necessary to maintain the immature animals for that purpose.

(5)In that case the immature animals are part of the herd for the purposes of this Chapter, but only so far as they are required to prevent a fall in the numbers of the herd.

(6)References in this Chapter to an animal being added to a herd include references to an immature animal that is not part of the herd reaching maturity.

(7)This Chapter applies—

(a)in relation to animals kept singly as it applies in relation to herds, and

(b)in relation to shares in animals as it applies in relation to animals themselves.

111Other interpretative provisions

(1)This section applies for the purposes of this Chapter.

(2)A production herd kept by a farmer is of the same class as another production herd only if—

(a)the animals kept in both herds are of the same species (irrespective of breed), and

(b)the products produced for the farmer to sell (for which the herds are wholly or mainly kept) are of the same kinds in both herds.

(3)References to the sale of an animal include references to its death or destruction.

(4)References to the sale proceeds of an animal include references to—

(a)money received from an insurer because of the animal’s death or destruction,

(b)compensation money received because of the animal’s death or destruction, and

(c)the sale proceeds of the animal’s carcass or any part of its carcass.

(5)Female animals become mature—

(a)in the case of laying birds, when they first lay, and

(b)in any other case, when they produce their first young.

(6)20% or more of a herd is a substantial part of the herd, but a lesser percentage than 20% is capable of being a substantial part of the herd depending on the circumstances of the case concerned.

The herd basis rules

112Initial cost of herd and value of herd

(1)In calculating the profits of the trade, no deduction is allowed for the initial cost of the herd.

(2)In calculating the profits of the trade, the value of the herd is not brought into account.

113Addition of animals to herd

(1)This section applies for the purpose of calculating the profits of the trade if an animal is added to the herd, unless it replaces another animal in the herd.

(2)No deduction is allowed for the cost of the animal.

(3)If, immediately before it was added to the herd, the animal was part of the farmer’s trading stock, the balancing amount is brought into account as a receipt.

(4)“The balancing amount” means—

(a)in the case of an animal bred by the farmer, the cost of breeding the animal and rearing it to maturity, and

(b)in any other case, the sum of the initial cost of acquiring the animal and the cost (if any) incurred by the farmer in rearing the animal to maturity.

114Replacement of animals in herd

(1)This section applies for the purpose of calculating the profits of the trade if—

(a)an animal (“the old animal”) is sold from the herd or otherwise ceases to be part of the herd, and

(b)it is replaced in the herd by another animal (“the new animal”).

(2)The sale proceeds (if any) of the old animal are brought into account as a receipt.

(3)But this needs to be read with—

(a)section 115 (amount of receipt if old animal slaughtered under disease control order),

(b)section 118 (acquisition of new herd begun within 5 years of sale), and

(c)section 120 (replacement of part sold begun within 5 years of sale).

(4)Except so far as otherwise allowable, a deduction is allowed under this section for the cost of the new animal.

(5)But if the new animal is of better quality than the old animal, the amount of the deduction must not exceed the amount that it would have been necessary to spend to replace the old animal with an animal of the same quality.

115Amount of receipt if old animal slaughtered under disease control order

(1)This section applies for the purposes of section 114.

(2)If—

(a)the old animal was slaughtered under a disease control order, and

(b)the new animal is of worse quality than the old animal,

the amount brought into account as a receipt under section 114 must not exceed the equivalent amount for the new animal.

(3)For this purpose “a disease control order” means an order made under the law relating to the diseases of animals by—

(a)central government,

(b)a devolved authority,

(c)a local authority, or

(d)another public authority.

(4)If, immediately before it was added to the herd, the new animal was part of the farmer’s trading stock, “the equivalent amount for the new animal” means—

(a)in the case of an animal bred by the farmer, the cost of breeding the animal and rearing it to maturity, and

(b)in any other case, the sum of the initial cost of acquiring the animal and the cost (if any) incurred by the farmer in rearing the animal to maturity.

(5)Otherwise “the equivalent amount for the new animal” means the cost of the new animal.

116Sale of animals from herd

(1)This section applies for the purpose of calculating the profits of the trade if an animal is sold from the herd unless—

(a)it is replaced in the herd by another animal (see section 114), or

(b)it is sold as part of the sale of the whole or a substantial part of the herd that takes place all at once or over a period not longer than 12 months (see section 117).

(2)A profit arising from the sale is brought into account as a receipt.

(3)A deduction is allowed for a loss arising from the sale.

(4)The amount of the profit or loss is the difference between the sale proceeds of the animal and the deductible amount for the animal.

(5)“The deductible amount for the animal” means—

(a)in the case of an animal bred by the farmer, the cost of breeding the animal and rearing it to maturity,

(b)in the case of an animal acquired by the farmer for valuable consideration, the sum of the initial cost to the farmer of acquiring the animal and the cost (if any) incurred by the farmer in rearing the animal to maturity, and

(c)in the case of an animal acquired by the farmer but not for valuable consideration, the sum of the market value of the animal when acquired and the cost (if any) incurred by the farmer in rearing the animal to maturity.

117Sale of whole or substantial part of herd

(1)This section applies for the purpose of calculating the profits of the trade if, either all at once or over a period not longer than 12 months, the herd or a substantial part of the herd is sold unless—

(a)section 118 applies (acquisition of new herd begun within 5 years of sale), or

(b)section 120 applies (replacement of part sold begun within 5 years of sale),

but paragraph (a) is subject to subsection (5) of section 118 (so far as that section provides for a case in which this section is to apply).

(2)A profit arising from the sale is not brought into account as a receipt.

(3)No deduction is allowed for a loss arising from the sale.

118Acquisition of new herd begun within 5 years of sale

(1)This section applies for the purpose of calculating the profits of the trade if—

(a)either all at once or over a period not longer than 12 months, the herd (“the old herd”) is sold, and

(b)the farmer acquires or starts to acquire another production herd of the same class (“the new herd”) within 5 years of the sale.

(2)Section 114 (replacement of animals in herd) applies as if a number of animals equal to—

(a)the number of animals in the old herd, or

(b)if smaller, the number of animals in the new herd,

had been sold from the old herd and replaced in that herd (but see section 119 (sale for reasons outside farmer’s control)).

(3)For the purposes of section 114, the sale proceeds of an animal that is treated as a result of subsection (2) above as if it had been—

(a)sold from the old herd, and

(b)replaced in that herd by another animal (“the new animal”),

are not brought into account as a receipt until the new animal is acquired.

(4)If—

(a)the number of animals in the new herd is smaller than the number of animals in the old herd, and

(b)the difference is not substantial,

section 116 (sale of animals from herd) applies as if a number of animals equal to the difference had been sold from the old herd.

(5)If the number of animals in the new herd is smaller than the number of animals in the old herd and the difference is substantial—

(a)section 117 (sale of whole or substantial part of herd where replacement not begun within 5 years), or

(b)section 120 (sale of substantial part of herd where replacement begun within 5 years),

applies as if a number of animals equal to the difference had been sold from the old herd.

(6)If the number of animals in the new herd is larger than the number of animals in the old herd, section 113 (addition of animals to herd) applies as if a number of animals equal to the difference had been added to the old herd.

(7)For the purposes of this section—

(a)if the difference between the number of animals in the new herd and the number of animals in the old herd is equal to 20% or more of the number of animals in the old herd, the difference is substantial, but

(b)a lesser percentage than 20% is capable of being a substantial difference depending on the circumstances of the case concerned.

119Section 118: sale for reasons outside farmer’s control

(1)This section applies for the purposes of section 114, as applied by section 118(2).

(2)If—

(a)the farmer was compelled to sell the old herd for reasons wholly outside the farmer’s control, and

(b)an animal (“the new animal”) that is treated as a result of section 118(2) as if it replaced an animal sold (“the old animal”) is of worse quality than the old animal,

the amount brought into account as a receipt under section 114 must not exceed the equivalent amount for the new animal.

(3)If, immediately before it was added to the herd, the new animal was part of the farmer’s trading stock, “the equivalent amount for the new animal” means—

(a)in the case of an animal bred by the farmer, the cost of breeding the animal and rearing it to maturity, and

(b)in any other case, the sum of the initial cost of acquiring the animal and the cost (if any) incurred by the farmer in rearing the animal to maturity.

(4)Otherwise “the equivalent amount for the new animal” means the cost of the new animal.

120Replacement of part sold begun within 5 years of sale

(1)This section applies for the purpose of calculating the profits of the trade if—

(a)either all at once or over a period not longer than 12 months, a substantial part of the herd is sold, and

(b)the farmer acquires or starts to acquire animals to replace the part sold within 5 years of the sale.

(2)Section 114 (replacement of animals in herd) applies so far as the animals included in the part sold are replaced (but see section 121 (sale for reasons outside farmer’s control)).

(3)The sale proceeds of an animal included in the part sold are not brought into account as a receipt until the animal that replaces it in the herd is acquired.

(4)If some of the animals included in the part sold are not replaced—

(a)a profit arising from their sale is not brought into account as a receipt, and

(b)no deduction is allowed for a loss arising from their sale.

121Section 120: sale for reasons outside farmer’s control

(1)This section applies for the purposes of section 114, as applied by section 120(2).

(2)If—

(a)the farmer was compelled to sell the part of the herd for reasons wholly outside the farmer’s control, and

(b)an animal (“the new animal”) that replaces an animal sold (“the old animal”) is of worse quality than the old animal,

the amount brought into account as a receipt under section 114 must not exceed the equivalent amount for the new animal.

(3)If, immediately before it was added to the herd, the new animal was part of the farmer’s trading stock, “the equivalent amount for the new animal” means—

(a)in the case of an animal bred by the farmer, the cost of breeding the animal and rearing it to maturity, and

(b)in any other case, the sum of the initial cost of acquiring the animal and the cost (if any) incurred by the farmer in rearing the animal to maturity.

(4)Otherwise “the equivalent amount for the new animal” means the cost of the new animal.

Elections

122Herd basis elections

(1)A herd basis election must specify the class of production herd to which it relates.

(2)A herd basis election must be made—

(a)not later than two years after the end of the first relevant accounting period (if the farmer is not a firm), or

(b)on or before the first anniversary of the normal self-assessment filing date for the tax year in which the first relevant period of account ends (if the farmer is a firm).

(3)For this purpose—

(a)“the first relevant accounting period” means the first accounting period in which the farmer making the election keeps a production herd of the class to which the election relates, and

(b)“the first relevant period of account” means the first period of account in which the firm making the election keeps a production herd of the class to which the election relates (but see subsection (8)).

(4)A herd basis election cannot relate to more than one class of production herd, but separate elections may be made for different classes.

(5)A herd basis election is irrevocable.

(6)A herd basis election has effect in relation to all production herds of the class to which it relates, including any which the farmer—

(a)has ceased to keep before making the election, or

(b)first keeps after making the election.

(7)A herd basis election has effect—

(a)for every accounting period in which the farmer carries on the trade and keeps a production herd of the class to which the election relates (if the farmer is not a firm), or

(b)for every period of account in which the farmer carries on the trade and keeps a production herd of the class to which the election relates (if the farmer is a firm).

(8)If the farmer is a firm and there is a change in the persons who are partners in the firm—

(a)any herd basis election made by the old firm ceases to have effect, and

(b)in relation to the new firm, “the first relevant period of account” means the first period of account in which the new firm keeps a production herd of the class to which the election relates.

123Five year gap in which no production herd kept

(1)This section applies if a farmer—

(a)keeps a production herd of a particular class, and

(b)ceases altogether to keep herds of that class for a period of at least 5 years.

(2)If the farmer keeps a production herd of that class after the end of that period—

(a)the accounting period or (as the case may be) period of account in which the farmer starts to keep the herd is treated as the first accounting period or period of account in which the farmer keeps a production herd of that class, and

(b)any herd basis election previously made by the farmer in relation to production herds of that class ceases to have effect.

124Slaughter under disease control order

(1)This section applies if—

(a)the whole or a substantial part of a production herd kept by a farmer is slaughtered under a disease control order, and

(b)the circumstances of the slaughter are such that compensation is payable in respect of the animals slaughtered.

(2)The farmer may make a herd basis election in respect of the class of production herd involved in the slaughter as if the accounting period or (as the case may be) period of account —

(a)in which the compensation falls to be brought into account in calculating the profits of the trade, or

(b)in which it would (but for the election) fall to be so brought into account,

were the first accounting period or period of account in which the farmer keeps a production herd of that class.

(3)An election made as a result of this section has effect for that accounting period or period of account and every subsequent accounting period or period of account in which the farmer—

(a)carries on the trade, and

(b)keeps a production herd of the class to which the election relates.

(4)In this section “disease control order” means an order made under the law relating to the diseases of animals by—

(a)central government,

(b)a devolved authority,

(c)a local authority, or

(d)another public authority.

Preventing abuse of the herd basis rules

125Preventing abuse of the herd basis rules

(1)This section applies if—

(a)a person carrying on a trade (the “transferor”) transfers the whole or part of a production herd to another person (the “transferee”),

(b)the transfer is not by way of sale or is by way of sale but for a price other than that which the animals sold would have fetched if sold in the open market, and

(c)the control condition or herd basis benefit condition is met.

(2)The control condition is met if—

(a)the transferor is a body of persons over which the transferee has control,

(b)the transferee is a body of persons over which the transferor has control, or

(c)both the transferor and transferee are bodies of persons and another person has control over both of them.

(3)For this purpose “body of persons” includes a firm.

(4)The herd basis benefit condition is met if—

(a)the transferor or transferee (or both) might (but for this section) have been expected to obtain a herd basis benefit as a result of the transfer or the transactions of which the transfer is one, and

(b)the herd basis benefit is the sole or main benefit, or one of the main benefits, that the person in question might have been expected to obtain.

(5)For this purpose a “herd basis benefit” is a benefit resulting from—

(a)the obtaining of a right to make a herd basis election,

(b)the herd basis rules applying or not applying, or

(c)the herd basis rules having a greater or lesser effect.

(6)For the purpose of calculating the profits of—

(a)the trade carried on by the transferor, and

(b)any trade carried on by the transferee,

the animals transferred are treated as having been sold at the price which they would have fetched if sold in the open market.

Supplementary

126Information if election made

(1)An officer of Revenue and Customs may by notice require the person carrying on a trade in relation to which a herd basis election is made to deliver a return of such information about—

(a)the animals kept for the purposes of the trade, and

(b)the products of those animals,

as may be required by the notice.

(2)The return must be delivered to an officer of Revenue and Customs within the time specified in the notice.

127Further assessment etc if herd basis rules apply

(1)If the herd basis rules apply in calculating the profits of an accounting period after an assessment for that period has become final and conclusive, any assessment or repayment of tax that is necessary to give effect to the rules must be made.

(2)But repayment of tax is due only if a claim for it is made.

Chapter 9Trade profits: other specific trades

Dealers in securities etc

128Taxation of amounts taken to reserves

(1)This section applies for the purpose of calculating the profits of a company’s trade if—

(a)the company carries on a banking business, an insurance business or a business consisting wholly or partly of dealing in securities, and

(b)a profit on the sale of securities held by the company would be brought into account in calculating the trading profits of that business.

(2)Profits and losses from the securities that in accordance with generally accepted accounting practice are—

(a)calculated by reference to the fair value of the securities, and

(b)recognised in the company’s statement of recognised gains and losses or statement of changes in equity,

are brought into account in calculating the profits of the trade.

(3)But subsection (2) does not apply—

(a)to an amount so far as deriving from or otherwise relating to an amount brought into account under that subsection in an earlier period of account, or

(b)to an amount recognised for accounting purposes by way of correction of a fundamental error.

(4)In this section “securities” includes—

(a)shares,

(b)rights of unit holders in unit trust schemes to which TCGA 1992 applies as a result of section 99 of TCGA 1992, and

(c)in the case of a company with no share capital, interests in the company possessed by members of the company,

but does not include a loan relationship (within the meaning of Part 5).

129Conversion etc of securities held as circulating capital

(1)This section applies for the purpose of calculating the profits of a company’s trade if—

(a)the company carries on a banking business, an insurance business or a business consisting wholly or partly of dealing in securities,

(b)a transaction falling within subsection (2) occurs in relation to securities (“the original holding”), and

(c)a profit on the sale of the securities would be brought into account in calculating the trading profits of that business.

(2)A transaction falls within this subsection if—

(a)it results in a new holding being treated as the same as the original holding as a result of sections 126 to 136 of TCGA 1992 (roll-over relief in cases of conversion etc), or

(b)it is treated, as a result of section 134 of TCGA 1992 (compensation stock), as an exchange for a new holding which does not involve a disposal of the original holding.

(3)This section does not apply to securities in respect of which unrealised profits or losses, calculated by reference to the fair value of the securities at the end of the period of account, are taken into account in the period of account in which the transaction occurs.

(4)The transaction is treated as not involving a disposal of the original holding and the new holding is treated as the same asset as the original holding.

(5)But if, under the transaction, the company carrying on the trade—

(a)receives consideration in addition to the new holding, or

(b)becomes entitled to receive such consideration,

subsection (4) applies as if the references to the original holding were to the proportion of the original holding given by the following fraction.

(6)The fraction is—

where—

  • NH is the market value of the new holding at the time of the transaction, and

  • C is the market value of the consideration at the time of the transaction or (if the consideration is cash) the amount of the consideration.

(7)In determining whether subsection (2)(a) applies as a result of section 135 or 136 of TCGA 1992, the reference to capital gains tax in section 137(1) of TCGA 1992 is to be read as a reference to income tax.

(8)In this section “securities” includes—

(a)shares,

(b)rights of unit holders in unit trust schemes to which TCGA 1992 applies as a result of section 99 of TCGA 1992, and

(c)in the case of a company with no share capital, interests in the company possessed by members of the company.

130Traders receiving distributions etc

(1)A receipt of a trade which is—

(a)a UK distribution, or

(b)a payment representative of a UK distribution,

is brought into account in calculating the profits of the trade.

(2)Subsection (1) is an exception to section 1285(2) (under which UK company distributions are not generally taken into account in calculating income).

(3)Subsection (4) applies if—

(a)a payment made by a company carrying on a trade is representative of a UK distribution, and

(b)but for section 1305(1) (company’s profits to be computed without any deduction for distributions), a deduction would be allowed for the payment in calculating the profits of the trade.

(4)A deduction is allowed for the payment in calculating the profits of the trade (despite section 1305(1)).

(5)Subsections (1) to (4) do not apply to receipts, or payments, in the course of insurance business or any category of insurance business.

(6)In this section “UK distribution” means a distribution made by a UK resident company.

Building societies

131Incidental costs of issuing qualifying shares

(1)In calculating the profits of a trade carried on by a building society, a deduction is allowed for incidental costs of obtaining finance by means of issuing shares in the society if—

(a)the shares are qualifying shares for the purposes of section 117(4) of TCGA 1992, and

(b)the condition in subsection (2) is met.

(2)The condition is that the amount of any—

(a)dividend or other distribution, or

(b)interest,

payable in respect of the shares is deductible in calculating, for corporation tax purposes, the profits of the society’s trade.

(3)But a deduction is not allowed by virtue of subsection (1) so far as the costs fall to be brought into account as debits for the purposes of Part 5 (loan relationships).

(4)“Incidental costs of obtaining finance” means expenses—

(a)which are incurred on fees, commissions, advertising, printing and other incidental matters, and

(b)which are incurred wholly and exclusively for the purpose of obtaining the finance, providing security for it or repaying it.

(5)Expenses incurred wholly and exclusively for the purpose of—

(a)obtaining finance, or

(b)providing security for it,

are incidental costs of obtaining the finance even if it is not in fact obtained.

(6)But the following are not incidental costs of obtaining finance—

(a)sums paid because of losses resulting from movements in the rate of exchange between different currencies,

(b)sums paid for the purpose of protecting against such losses,

(c)the cost of repaying qualifying shares so far as attributable to their being repayable at a premium or having been issued at a discount, and

(d)stamp duty.

Industrial and provident societies

132Dividends etc granted by industrial and provident societies

(1)This section applies if a trade is carried on by a registered industrial and provident society and—

(a)the society does not sell to persons who are not its members, or

(b)the number of shares in the society is not limited by the society’s rules or practice.

(2)In calculating the profits of the trade, a deduction is allowed for sums which meet conditions A and B.

(3)Condition A is that—

(a)the sum represents a discount, rebate, dividend or bonus granted by the society to a member or other person (“the recipient”),

(b)the discount, rebate, dividend or bonus is in respect of—

(i)amounts paid or payable by the recipient, or

(ii)amounts paid or payable to the recipient,

on account of the recipient’s transactions with the society, and

(c)those transactions are taken into account in calculating the society’s profits chargeable under this Part.

(4)Condition B is that the sum mentioned in subsection (2) is calculated by reference to—

(a)the amounts paid or payable by or to the recipient, or

(b)the size of the transactions,

and not by reference to the amount of any share or interest in the capital of the society.

(5)See also section 230A of ICTA (dividend or bonus to which this section applies is not treated as a distribution).

Credit unions

133Annual payments paid by a credit union

In calculating the profits of a credit union’s trade, no deduction is allowed for annual payments made by the credit union.

Dealers in land etc

134Purchase or sale of woodlands

(1)This section applies for the purpose of calculating the profits of a trade of dealing in land.

(2)If the company carrying on the trade buys woodlands in the United Kingdom in the course of the trade, the part of the cost of the woodlands which is attributable to trees or saleable underwood growing on the land is ignored.

(3)If—

(a)the woodlands are subsequently sold in the course of the trade, and

(b)any of the trees or underwood are still growing on the land at the time of the sale,

the part of the price that is equal to the amount ignored under subsection (2) for those trees or that underwood is ignored.

135Relief in respect of mineral royalties

(1)This section applies for the purpose of calculating the profits of a trade carried on by a UK resident company in an accounting period if the receipts of the trade include mineral royalties—

(a)which the company is entitled to receive under a mineral lease or agreement, and

(b)which are not chargeable to tax under Chapter 7 of Part 4 (rent receivable in connection with a UK section 39(4) concern) because of the priority rule in section 287.

(2)The company is treated as entitled to receive only half of the total of the mineral royalties arising under the lease or agreement in the accounting period.

(3)Sections 274 to 276 (meaning of “mineral lease or agreement” and “mineral royalties”) apply for the purposes of this section as they apply for the purposes of Chapter 7 of Part 4.

(4)See also section 201 of TCGA 1992 (gains treated as accruing to a company entitled to receive mineral royalties).

136Lease premiums etc: reduction of receipts

(1)This section applies for the purpose of calculating the profits of a trade of dealing in land if a receipt of the trade falls within one of the following categories—

(a)lease premiums within section 217,

(b)sums within section 219 (sums payable instead of rent),

(c)sums within section 220 (sums payable for surrender of a lease),

(d)sums within section 221 (sums payable for variation or waiver of terms of lease),

(e)consideration for the assignment of a lease within section 222 (lease granted at an undervalue), and

(f)amounts received on the sale of an estate or interest in land within section 224 (sales with right to reconveyance) or section 225 (sale and leaseback transactions).

(2)The receipt is reduced by the relevant amount.

(3)The relevant amount is the amount which is treated as a receipt of a property business as a result of any of sections 217 to 225.

(4)But if—

(a)the company carrying on the trade makes a claim under section 238 or 239, and

(b)as a result of the claim a repayment of tax is made to that company,

the relevant amount is the amount which, for the purpose of determining the amount of the repayment of tax, is treated as brought into account as a receipt in calculating the profits of the property business.

(5)If subsection (4) applies, any adjustment of liability to tax may be made—

(a)by assessment or otherwise, and

(b)at any time at which it could be made if it related only to tax for the accounting period in which the claim under section 238 or 239 is made.

Mineral exploration and access

137Mineral exploration and access

(1)This section applies for the purpose of calculating the profits of a trade if—

(a)the company carrying on the trade incurs expenditure on mineral exploration and access in an area or group of sands, and

(b)the presence of mineral deposits in commercial quantities has already been established in that area or group of sands.

(2)A deduction is allowed for the expenditure only if a deduction would have been allowed for it if the presence of mineral deposits in commercial quantities had not already been established in that area or group of sands.

(3)In this section “mineral exploration and access” has the same meaning as in Part 5 of CAA 2001 (see section 396(1) of that Act).

Companies liable to pool betting duty

138Payments by companies liable to pool betting duty

(1)This section applies for the purpose of calculating the profits of a trade if—

(a)the company carrying on the trade is liable to pool betting duty,

(b)there is a reduction in that duty, and

(c)the company makes a qualifying payment in consequence of that reduction.

(2)A qualifying payment is one—

(a)made in order to meet (directly or indirectly) capital expenditure incurred by any person in improving the safety or comfort of spectators at a ground to be used for the playing of association football, or

(b)made to trustees established mainly for the support of athletic sports or athletic games but with power to support the arts.

(3)A deduction is allowed for the qualifying payment.

Intermediaries treated as making employment payments

139Deduction for deemed employment payment

(1)This section applies for the purpose of calculating the profits of a trade carried on by an intermediary which is treated as making a deemed employment payment in connection with the trade.

(2)A deduction is allowed for—

(a)the amount of the deemed employment payment, and

(b)the amount of any employer’s national insurance contributions paid by the intermediary in respect of it.

(3)The deduction is allowed for the period of account in which the deemed employment payment is treated as made.

(4)No deduction in respect of—

(a)the deemed employment payment, or

(b)any employer’s national insurance contributions paid by the intermediary in respect of it,

may be made except in accordance with this section.

(5)In this section “deemed employment payment” and “intermediary” have the same meaning as in Chapter 8 of Part 2 of ITEPA 2003 (see sections 49 and 50 of that Act).

140Special rules for partnerships

(1)This section applies for the purpose of calculating the profits of a trade carried on by a firm that is treated as making a deemed employment payment in connection with the trade.

(2)The amount of the deduction allowed under section 139 is limited to the amount that reduces the profits of the firm of the period of account to nil.

(3)The expenses of the firm in connection with the relevant engagements for any period of account are limited to the total of—

(a)5% of the amount taken into account at Step 1 of the calculation in section 54(1) of ITEPA 2003 (calculation of deemed employment payment), and

(b)the amount deductible at Step 3 of that calculation.

(4)In this section “deemed employment payment” and “the relevant engagements” have the same meaning as in Chapter 8 of Part 2 of ITEPA 2003 (see sections 49 and 50 of that Act).

Managed service companies

141Deduction for deemed employment payments

(1)This section applies for the purpose of calculating the profits of a trade carried on by a managed service company (the “MSC”) which is treated as making a deemed employment payment in connection with the trade.

(2)A deduction is allowed for—

(a)the amount of the deemed employment payment, and

(b)the amount of any employer’s national insurance contributions paid by the MSC in respect of it.

(3)The deduction is allowed for the period of account in which the deemed employment payment is treated as made.

(4)If the MSC is a firm, the amount of the deduction allowed under subsection (2) is limited to the amount that reduces the profits of the firm of the period of account to nil.

(5)No deduction in respect of—

(a)the deemed employment payment, or

(b)any employer’s national insurance contributions paid by the MSC in respect of it,

may be made except in accordance with this section.

(6)In this section the following expressions have the same meanings as in Chapter 9 of Part 2 of ITEPA 2003—

Waste disposal

142Deduction for site preparation expenditure

(1)This section applies for the purpose of calculating the profits of a trade of a period of account in which waste materials are deposited on a waste disposal site if—

(a)the company carrying on the trade (“the trader”), or a predecessor, has incurred site preparation expenditure in relation to the site in the course of carrying on the trade, and

(b)at the time the trader first deposits waste materials on the site, the trader holds a waste disposal licence which is then in force.

(2)A deduction is allowed for the amount of the site preparation expenditure allocated to the period of account under section 143.

(3)For the purposes of this section “predecessor”, in relation to the trader, means a person who—

(a)has ceased to carry on the trade carried on by the trader or ceased to carry on a trade so far as relating to the site, and

(b)has transferred the whole of the site to the trader,

and it does not matter for this purpose whether or not the estate or interest in the site transferred to the trader is the same as that held by that person.

(4)For the purposes of this section and section 143, if site preparation expenditure has been incurred by a predecessor—

(a)the trade carried on by the trader is treated as the same as the trade carried on by the predecessor, and

(b)deductions are to be allowed to the trader (and not to the predecessor) as if everything done to or by the predecessor were done to or by the trader.

(5)For—

(a)the meaning of “site preparation expenditure”, “waste disposal licence” and “waste disposal site”, and

(b)a rule about pre-trading expenditure,

see section 144.

143Allocation of site preparation expenditure

(1)The amount of site preparation expenditure allocated to a period of account for the purposes of section 142(2) is the amount given by the formula—

where—

  • RE means residual expenditure (see subsection (2)),

  • WD means the volume of waste materials deposited on the waste disposal site during the period, and

  • SV means the volume of the waste disposal site not used up for the deposit of waste materials at the end of the period.

(2)“Residual expenditure” means the total of all site preparation expenditure incurred by the trader in relation to the waste disposal site at any time before the end of the period, less—

(a)any of that expenditure for which an allowance has been, or may be, made for corporation or income tax purposes under the enactments relating to capital allowances,

(b)any of that expenditure for which a deduction has been made in calculating for corporation or income tax purposes the profits of an earlier period of account, and

(c)if the trader started to carry on the trade before 6 April 1989, the excluded amount of any unrelieved old expenditure (see subsections (3) and (4)).

(3)The excluded amount of unrelieved old expenditure is calculated by multiplying the unrelieved old expenditure (see subsection (4)) by the fraction—

where—

  • WD means the volume of waste materials deposited on the site before 6 April 1989, and

  • SV means the volume of the site not used up for the deposit of waste materials immediately before that date.

(4)“Unrelieved old expenditure” means site preparation expenditure which—

(a)was incurred by the trader in relation to the waste disposal site before 6 April 1989, and

(b)does not fall within subsection (2)(a) or (b).

144Site preparation expenditure: supplementary

(1)For the purposes of this section and sections 142 and 143 “waste disposal licence” means—

(a)a disposal licence under Part 1 of the Control of Pollution Act 1974 (c. 40) or Part 2 of the Pollution Control and Local Government (Northern Ireland) Order 1978 (S.I. 1978/1049 (N.I. 19)),

(b)a waste management licence under Part 2 of the Environmental Protection Act 1990 (c. 43) or any corresponding provision for the time being in force in Northern Ireland,

(c)a permit under regulations under—

(i)section 2 of the Pollution Prevention and Control Act 1999 (c. 24), or

(ii)Article 4 of the Environment (Northern Ireland) Order 2002 (S.I. 2002/3153 (N.I. 7)),

(d)an authorisation under the Radioactive Substances Act 1960 (c. 34) or the Radioactive Substances Act 1993 (c. 12) for the disposal of radioactive waste, or

(e)a nuclear site licence under the Nuclear Installations Act 1965 (c. 57).

(2)For the purposes of this section and sections 142 and 143—

(3)For the purposes of sections 142 and 143, expenditure incurred for the purposes of a trade by a company about to carry on the trade is treated as if it were incurred—

(a)on the date on which the company starts to carry on the trade, and

(b)in the course of carrying it on.

145Site restoration payments

(1)This section applies for the purpose of calculating the profits of a trade if the company carrying on the trade makes a site restoration payment in the course of carrying it on.

(2)A deduction is allowed for the unrelieved amount of the payment.

(3)The deduction is allowed for the period of account in which the payment is made.

(4)The unrelieved amount of a site restoration payment is the amount of the payment, less—

(a)any amount of the payment that represents expenditure for which an allowance has been, or may be, made under the enactments relating to capital allowances, and

(b)any amount of the payment that represents expenditure for which a deduction has been made in calculating the profits of the trade of an earlier period of account.

(5)A “site restoration payment” means a payment made in connection with the restoration of a site (or part of a site) in order to comply with—

(a)a condition of a waste disposal licence (as defined in section 144(1)),

(b)a condition imposed on the grant of planning permission to use the site for the collection, treatment, conversion and final depositing of waste materials or for the carrying out of any of those activities, or

(c)a relevant planning obligation.

(6)For this purpose “a relevant planning obligation” means—

(a)an obligation arising under an agreement made under section 106 of the Town and Country Planning Act 1990 (c. 8) (as originally enacted) or any corresponding provision for the time being in force in Northern Ireland,

(b)an obligation arising under an agreement made under section 75 of the Town and Country Planning (Scotland) Act 1997 (c. 8),

(c)a planning obligation entered into under section 106 of the Town and Country Planning Act 1990 (as substituted by section 12 of the Planning and Compensation Act 1991 (c. 34)) or any corresponding provision for the time being in force in Northern Ireland, or

(d)a planning obligation entered into under section 299A of the Town and Country Planning Act 1990 or any corresponding provision for the time being in force in Northern Ireland.

Cemeteries and crematoria

146Cemeteries and crematoria: introduction

(1)This section and sections 147 to 149 apply for the purpose of calculating the profits of a period of account (“the relevant period”) of a trade which consists of or includes—

(a)the carrying on of a cemetery, or

(b)the carrying on of a crematorium and, in connection with doing so, the maintenance of memorial garden plots,

and the following provisions of this section apply for the interpretation of this section and those sections.

(2)References to the sale of land in a cemetery include the sale of a right of interment in land in a cemetery.

(3)References to the sale of land in a memorial garden include the appropriation of part of a memorial garden in return for a dedication fee or similar payment.

(4)“Ancillary capital expenditure” means capital expenditure incurred for the purposes of the trade by the company carrying on the trade (“the trader”), or a predecessor, on—

(a)any building or structure (other than a dwelling-house) which is in the cemetery or memorial garden and is likely to have little or no value when the cemetery or memorial garden is full,

(b)the purchase of an interest in, or the preparation of, any land taken up by such a building or structure, or

(c)the purchase of an interest in, or the preparation of, any other land in the cemetery or memorial garden which is not suitable or adaptable for use for interments or memorial garden plots and which is likely to have little or no value when the cemetery or memorial garden is full.

(5)“Predecessor”, in relation to the trader, means a person who carried on the trade at any time before the trader started to do so.

(6)“Preparation”, in relation to land, means levelling or draining the land or making it suitable in some other way for use as a cemetery or memorial garden.

147Deduction for capital expenditure

(1)This section applies if, in the relevant period, an interest in land in the cemetery or memorial garden is sold with a view to the land being used—

(a)for the purpose of interments, or

(b)for memorial garden plots.

(2)A deduction is allowed for—

(a)capital expenditure incurred by the trader, or a predecessor, on the purchase of an interest in the land or on the preparation of the land, and

(b)ancillary capital expenditure allocated to the relevant period under section 148 (allocation of ancillary capital expenditure).

(3)But no expenditure is to be brought into account—

(a)under both paragraphs (a) and (b) of subsection (2), or

(b)under both subsection (2)(a) above and section 170(2)(b) of ITTOIA 2005 (relief for income tax purposes) or under both subsection (2)(b) above and section 170(2)(a) of ITTOIA 2005,

whether for the same or different periods of account.

(4)Any purchase price paid on a sale in connection with a change in the persons carrying on the trade is ignored in calculating the amount of the deduction.

(5)No deduction is allowed for any expenditure which is excluded by section 149 (exclusion of expenditure met by subsidies).

148Allocation of ancillary capital expenditure

(1)The amount of ancillary capital expenditure allocated to the relevant period for the purposes of section 147(2)(b) is the amount given by the formula—

where—

  • RE means residual expenditure (see subsection (2)),

  • PSR means the number of grave-spaces or memorial garden plots in the cemetery or memorial garden sold in the relevant period, and

  • PAR means the number of grave-spaces or memorial garden plots in the cemetery or memorial garden which are or could be made available for sale at the end of the relevant period.

(2)“Residual expenditure” means the total of all ancillary capital expenditure incurred at any time before the end of the relevant period, less—

(a)ancillary capital expenditure incurred on buildings or structures which were destroyed before the beginning of the first sale period,

(b)the excluded amount of any remaining old expenditure (see subsection (3)),

(c)if, after the beginning of the first sale period and before the end of the relevant period, an asset representing ancillary capital expenditure was sold or destroyed, the net sale proceeds or the compensation, and

(d)any amount deducted under section 147(2)(b) above, or under section 170(2)(b) of ITTOIA 2005, for a period of account ending before the relevant period.

(3)The excluded amount of remaining old expenditure is calculated by multiplying the remaining old expenditure by the fraction—

where—

  • PSB means the number of grave-spaces or memorial garden plots in the cemetery or memorial garden sold before the beginning of the basis period for the tax year 1954-55, and

  • PAB means the number of grave-spaces or memorial garden plots in the cemetery or memorial garden which were or could have been made available for sale immediately before the beginning of the basis period for that tax year.

(4)In this section—

149Exclusion of expenditure met by subsidies

(1)Expenditure is excluded for the purposes of section 147 so far as it has been, or is to be, met (directly or indirectly) by—

(a)the Crown,

(b)a government or local or other public authority (whether in the United Kingdom or elsewhere), or

(c)any person other than the person incurring the expenditure.

(2)This is subject to the following exceptions.

(3)Expenditure is not excluded for the purposes of section 147 if it is met (directly or indirectly) by a grant—

(a)made under Northern Ireland legislation, and

(b)declared by the Treasury by an order under section 534 of CAA 2001 to correspond to a grant under Part 2 of the Industrial Development Act 1982 (c. 52).

(4)Expenditure is not excluded for the purposes of section 147 if it is met (directly or indirectly) by—

(a)insurance money, or

(b)other compensation money,

payable in respect of an asset which has been destroyed, demolished or put out of use.

(5)Expenditure is not excluded for the purposes of section 147 if—

(a)it has been, or is to be, met (directly or indirectly) by a person other than the Crown or a government or local or other public authority, and

(b)no deduction is allowed for the expenditure in calculating for corporation or income tax purposes the profits of a trade carried on by that person.

Sound recordings

150Revenue nature of expenditure

(1)If a company carrying on a trade incurs expenditure on the production or acquisition of the original master version of a sound recording, the expenditure is treated for corporation tax purposes as expenditure of a revenue nature.

(2)If expenditure is treated under this section as revenue in nature, sums received by the company from the disposal of the original master version of the sound recording—

(a)are treated for corporation tax purposes as receipts of a revenue nature, and

(b)are brought into account in calculating the profits of the relevant period in which they are received.

(3)For this purpose sums received from the disposal of the original master version include—

(a)sums received from the disposal of any interest or right in or over the original master version (including an interest or right created by the disposal), and

(b)insurance, compensation or similar money derived from the original master version.

151Allocation of expenditure

(1)This section applies in calculating for corporation tax purposes the profits or losses of a company from a trade if—

(a)the trade consists of or includes the exploitation of original master versions of sound recordings, and

(b)the original master versions do not constitute trading stock of the trade as defined by section 163.

(2)Expenditure that—

(a)is incurred on the production or acquisition of the original master version of a sound recording, and

(b)is of a revenue nature (whether as a result of section 150 or otherwise),

must be allocated to relevant periods in accordance with this section.

(3)The company must allocate to a relevant period so much of the expenditure as is just and reasonable having regard to—

(a)the amount of the expenditure that remains unallocated at the beginning of the period,

(b)the proportion that the estimated value of the original master version of the sound recording that is realised in that period (whether by way of income or otherwise) bears to the total value so realised and the estimated remaining value of the original master version at the end of the period, and

(c)the need to bring the whole of the expenditure into account over the time during which the value of the original master version is expected to be realised.

(4)The company may also allocate to a relevant period a further amount, so long as the total amount allocated does not exceed the value of the original master version of the sound recording realised in that period (whether by way of income or otherwise).

152Interpretation of sections 150 and 151

(1)For the purposes of sections 150 and 151—

(a)“sound recording” does not include a film soundtrack,

(b)“original master version” means the master tape or master audio disc of the recording,

(c)references to the original master version of a sound recording include any rights in the original master version that are held or acquired with it, and

(d)“relevant period” means—

(i)a period for which accounts of the trade are made up, or

(ii)if no accounts of the trade are made up for a period, an accounting period of the company.

(2)In subsection (1)(a) “film” is to be read in accordance with section 1181.

Reserves of marketing authorities etc

153Reserves of marketing authorities and certain other statutory bodies

(1)This section applies to a statutory body if its object (or one of its objects) is—

(a)marketing an agricultural product, or

(b)stabilising the price of an agricultural product.

(2)Subsections (3) and (4) apply if the body is required, by or under an approved scheme or arrangement (“the scheme”), to pay the whole or part of any trading surplus into a reserve fund meeting the conditions specified in section 154.

(3)Any sums which the body is required by or under the scheme to pay into the fund out of the profits of its trade are allowed as deductions in calculating the profits of the trade.

(4)Any sums withdrawn by the body from the fund are taken into account as trading receipts, except so far as—

(a)they are required, by or under the scheme, to be paid to a Minister or department,

(b)they are distributed to producers of the product in question, or

(c)they are refunded to persons who pay any levy or duty.

(5)In this section—

154Conditions to be met by reserve fund

(1)These are the conditions to be met by the reserve fund (see section 153(2)).

(2)The first condition is that no sum may be withdrawn from the fund without the authority or consent of a Minister or department.

(3)The second condition is that if—

(a)money has been paid to the body by a Minister or department—

(i)in connection with arrangements for maintaining guaranteed prices, or

(ii)in connection with the body’s trading arrangements, and

(b)the money is repayable to the Minister or department,

sums standing to the credit of the fund are required to be applied (in whole or in part) in repaying the money.

(4)The requirement mentioned in subsection (3) must be imposed by or under the scheme or arrangement mentioned in section 153(2).

(5)The third condition is that—

(a)the fund is reviewed by a Minister at intervals fixed by or under the scheme or arrangement mentioned in section 153(2), and

(b)if the fund appears to the Minister to exceed what is reasonably required by the body, the excess is withdrawn from the fund.

155Interpretation of sections 153 and 154

(1)In sections 153 and 154 “Minister” means—

(a)a Minister of the Crown,

(b)the Scottish Ministers,

(c)the Welsh Ministers, or

(d)a Minister within the meaning of the Northern Ireland Act 1998 (c. 47).

(2)In sections 153 and 154 “department” means—

(a)a government department,

(b)a part of the Scottish Administration,

(c)a part of the Welsh Assembly Government, or

(d)a Northern Ireland department.

Chapter 10Trade profits: changes in trading stock

Introduction

156Meaning of “trading stock”

(1)In this Chapter “trading stock”, in relation to a trade, means anything (whether land or other property)—

(a)which is sold in the ordinary course of the trade, or

(b)which would be so sold if it were mature or its manufacture, preparation or construction were complete.

(2)It does not include—

(a)materials used in the manufacture, preparation or construction of any such thing,

(b)any services performed in the ordinary course of the trade, or

(c)any article produced, or any material used, in the performance of any such services.

Transfers of trading stock between trade and trader

157Trading stock appropriated by trader

(1)This section applies if trading stock of a company’s trade is appropriated by the company for any other purpose.

(2)In calculating the profits of the trade—

(a)the amount which the stock appropriated would have realised if sold in the open market at the time of the appropriation is brought into account as a receipt, and

(b)the value of anything in fact received for it is left out of account.

(3)The receipt is treated as arising on the date of the appropriation.

158Trading stock supplied by trader

(1)This section applies if something that—

(a)belongs to a company carrying on a trade, but

(b)is not trading stock of the trade,

becomes trading stock of the trade.

(2)In calculating the profits of the trade—

(a)the cost of the stock is taken to be the amount which it would have realised if sold in the open market at the time it became trading stock of the trade, and

(b)the value of anything in fact given for it is left out of account.

(3)The cost is treated as being incurred on the date it became trading stock of the trade.

Other disposals and acquisitions not made in the course of trade

159Disposals not made in the course of trade

(1)This section applies if—

(a)trading stock of a trade is disposed of otherwise than in the course of the trade, and

(b)section 157 does not apply.

(2)In calculating the profits of the trade—

(a)the amount which the stock disposed of would have realised if sold in the open market at the time of the disposal is brought into account as a receipt, and

(b)any consideration obtained for it is left out of account.

(3)The receipt is treated as arising on the date of the disposal.

(4)This section is subject to section 161.

160Acquisitions not made in the course of trade

(1)This section applies if—

(a)trading stock of a trade has been acquired otherwise than in the course of the trade, and

(b)section 158 does not apply.

(2)In calculating the profits of the trade—

(a)the cost of the stock is taken to be the amount which it would have realised if sold in the open market at the time of the acquisition, and

(b)the value of anything in fact given for it is left out of account.

(3)The cost is treated as being incurred on the date of the acquisition.

(4)This section is subject to section 161.

Relationship with transfer pricing rules

161Transfer pricing rules to take precedence

(1)Section 159 or 160 does not apply if the relevant consideration—

(a)falls to be adjusted for tax purposes under Schedule 28AA to ICTA, or

(b)falls within that Schedule without falling to be so adjusted.

(2)For the purposes of subsection (1)(b), the relevant consideration falls within Schedule 28AA to ICTA without falling to be adjusted under that Schedule if the conditions in paragraph 1(1) of that Schedule are met, but either—

(a)the actual provision does not differ from the arm’s length provision, or

(b)one of the exceptions mentioned in subsection (3) applies.

(3)The exceptions are those in—

(a)section 447(5) (exchange gains or losses from loan relationships)

(b)section 694(8) (exchange gains or losses from derivative contracts),

(c)paragraph 10 of Schedule 28AA to ICTA (transactions and deemed transactions involving oil), and

(d)paragraph 13 of Schedule 28AA to ICTA (saving for provisions relating to capital allowances and capital gains).

(4)In this section “relevant consideration” means—

(a)in relation to section 159, the consideration for the disposal of the trading stock, and

(b)in relation to section 160, the consideration for the acquisition of the trading stock.

Chapter 11Trade profits: valuation of stock on cessation of trade

162Valuation of trading stock on cessation

(1)If a company permanently ceases to carry on a trade, in calculating the profits of the trade—

(a)trading stock belonging to the trade at the time of the cessation must be valued, and

(b)the value must be determined in accordance with sections 164 to 167 (bases of valuation).

(2)But no valuation of the stock is required under this Chapter if paragraph 1(2) of Schedule 28AA to ICTA (provision not at arm’s length) has effect in relation to any provision which—

(a)is made or imposed in relation to the stock, and

(b)has effect in connection with the cessation.

(3)If there is a partnership change, no valuation of the stock is required under this Chapter so long as a company carrying on the trade in partnership immediately before the change continues to carry it on in partnership after the change.

(4)The reference in subsection (3) to a partnership change is to a change in the persons carrying on the trade in circumstances where the trade is carried on by persons in partnership immediately before or immediately after the change (or at both those times).

163Meaning of “trading stock”

(1)In this Chapter “trading stock” means—

(a)any property (whether land or other property) which is sold in the ordinary course of the trade or would be so sold if it were mature or its manufacture, preparation or construction were complete, or

(b)materials used in the manufacture, preparation or construction of any property mentioned in paragraph (a).

(2)In this Chapter “trading stock” includes also any services performed in the ordinary course of the trade—

(a)the performance of which is wholly or partly completed at the time of the cessation, and

(b)for which it would be reasonable to expect that a charge would be made if there were no cessation and, in the case of partly completed services, their performance were fully completed,

and any article produced, and any material used, in the performance of any such services.

(3)In this Chapter references to the sale or transfer of trading stock include the sale or transfer of any benefits and rights which accrue, or might reasonably be expected to accrue, from the performance of any such services.

164Basis of valuation of trading stock

(1)The value of trading stock belonging to the trade at the time of the cessation is determined as follows.

(2)If the stock is sold to a person who—

(a)carries on, or intends to carry on, a trade, profession or vocation in the United Kingdom, and

(b)is entitled to deduct the cost of the stock as an expense in calculating the profits of that trade, profession or vocation for corporation or income tax purposes,

the value is determined in accordance with section 165 (sale to unconnected person), 166 (sale to connected person) or 167 (election by connected persons).

(3)But if section 125 (preventing abuse of the herd basis rules) applies—

(a)the value is not determined in accordance with any of those sections, and

(b)the value is instead taken to be that given by section 125 (the price which the animals transferred would have fetched if sold in the open market at the time of the sale).

(4)In any other case, the value is taken to be the amount which the stock would have realised if sold in the open market at the time of the cessation.

165Sale basis of valuation: sale to unconnected person

(1)The value of trading stock is determined in accordance with this section if—

(a)it is sold to a person who carries on, or intends to carry on, a trade, profession or vocation in the United Kingdom and is entitled to deduct the cost of the stock as an expense in calculating the profits of that trade, profession or vocation for corporation or income tax purposes, and

(b)the buyer is not connected with the seller.

(2)The value is taken to be the amount in fact realised on the sale.

(3)If the stock is sold together with other assets, so much of the amount realised on the sale as, on a just and reasonable apportionment, is properly attributable to each asset is treated as the amount realised on the sale of that asset.

166Sale basis of valuation: sale to connected person

(1)The value of trading stock is determined in accordance with this section if—

(a)it is sold to a person who carries on, or intends to carry on, a trade, profession or vocation in the United Kingdom and is entitled to deduct the cost of the stock as an expense in calculating the profits of that trade, profession or vocation for corporation or income tax purposes,

(b)the buyer is connected with the seller, and

(c)no election is made under section 167 (election by connected persons).

(2)The value is taken to be the amount which would have been realised if the sale had been between independent persons dealing at arm’s length.

167Sale basis of valuation: election by connected persons

(1)The value of trading stock is determined in accordance with this section if—

(a)it is sold to a person who carries on, or intends to carry on, a trade, profession or vocation in the United Kingdom and is entitled to deduct the cost of the stock as an expense in calculating the profits of that trade, profession or vocation for corporation or income tax purposes,

(b)the buyer is connected with the seller, and

(c)an election is made under this section.

(2)The parties to the sale may make an election under this section if the value of the stock determined under section 166 exceeds both—

(a)its acquisition value, and

(b)the amount in fact realised on the sale.

(3)If an election is made, the value is taken to be—

(a)its acquisition value, or

(b)if greater, the amount in fact realised on the sale.

(4)An election under this section must be made by both parties not later than two years after the end of the accounting period in which the cessation occurred.

(5)The “acquisition value” of trading stock means the amount which would have been deductible as representing its acquisition value, in calculating the profits of the trade, on the following assumptions—

(a)that the stock had been sold in the course of the trade, immediately before the cessation, for a price equal to the value of the stock determined under section 166, and

(b)that the period for which those profits were to be calculated began immediately before the sale.

(6)If the stock is sold together with other assets, so much of the amount realised on the sale as, on a just and reasonable apportionment, is properly attributable to each asset is treated as the amount realised on the sale of that asset.

168Connected persons

For the purposes of sections 164 to 167 two persons are connected with each other if any of the following tests is met—

(a)they are connected with each other within the meaning of section 839 of ICTA,

(b)one of them is a firm and the other has a right to a share of the assets or income of the firm,

(c)one of them is a body corporate and the other has control over that body,

(d)both of them are firms and some other person has a right to a share of the assets or income of both of them, or

(e)both of them are bodies corporate, or one of them is a firm and the other is a body corporate, and in either case some other person has control over both of them.

169Cost to buyer of stock valued on sale basis of valuation

(1)This section applies for the purpose of calculating the profits of the trade carried on by the buyer of trading stock.

(2)If the value of the stock is determined in accordance with—

(a)section 164(3) or sections 165 to 167 (sale basis of valuation), or

(b)section 175(3) or sections 176 to 178 of ITTOIA 2005 (corresponding income tax rules),

the cost of the stock to the buyer is taken to be the value as so determined.

170Meaning of “sale” and related expressions

(1)In sections 164 to 167 (except in section 167(5)) references to a sale include a transfer for valuable consideration.

(2)In relation to a transfer which is not a sale—

171Determination of questions

Any question arising under section 164(3) or sections 165 to 167 (sale basis of valuation of trading stock) must be determined in the same way as an appeal.

Chapter 12Deductions from profits: unremittable amounts

172Application of Chapter

(1)This Chapter applies if—

(a)an amount received by, or owed to, a company carrying on a trade (“the trader”) is brought into account as a receipt in calculating the profits of the trade,

(b)the amount is paid or owed in a territory outside the United Kingdom, and

(c)some or all of the amount is unremittable.

(2)An amount received is unremittable if it cannot be transferred to the United Kingdom merely because of foreign exchange restrictions.

(3)An amount owed is unremittable if it cannot be paid in the United Kingdom and—

(a)it temporarily cannot be paid in the territory in which it is owed merely because of foreign exchange restrictions, or

(b)it can be paid in that territory but, if it were paid there, the amount paid would not be transferable to the United Kingdom merely because of foreign exchange restrictions.

(4)“Foreign exchange restrictions” are restrictions imposed by any of the following—

(a)the laws of the territory where the amount is paid or owed,

(b)executive action of its government, and

(c)the impossibility of obtaining there currency that could be transferred to the United Kingdom.

(5)Section 464(1) (matters to be brought into account in the case of loan relationships) does not prevent any amount from being brought into account in accordance with section 173 or 175.

173Relief for unremittable amounts

(1)If—

(a)the trader has profits from the trade in a period of account, and

(b)an unremittable amount has been brought into account as a receipt for that period,

a deduction of the amount is allowed from those profits (but see subsection (5)).

(2)If the trader has profits from the trade in a period of account and the total of—

(a)any unremittable amounts brought into account as receipts for that period, and

(b)any amount carried forward under this subsection or subsection (3) from the previous period of account,

exceeds the amount of those profits, the excess may be carried forward to the next period of account.

(3)If the trader does not have profits from the trade in a period of account and an unremittable amount has been brought into account as a receipt for that period, the total of—

(a)any unremittable amounts brought into account as receipts for that period, and

(b)any amount carried forward under this subsection or subsection (2) from the previous period of account,

may be carried forward to the next period of account.

(4)If an amount is carried forward under this section to a period of account in which the trader has profits from the trade, a deduction of the amount is allowed from those profits (but see subsection (5)).

(5)The total amount deducted under this section from the profits from a trade in a period of account must not exceed the amount of the profits.

174Restrictions on relief

(1)No deduction is allowed under section 173 in relation to an amount so far as—

(a)it is used to finance expenditure or investment outside the United Kingdom, or

(b)it is applied outside the United Kingdom in another way.

(2)No deduction is allowed under section 173 in relation to an amount owed so far as a payment under a contract of insurance has been received in relation to it.

(3)No deduction is allowed under section 173 in relation to an amount brought into account in calculating profits if relief under section 1275 (unremittable income) may be claimed in relation to that amount.

175Withdrawal of relief

(1)This section applies if—

(a)some or all of an unremittable amount has been deducted from profits under section 173, and

(b)any of the following events occurs.

(2)The events are that—

(a)the amount or part of it ceases to be unremittable,

(b)an allowable provision for impairment loss is made in respect of the amount or part of it,

(c)the amount or part of it is used to finance expenditure or investment outside the United Kingdom,

(d)the amount or part of it is applied outside the United Kingdom in another way,

(e)the amount or part of it is exchanged for, or discharged by, an amount that is not unremittable, and

(f)if the amount is an amount owed, a payment under a contract of insurance is received in relation to the amount or part of it.

(3)The amount or the part of it in question is brought into account as a receipt in calculating the profits of the trade of the period of account in which the event occurs, but only so far as—

(a)it has been deducted from profits under section 173, and

(b)it has not already been brought into account as a receipt in calculating the profits of the trade as a result of this section.

(4)If the event is the receipt of a payment under a contract of insurance, the amount brought into account as a receipt must not exceed the amount of the payment.

(5)In subsection (2)(b) “allowable provision for impairment loss” means either—

(a)a debit in respect of the impairment of a financial asset (see section 476(1)) which is brought into account under Part 5 (loan relationships), or

(b)a provision in respect of which a deduction is allowable under section 55 (bad debts).

Chapter 13Disposal and acquisition of know-how

176Meaning of “know-how” etc

(1)In this Chapter “know-how” means any industrial information or techniques likely to assist in—

(a)manufacturing or processing goods or materials,

(b)working a source of mineral deposits (including searching for, discovering or testing mineral deposits or obtaining access to them), or

(c)carrying out any agricultural, forestry or fishing operations.

(2)For this purpose—

(3)For the purposes of this Chapter any consideration received for giving, or wholly or partly fulfilling, an undertaking which—

(a)is given in connection with a disposal of know-how, and

(b)restricts, or is designed to restrict, any person’s activities in any way,

is treated as consideration received for the disposal of the know-how.

(4)It does not matter whether or not the undertaking is legally enforceable.

(5)For the purposes of this Chapter references to a sale of know-how include an exchange of know-how and any provision of this Chapter referring to a sale has effect with the necessary modifications.

(6)Those modifications include, in particular, reading references to the proceeds of sale and to the price as including the consideration for the exchange.

177Disposal of know-how if trade continues to be carried on

(1)This section applies if—

(a)a company carrying on a trade receives consideration for the disposal of know-how which has been used in the trade,

(b)the company continues to carry on the trade after the disposal, and

(c)neither section 178 (disposal of know-how as part of disposal of all or part of a trade) nor section 179 (seller controlled by buyer etc) applies.

(2)The amount or value of the consideration is treated for corporation tax purposes as a trading receipt, except so far as it is brought into account under section 462 of CAA 2001 (disposal values).

(3)If the know-how is sold together with other property, the net proceeds of the sale of the know-how are treated as being so much of the net proceeds of the sale of all the property as, on a just and reasonable apportionment, is attributable to the know-how.

(4)For this purpose all property sold as a result of one bargain is treated as sold together even though—

(a)separate prices are, or purport to be, agreed for separate items of that property, or

(b)there are, or purport to be, separate sales of separate items of that property.

(5)Any question about the way in which a sum is to be apportioned under this section must be determined in accordance with section 563(2) to (6) of CAA 2001 (procedure for determining certain questions affecting two or more persons) if it materially affects two or more taxpayers.

(6)For this purpose a question materially affects two or more taxpayers if, at the time when the question falls to be determined, it appears that the determination is material to the liability to tax (for whatever period) of two or more persons.

178Disposal of know-how as part of disposal of all or part of a trade

(1)This section applies if —

(a)a person carrying on a trade receives consideration for the disposal of know-how which has been used in the trade, and

(b)the know-how is disposed of as part of the disposal of all or part of the trade.

(2)If the person disposing of the know-how is within the charge to corporation tax, the consideration is treated for corporation tax purposes as a capital receipt for goodwill.

(3)If the person acquiring the know-how—

(a)is within the charge to corporation tax, and

(b)provided the consideration,

the consideration is treated for corporation tax purposes as a capital payment for goodwill.

(4)But the consideration is not treated for corporation tax purposes as a capital payment for goodwill if, before the acquisition, the trade was carried on wholly outside the United Kingdom.

(5)If the person disposing of the know-how is within the charge to corporation tax—

(a)that person, and

(b)the person acquiring the know-how (whether or not within the charge to corporation tax),

may jointly elect for this section not to apply (but see section 179).

(6)The election must be made within two years of the disposal.

(7)If—

(a)an election is made under section 194 of ITTOIA 2005 (corresponding income tax provision), and

(b)the person making the acquisition mentioned in that section is within the charge to corporation tax,

the persons making the election under that section are treated as also making an election under this section (even though the person disposing of the know-how is not within the charge to corporation tax).

179Seller controlled by buyer etc

(1)This section applies if a disposal of know-how is by way of sale and—

(a)the seller is a body of persons over which the buyer has control,

(b)the buyer is a body of persons over which the seller has control, or

(c)both the seller and the buyer are bodies of persons and another person has control over both of them.

(2)In such a case—

(a)section 177 does not apply, and

(b)no election may be made under section 178.

(3)For the purposes of this section “body of persons” includes a firm.

Chapter 14Adjustment on change of basis

Adjustment on change of basis

180Application of Chapter

(1)This Chapter applies if—

(a)a company carrying on a trade changes, from one period of account to the next, the basis on which profits of the trade are calculated for corporation tax purposes,

(b)the old basis accorded with the law or practice applicable in relation to the period of account before the change, and

(c)the new basis accords with the law and practice applicable in relation to the period of account after the change.

(2)The practice applicable in any case means the accepted practice in cases of that description as to how profits of a trade should be calculated for corporation tax purposes.

(3)A company changes the basis on which profits of a trade are calculated for corporation tax purposes if the company makes—

(a)a relevant change of accounting approach (see subsection (4)), or

(b)a change in the tax adjustments applied (see subsections (5) and (6)).

(4)A “relevant change of accounting approach” means—

(a)a change of accounting principle or practice that, in accordance with generally accepted accounting practice, gives rise to a prior period adjustment, or

(b)a change from using UK generally accepted accounting practice to using generally accepted accounting practice with respect to accounts drawn up in accordance with international accounting standards.

(5)A “tax adjustment” means any adjustment required or authorised by law in calculating profits of a trade for corporation tax purposes.

(6)A “change in the tax adjustments applied”—

(a)does not include a change made in order to comply with amending legislation not applicable to the previous period of account, but

(b)includes a change resulting from a change of view as to what is required or authorised by law or as to whether any adjustment is so required or authorised.

181Giving effect to positive and negative adjustments

(1)An amount by way of adjustment must be calculated in accordance with section 182.

(2)If the amount produced by the calculation is positive—

(a)the amount is brought into account as a receipt in calculating the profits of the trade, and

(b)the receipt is treated as arising on the first day of the first period of account for which the new basis is adopted.

(3)If the amount produced by the calculation is negative—

(a)a deduction is allowed for the amount as an expense of the trade in calculating the profits of the trade, and

(b)the expense is treated as arising on the first day of the first period of account for which the new basis is adopted.

(4)This section is subject to—

(a)section 183 (no adjustment for certain expenses previously brought into account),

(b)section 184 (cases where adjustment not required until assets realised or written off), and

(c)section 185 (change from realisation basis to mark to market).

182Calculation of the adjustment

The amount of the adjustment is calculated as follows.

Expenses previously brought into account

183No adjustment for certain expenses previously brought into account

(1)This section applies if, as a result of a change of basis, expenses brought into account before the change on the old basis would on the new basis be brought into account over more than one period of account after the change.

(2)In such a case—

(a)no adjustment is made under this Chapter, and

(b)in calculating the profits of the trade no deduction is allowed for the expenses for any period of account after the change.

Realising or writing off assets

184Cases where adjustment not required until assets realised or written off

(1)This section applies if there is a change of basis resulting from a tax adjustment affecting the calculation of any of the following amounts.

(2)The amounts are—

(a)any amount brought into account in respect of closing trading stock in the last period of account before the change of basis,

(b)any amount brought into account in respect of opening trading stock in the first period of account on the new basis, and

(c)any amount brought into account in respect of depreciation.

(3)The receipt of the trade or (as the case may be) the expense of the trade is treated as arising only when the asset to which it relates is realised or written off.

Mark to market

185Change from realisation basis to mark to market

(1)This section applies if there is a change of basis from—

(a)not recognising a profit or loss on an asset until the asset is realised, to

(b)bringing assets into account in each period of account at a fair value.

(2)So far as—

(a)a receipt within item 1 of Step 1 in section 182 represents the fair value of an asset that is trading stock, or

(b)an expense within item 2 of that step relates to such an asset,

the receipt of the trade or (as the case may be) the expense of the trade is treated as not arising until the period of account in which the value of the asset is realised.

(3)In the case of a receipt of the trade, this is subject to any election under section 186 (election for spreading).

(4)In this section “trading stock” has the same meaning as in section 163.

186Election for spreading if section 185 applies

(1)If section 185 applies, the company carrying on the trade may elect for any receipt treated as arising under this Chapter to be spread over 6 periods of account.

(2)The election must be made within 12 months of the end of the first accounting period to which the new basis applies.

(3)If an election is made, an amount equal to one-sixth of the amount of the receipt—

(a)is treated as arising, and

(b)is brought into account in calculating the profits of the trade,

in each of the 6 periods of account beginning with the first period to which the new basis applies.

(4)But if, before the whole of the receipt has been so brought into account, the company permanently ceases to carry on the trade, the whole of the amount so far as not previously brought into account—

(a)is treated as arising, and

(b)is brought into account in calculating the profits of the trade,

immediately before the cessation.

187Transfer of insurance business

(1)This section applies if—

(a)an asset to which section 185 or 186 applies is transferred from one insurance company to another,

(b)the transfer is made under an insurance business transfer scheme, and

(c)immediately after the transfer, the transferee is UK resident or the asset is held for the purposes of a business carried on by the transferee in the United Kingdom through a permanent establishment.

(2)For the purposes of section 185, the asset is not to be treated as realised by the transferor merely because of its transfer under the scheme.

(3)If the transfer is of the transferor’s whole business, the transferee is responsible under section 185 or 186 for bringing into account any amount required to be brought into account after the transfer.

Chapter 15Post-cessation receipts

Charge to tax on post-cessation receipts

188Charge to tax on post-cessation receipts

The charge to corporation tax on income applies to post-cessation receipts arising from a trade.

189Extent of charge to tax

(1)A post-cessation receipt is chargeable to tax under this Chapter only so far as it is not otherwise chargeable to corporation or income tax.

(2)Accordingly, a post-cessation receipt arising from a trade is not chargeable to tax under this Chapter so far as it is brought into account in calculating the profits of the trade of any period.

(3)A post-cessation receipt is not chargeable to tax under this Chapter if—

(a)it is received by or on behalf of a non-UK resident company which is beneficially entitled to it, and

(b)it represents income arising outside the United Kingdom.

(4)A post-cessation receipt is not chargeable to tax under this Chapter if it arises from a trade carried on wholly outside the United Kingdom.

Meaning of “post-cessation receipts”

190Basic meaning of “post-cessation receipt”

(1)In this Part “post-cessation receipt” means a sum—

(a)which is received after a person permanently ceases to carry on a trade, and

(b)which arises from the carrying on of the trade before the cessation.

(2)In this Chapter, except in sections 194 and 195, references to a person permanently ceasing to carry on a trade include—

(a)in the case of a company, the occurrence of an event treated under section 18 of ITTOIA 2005 (companies beginning or ceasing to be within charge to income tax) as the company permanently ceasing to carry on the trade, and

(b)in the case of a trade carried on by a person in partnership, the occurrence of an event treated under section 246(4) of ITTOIA 2005 (basic meaning of “post-cessation receipt”) as the person permanently ceasing to carry on the trade.

191Other rules about what counts as post-cessation receipts

(1)The following provisions treat certain amounts as post-cessation receipts for the purposes of this Part—

(2)Section 95 (acquisition of trade: receipts from transferor’s trade) and section 194 (transfer of rights if transferee does not carry on trade) treat certain amounts as not being post-cessation receipts for the purposes of this Part.

Sums treated as post-cessation receipts

192Debts paid after cessation

(1)This section applies if, in calculating the profits of a trade for corporation or income tax purposes, a deduction is made in respect of a debt under—

(a)section 55 (bad debts), or

(b)section 35 of ITTOIA 2005 (bad and doubtful debts),

and a person permanently ceases to carry on the trade.

(2)A sum received after the cessation is treated as a post-cessation receipt so far as the deduction is made.

193Debts released after cessation

(1)This section applies if—

(a)in calculating the profits of a trade of any period for corporation or income tax purposes, a deduction is allowed for the expense giving rise to a debt owed by the person who carried on the trade,

(b)the person has permanently ceased to carry on the trade at or after the end of that period,

(c)after the cessation, all or part of the debt is released, and

(d)the release is not part of a statutory insolvency arrangement.

(2)The amount released is treated as a post-cessation receipt.

194Transfer of rights if transferee does not carry on trade

(1)This section applies if—

(a)a company (“the transferor”) permanently ceases to carry on a trade,

(b)the transferor transfers to another person (“the transferee”) for value the right to receive sums arising from the carrying on of the trade, and

(c)the transferee does not subsequently carry on the trade.

(2)The transferor is treated as receiving a post-cessation receipt.

(3)The amount of the receipt is—

(a)the amount or value of the consideration for the transfer, if the transfer is at arm’s length, or

(b)the value of the rights transferred as between parties at arm’s length, if the transfer is not at arm’s length.

(4)Any sums mentioned in subsection (1)(b) which are received after the cessation of the trade are not post-cessation receipts.

(5)This section is subject to section 195 (transfer of trading stock).

Sums that are not post-cessation receipts

195Transfer of trading stock

(1)When a company permanently ceases to carry on a trade, a sum realised by the transfer of trading stock is not a post-cessation receipt if a valuation of the stock is brought into account in accordance with Chapter 11 (valuation of stock).

(2)In this section “trading stock” has the meaning given by section 163.

Deductions

196Allowable deductions

(1)In calculating the amount on which tax is charged under this Chapter, deductions are allowed in accordance with—

(a)this section, and

(b)section 197,

from the amount which would otherwise be chargeable to tax under this Chapter.

(2)A deduction is allowed for a loss, expense or debit which, if the person carrying on the trade had not permanently ceased to do so—

(a)would have been deducted in calculating the profits of the trade for corporation or income tax purposes, or

(b)would have been deducted from or set off against the profits of the trade for corporation or income tax purposes,

but no deduction is allowed if the loss, expense or debit arises directly or indirectly from the cessation itself.

(3)No deduction for an amount is allowed under this section if the amount has been allowed under any other provision of the Tax Acts.

197Further rules about allowable deductions

(1)An amount may not be deducted more than once under section 196.

(2)A deduction under that section of a loss must be made from post-cessation receipts charged for an earlier accounting period in preference to those charged for a later accounting period.

(3)But this does not authorise the deduction of a loss from post-cessation receipts charged for an accounting period before the accounting period in which the loss is made.

Election to carry back

198Election to carry back

(1)This section applies if a post-cessation receipt is received by a company in an accounting period beginning not later than 6 years after the company permanently ceased to carry on the trade.

(2)The company may elect that the tax chargeable in respect of the receipt is to be charged as if the receipt had been received on the date of the cessation (but see sections 199 and 200).

(3)The election must be made before the end of the period of two years beginning immediately after the end of the accounting period in which the receipt is received.

199Deductions already made are not displaced

(1)This section applies if—

(a)a company which has permanently ceased to carry on a trade makes an election under section 198 in respect of a post-cessation receipt (“the carried back receipt”), and

(b)a deduction in respect of a loss has already been made under section 196 for an accounting period later than that in which the cessation occurred.

(2)Nothing in section 196 (read with section 197(2)) requires or permits a deduction in respect of that loss to be allowed, as a result of the election, for the accounting period in which the cessation occurred instead of the accounting period for which the deduction has already been made.

(3)But if the deduction was made for the accounting period in which the carried back receipt was received, subsection (2) applies to the loss only so far as it has been deducted from post-cessation receipts other than the carried back receipt.

200Election given effect in accounting period in which receipt is received

(1)If a company makes an election under section 198, the additional tax is payable for the accounting period in which the receipt is received (and not for the accounting period in which the cessation occurred).

(2)In subsection (1) “the additional tax” means an amount of tax equal to the difference between—

(a)the amount of tax that is chargeable on the company for the accounting period in which the cessation occurred (“amount A”), and

(b)the amount of tax that would have been chargeable on the company for that period if the election had not been made (“amount B”).

(3)If—

(a)the company has made, under section 198, one or more other elections for receipts to be treated as received in the period in which the cessation occurred, and

(b)effect has been given to those elections,

the effect of those elections is taken into account in determining amounts A and B.

Chapter 16Priority rules

201Provisions which must be given priority over this Part

(1)Any receipt or other credit item, so far as it falls within—

(a)Chapter 2 of this Part (receipts of trade), and

(b)Chapter 3 of Part 4 so far as it relates to a UK property business,

is dealt with under Chapter 3 of Part 4.

(2)Any receipt or other credit item, so far as it falls within—

(a)this Part, and

(b)Chapter 4 of Part 10 (income from holding an office),

is dealt with under Chapter 4 of Part 10.

Part 4Property income

Chapter 1Introduction

202Overview of Part

(1)Chapter 2 contains definitions relevant to the application of the Part.

(2)Chapter 3 applies the charge to corporation tax on income to the profits of a UK property business or an overseas property business and contains basic rules about the calculation of the profits of such a property business.

(3)Chapter 4 provides for certain amounts of a capital nature to be brought into account as receipts in calculating the profits of a property business.

(4)Chapter 5 contains additional rules about the calculation of the profits of a property business.

(5)Chapter 6 explains what is meant by the commercial letting of furnished holiday accommodation.

(6)Chapters 7, 8 and 9 apply the charge to corporation tax on income to—

(a)rent receivable in connection with a UK section 39(4) concern,

(b)rent receivable for UK electric-line wayleaves, and

(c)post-cessation receipts arising from a UK property business,

and contain related rules.

(7)Chapter 10 contains supplementary provisions including—

(a)rules that give priority to provisions outside this Part in relation to certain matters that fall within it, and

(b)rules that give priority to one Chapter of this Part in relation to certain matters that fall both within it and another Chapter of this Part.

(8)This Part needs to be read with Parts 19 (general exemptions) and 20 (general calculation rules).

Chapter 2Property businesses

Introduction

203Overview of Chapter

(1)This Chapter explains for the purposes of this Act what is meant by—

(a)a company’s UK property business (see section 205), and

(b)a company’s overseas property business (see section 206).

(2)Both those sections need to be read with—

(a)section 207 (which explains what is meant by generating income from land), and

(b)section 208 (which provides that certain activities do not count as activities for generating income from land).

(3)In the case of a property business carried on by a company as a member of a firm, the basic rules in sections 205 and 206 are explained in section 1270(2) and (3).

(4)See also section 432AA of ICTA (which qualifies the basic rules in sections 205 and 206 in the case of an insurance company).

204Meaning of “property business”

(1)In this Act “property business” means a UK property business or an overseas property business.

(2)References in this Act to a property business are to a property business so far as any profits of the business are chargeable to tax under Chapter 3 (as to which see, in particular, the rules about territorial scope in section 5).

(3)Accordingly, nothing in Chapter 4 or 5 is to be read as treating an amount as a receipt of a property business if the profits concerned would not be chargeable to tax under Chapter 3.

Basic meaning of UK and overseas property business

205UK property business

A company’s UK property business consists of—

(a)every business which the company carries on for generating income from land in the United Kingdom, and

(b)every transaction which the company enters into for that purpose otherwise than in the course of such a business.

206Overseas property business

A company’s overseas property business consists of—

(a)every business which the company carries on for generating income from land outside the United Kingdom, and

(b)every transaction which the company enters into for that purpose otherwise than in the course of such a business.

Generating income from land

207Meaning of “generating income from land”

(1)In this Chapter “generating income from land” means exploiting an estate, interest or right in or over land as a source of rents or other receipts.

(2)“Rents” includes payments by a tenant for work to maintain or repair leased premises which the lease does not require the tenant to carry out.

(3)“Other receipts” includes—

(a)payments in respect of a licence to occupy or otherwise use land,

(b)payments in respect of the exercise of any other right over land, and

(c)rentcharges and other annual payments reserved in respect of, or charged on or issuing out of, land.

(4)For the purposes of this section a right to use a caravan or houseboat at only one location is treated as a right deriving from an estate or interest in land.

208Activities not for generating income from land

For the purposes of this Chapter the following activities are not carried on for generating income from land—

(a)farming or market gardening in the United Kingdom (but see section 36 (UK farming or market gardening treated as trade)),

(b)any other occupation of land (but see section 38 (certain commercial occupation of UK land treated as trade)), and

(c)activities for the purposes of a concern to which section 39 applies (profits of mines, quarries etc).

Chapter 3Profits of property businesses: basic rules

Charge to tax on profits of a property business

209Charge to tax on profits of a property business

The charge to corporation tax on income applies to the profits of a property business.

Calculation of profits

210Profits of a property business: application of trading income rules

(1)The profits of a property business are calculated in the same way as the profits of a trade.

(2)But the provisions of Part 3 (trading income) which apply as a result of subsection (1) are limited to the following—

In Chapter 3 (basic rules)—
section 46generally accepted accounting practice
section 47losses calculated on same basis as profits
section 48receipts and expenses
section 52apportionment etc of profits and losses to accounting period
In Chapter 4 (rules restricting deductions)—
section 53capital expenditure
section 54expenses not wholly and exclusively for trade and unconnected losses
section 55bad debts
sections 56 to 58car or motor cycle hire
section 59patent royalties
In Chapter 5 (rules allowing deductions)—
section 61pre-trading expenses
section 68replacement and alteration of trade tools
section 69payments for restrictive undertakings
sections 70 and 71seconded employees
section 72payroll deduction schemes: contributions to agents' expenses
sections 73 to 75counselling and retraining expenses
sections 76 to 81redundancy payments etc
sections 82 to 86contributions to local enterprise organisations or urban regeneration companies
sections 87 and 88scientific research
sections 89 and 90expenses connected with patents, designs and trade marks
section 91payments to Export Credits Guarantee Department
section 92levies under FISMA 2000
In Chapter 6 (receipts)—
section 93capital receipts
section 94debts incurred and later released
section 101distribution of assets of mutual concerns
section 102industrial development grants
section 103sums recovered under insurance policies etc
section 104repayments under FISMA 2000
In Chapter 7 (gifts to charities etc)—
section 108receipt of benefits by donor or connected person
In Chapter 9 (other specific trades)—
section 131incidental costs of issuing qualifying shares (building societies)
section 133annual payments paid by a credit union
In Chapter 12 (deductions from profits)—
sections 172 to 175unremittable amounts
211Loan relationships and derivative contracts

(1)The profits of a property business are calculated without regard to items giving rise to—

(a)credits or debits within Part 5 (loan relationships), or

(b)credits or debits within Part 7 (derivative contracts).

(2)This section does not affect the width of the provision made by—

(a)section 464 (priority of Part 5 for corporation tax purposes), or

(b)section 699 (priority of Part 7 for corporation tax purposes).

212Items treated as receipts and expenses

The rules for calculating the profits of a property business need to be read with—

(a)the provisions of CAA 2001 which treat allowances as expenses of a property business,

(b)the provisions of CAA 2001 which treat charges as receipts of a property business, and

(c)section 748 (credits and debits in respect of an intangible fixed asset held by a company for the purposes of a property business carried on by it treated as receipts and expenses of the business).

213Certain amounts brought into account under Part 3

(1)The rules for calculating the profits of a property business need to be read with the following provisions of Part 3 (trading income)—

(a)section 42 (tied premises),

(b)section 43 (caravan sites where trade carried on),

(c)section 44 (surplus business accommodation), and

(d)section 45(3) (payments for wayleaves).

(2)Those provisions secure that amounts which would otherwise be brought into account in calculating the profits of the business are, or may be, brought into account instead in calculating the profits of a trade.

214Relationship between rules prohibiting and allowing deductions

(1)Any relevant permissive rule in this Part—

(a)has priority over any relevant prohibitive rule, but

(b)is subject to the following provisions—

(i)section 56 (car or motor cycle hire), as applied by section 210,

(ii)section 1288 (unpaid remuneration),

(iii)section 1290 (employee benefit contributions),

(iv)section 1304 (crime-related payments).

(2)In this section “any relevant permissive rule in this Part” means any provision of this Part (apart from sections 231 to 234) which allows a deduction in calculating the profits of a property business.

(3)In this section “any relevant prohibitive rule”, in relation to any deduction, means any provision of this Part or Chapter 1 of Part 20 (apart from those mentioned in subsection (1)(b)) which might otherwise be read as—

(a)prohibiting or deferring the deduction, or

(b)restricting the amount of the deduction.

(4)In this section any reference to any provision of this Part includes any provision applied by section 210.

Chapter 4Profits of property businesses: lease premiums etc

Introduction

215Overview of Chapter

(1)This Chapter provides for certain amounts (which would otherwise generally be amounts of a capital nature) to be brought into account as receipts in calculating the profits of a property business.

(2)The amounts relate to short-term leases in the case of—

(3)The amounts relate to any lease in the case of—

(4)The amounts relate to the sale of any estate or interest in land in the case of—

(5)This Chapter also permits certain deductions in calculating the profits of property businesses carried on by tenants under certain leases (see sections 231 and 232).

216Meaning of “short-term lease”

In this Chapter “short-term lease” means a lease whose effective duration is 50 years or less.

Amounts treated as receipts: leases

217Lease premiums

(1)This section applies if a premium is required to be paid—

(a)under a short-term lease, or

(b)otherwise under the terms subject to which a short-term lease is granted.

(2)The company to which the premium is due is treated as—

(a)entering into a transaction mentioned in section 205 (if the land to which the lease relates is in the United Kingdom) or section 206 (if that land is outside the United Kingdom), and

(b)receiving the amount calculated under subsections (4) and (5) as a result of that transaction.

(3)That amount is brought into account as a receipt in calculating the profits of the property business which consists of or includes that transaction for the accounting period in which the lease is granted.

(4)The amount of the receipt is given by the formula—

P × 50 - Y50

where—

  • P is the premium, and

  • Y is the number of complete periods of 12 months (other than the first) comprised in the effective duration of the lease.

(5)But, if the rule in section 228 (the additional calculation rule) applies, the amount given by the formula in subsection (4) is reduced by the amount calculated in accordance with section 228.

218Amount treated as lease premium where work required

(1)This section applies if the terms subject to which a lease is granted impose on the tenant an obligation to carry out work on the premises.

(2)The lease is treated for the purposes of section 217 (lease premiums) as requiring the payment of a premium to the landlord (in addition to any other premium).

(3)The amount of the premium is the amount by which the value of the landlord’s estate or interest immediately after the commencement of the lease exceeds what its value would have been at that time if the terms of the lease did not impose the obligation on the tenant.

(4)An obligation, or part of an obligation, that requires the carrying out of excepted work is ignored for the purposes of this section.

(5)Work is “excepted work” if the payment for carrying it out would, if the landlord and not the tenant were obliged to carry it out, be deductible as an expense in calculating the profits of the landlord’s property business.

219Sums payable instead of rent

(1)This section applies if—

(a)under the terms subject to which a lease is granted a sum becomes payable by the tenant instead of the whole or a part of the rent for a period, and

(b)the period is 50 years or less.

(2)The company to which the sum is due is treated as—

(a)entering into a transaction mentioned in section 205 (if the land to which the lease relates is in the United Kingdom) or section 206 (if that land is outside the United Kingdom), and

(b)receiving the amount calculated under subsections (4) and (5) as a result of that transaction.

(3)That amount is brought into account as a receipt in calculating the profits of the property business which consists of or includes that transaction for the accounting period in which the sum becomes payable.

(4)The amount of the receipt is given by the formula—

S × 50 - Y50

where—

  • S is the sum payable instead of rent, and

  • Y is the number of complete periods of 12 months (other than the first) comprised in the period in relation to which the sum is payable.

(5)But, if the rule in section 228 (the additional calculation rule) applies, the amount given by the formula in subsection (4) is reduced by the amount calculated in accordance with section 228.

(6)In determining for the purposes of this Chapter the duration of the period in relation to which the sum is payable, any part of the period that falls after the expiry of the effective duration of the lease is excluded.

220Sums payable for surrender of lease

(1)This section applies if, under the terms subject to which a short-term lease is granted, a sum becomes payable by the tenant as consideration for the surrender of the lease.

(2)The company to which the sum is due is treated as—

(a)entering into a transaction mentioned in section 205 (if the land to which the lease relates is in the United Kingdom) or section 206 (if that land is outside the United Kingdom), and

(b)receiving the amount calculated under subsections (4) and (5) as a result of that transaction.

(3)That amount is brought into account as a receipt in calculating the profits of the property business which consists of or includes that transaction for the accounting period in which the sum becomes payable.

(4)The amount of the receipt is given by the formula—

S × 50 - Y50

where—

  • S is the sum payable as consideration for the surrender of the lease, and

  • Y is the number of complete periods of 12 months (other than the first) comprised in the effective duration of the lease.

(5)But, if the rule in section 228 (the additional calculation rule) applies, the amount given by the formula in subsection (4) is reduced by the amount calculated in accordance with section 228.

221Sums payable for variation or waiver of terms of lease

(1)This section applies if—

(a)a sum becomes payable by the tenant (otherwise than by way of rent) as consideration for the variation or waiver of a term of a lease,

(b)the sum is due to the landlord or a company which is connected with the landlord, and

(c)the period for which the variation or waiver has effect is 50 years or less.

(2)The company to which the sum is due is treated as—

(a)entering into a transaction mentioned in section 205 (if the land to which the lease relates is in the United Kingdom) or section 206 (if that land is outside the United Kingdom), and

(b)receiving the amount calculated under subsections (4) and (5) as a result of that transaction.

(3)That amount is brought into account as a receipt in calculating the profits of the property business which consists of or includes that transaction for the accounting period in which the contract providing for the variation or waiver is entered into.

(4)The amount of the receipt is given by the formula—

S × 50 - Y50

where—

  • S is the sum payable as consideration for the variation or waiver, and

  • Y is the number of complete periods of 12 months (other than the first) comprised in the period for which the variation or waiver has effect.

(5)But, if the rule in section 228 (the additional calculation rule) applies, the amount given by the formula in subsection (4) is reduced by the amount calculated in accordance with section 228.

(6)In determining for the purposes of this Chapter the duration of the period for which the variation or waiver has effect, any part of the period that falls after the expiry of the effective duration of the lease is excluded.

222Assignments for profit of lease granted at undervalue

(1)This section applies to an assignment of a short-term lease if—

(a)the lease was granted at an undervalue, and

(b)a profit is made on the assignment.

(2)The company which assigns the lease is treated as—

(a)entering into a transaction mentioned in section 205 (if the land to which the lease relates is in the United Kingdom) or section 206 (if that land is outside the United Kingdom), and

(b)receiving the amount calculated under subsections (4) and (5) as a result of that transaction.

(3)That amount is brought into account as a receipt in calculating the profits of the property business which consists of or includes that transaction for the accounting period in which the consideration for the assignment becomes payable.

(4)The amount of the receipt is given by the formula—

P × 50 - Y50

where—

  • P is the lesser of—

    (a)

    the profit on the assignment, and

    (b)

    the amount by which the undervalue exceeds the total of the profits (if any) made on previous assignments of the lease, and

  • Y is the number of complete periods of 12 months (other than the first) comprised in the effective duration of the lease.

(5)But, if the rule in section 228 (the additional calculation rule) applies, the amount given by the formula in subsection (4) is reduced by the amount calculated in accordance with section 228.

(6)Section 223 explains references in this section to the grant of a lease at an undervalue and the making of a profit on an assignment of a lease.

223Provisions supplementary to section 222

(1)This section operates for the purposes of section 222.

(2)A lease is granted at an undervalue if the terms subject to which it was granted are such that the landlord who granted it could have required the payment of an additional sum by way of premium, or additional premium, for its grant.

(3)The additional sum is the undervalue.

(4)The test in subsection (2) must be applied—

(a)having regard to values prevailing at the time the lease was granted, and

(b)on the assumption that the negotiations for the lease were at arm’s length.

(5)A profit is made on an assignment of a lease if the consideration for the assignment exceeds—

(a)if the lease has not previously been assigned, any premium for which it was granted, or

(b)in any other case, any consideration for which it was last assigned.

(6)The amount of the excess is the profit.

Other amounts treated as receipts

224Sales with right to reconveyance

(1)This section applies if—

(a)an estate or interest in land is sold subject to terms which provide that it is to be, or may be required to be, reconveyed on a future date to the seller or a person connected with the seller,

(b)the period beginning with the sale and ending with the earliest date on which under the terms of the sale the estate or interest would fall to be reconveyed is 50 years or less, and

(c)the price at which the estate or interest is sold exceeds the price at which it is to be reconveyed.

(2)The seller is treated as—

(a)entering into a transaction mentioned in section 205 (if the land is in the United Kingdom) or section 206 (if the land is outside the United Kingdom), and

(b)receiving the amount calculated under subsection (4) as a result of that transaction.

(3)That amount is brought into account as a receipt in calculating the profits of the property business which consists of or includes that transaction for the accounting period in which the estate or interest is sold.

(4)The amount of the receipt is given by the formula—

E × 50 - Y50

where—

  • E is the amount by which the price at which the estate or interest is sold exceeds the price at which it is to be reconveyed, and

  • Y is the number of complete periods of 12 months (other than the first) comprised in the period beginning with the sale and ending with the earliest date on which under the terms of the sale the estate or interest would fall to be reconveyed.

(5)See section 226 for some provisions which are supplementary to this section.

225Sale and leaseback transactions

(1)This section applies if—

(a)an estate or interest in land is sold subject to terms which provide for the grant of a lease directly or indirectly out of the estate or interest to the seller or a person connected with the seller,

(b)the period beginning with the sale and ending with the earliest date on which under the terms of the sale the lease would fall to be granted is 50 years or less, and

(c)the price at which the estate or interest is sold exceeds the total of—

(i)the amount of any premium for the lease, and

(ii)the value on the date of the sale of the right to receive a conveyance of the reversion immediately after the lease begins to run.

(2)This section does not apply if the lease is granted and begins to run within one month after the sale.

(3)The seller is treated as—

(a)entering into a transaction mentioned in section 205 (if the land is in the United Kingdom) or section 206 (if the land is outside the United Kingdom), and

(b)receiving the amount calculated under subsection (5) as a result of that transaction.

(4)That amount is brought into account as a receipt in calculating the profits of the property business which consists of or includes that transaction for the accounting period in which the estate or interest is sold.

(5)The amount of the receipt is given by the formula—

E × 50 - Y50

where—

  • E is the amount by which the price at which the estate or interest is sold exceeds the total of—

    (a)

    the amount of any premium for the lease, and

    (b)

    the value on the date of the sale of the right to receive a conveyance of the reversion immediately after the lease begins to run, and

  • Y is the number of complete periods of 12 months (other than the first) comprised in the period beginning with the sale and ending with the earliest date on which under the terms of the sale the lease would fall to be granted.

(6)See section 226 for some provisions which are supplementary to this section.

226Provisions supplementary to sections 224 and 225

(1)This section operates for the purposes of sections 224 (sales with right to reconveyance) and 225 (sale and leaseback transactions).

(2)Subsection (3) explains how to determine for the purposes of section 224 the price at which an estate or interest is to be reconveyed when—

(a)the date on which the estate or interest would fall to be reconveyed is not fixed under the terms of the sale, and

(b)the price at which it is to be reconveyed varies with the date.

(3)The price is taken to be the lowest possible under the terms of the sale.

(4)Subsection (5) explains how to determine for the purposes of section 225 the total of—

(a)the amount of any premium for the lease, and

(b)the value on the date of the sale of the right to receive a conveyance of the reversion immediately after the lease begins to run,

when the date for the grant of the lease is not fixed under the terms of the sale and the total varies with the date.

(5)The total is taken to be the lowest possible under the terms of the sale.

(6)For the purposes of sections 224(3) and 225(4) (receipts of property business for accounting period in which estate or interest sold) an estate or interest in land is sold when any of the following occurs—

(a)an unconditional contract for its sale is entered into,

(b)a conditional contract for its sale becomes unconditional, or

(c)an option or right of pre-emption is exercised requiring the seller to enter into an unconditional contract for its sale.

Additional calculation rule for reducing certain receipts

227Circumstances in which additional calculation rule applies

(1)The rule in section 228 (the additional calculation rule) applies in relation to the calculation of receipts under—

(2)It applies if conditions A and B are met.

(3)Condition A is that—

(a)in the case of a receipt under section 217, 219 or 220, the lease is granted out of a taxed lease,

(b)in the case of a receipt under section 221, the lease was granted out of a taxed lease, and

(c)in the case of a receipt under section 222, the assignment is of a taxed lease.

(4)A lease is a “taxed lease” for the purposes of this Chapter if—

(a)there is a receipt under any of sections 217 to 222 in respect of the lease,

(b)there would be such a receipt, but for the operation of the rule in section 228 (the additional calculation rule) in the calculation of its amount,

(c)there is a receipt under any of sections 277 to 282 of ITTOIA 2005 (receipts in respect of lease premiums, sums payable instead of rent, for surrender of lease and for variation or waiver of terms of lease and assignments) in respect of the lease, or

(d)there would be such a receipt, but for the operation of the rule in section 288 of that Act (the additional calculation rule) in the calculation of its amount.

In this Chapter a receipt falling within paragraph (a), (b), (c) or (d) is referred to as a “taxed receipt”.

(5)Condition B is that the taxed receipt, or if there is more than one, at least one of them, has an unused amount.

(6)See section 230 for an explanation of when a taxed receipt has an “unused amount”.

228The additional calculation rule

(1)The rule in this section applies if the conditions mentioned in section 227(2) are met.

(2)The additional calculation rule is that the amount given by the formula in section 217, 219, 220, 221 or 222 must be reduced by the amount calculated in accordance with this section in order to give the amount of the receipt under calculation.

(3)The amount of the reduction is—

(a)if there is one taxed receipt which has an unused amount, the basic relieving amount by reference to that receipt, and

(b)if there is more than one taxed receipt which has an unused amount, the total of the basic relieving amounts by reference to each receipt,

adjusted, if necessary, in the light of section 229(5) (reduction not to exceed amount being reduced).

(4)The basic relieving amount by reference to a taxed receipt is given by the formula—

where—

  • A is the unreduced amount of the taxed receipt (which is, generally, the amount given by the formula in section 217, 219, 220, 221 or 222, or in section 277, 279, 280, 281 or 282 of ITTOIA 2005, but see section 230(2) to (4) of this Act),

  • LRP is the receipt period of the receipt under calculation, and

  • TRP is the receipt period of the taxed receipt.

(5)But the basic relieving amount is different if section 229(2) or (4) applies (certain special cases).

(6)For the purposes of this Chapter, the “receipt period” of a receipt is—

(a)in the case of a receipt under section 217 or 220, the effective duration of the lease,

(b)in the case of a receipt under section 219, the period in relation to which the sum payable instead of rent is payable,

(c)in the case of a receipt under section 221, the period for which the variation or waiver has effect,

(d)in the case of a receipt under section 222, the effective duration of the lease remaining at the date of the assignment, and

(e)in the case of a receipt under Chapter 4 of Part 3 of ITTOIA 2005 (profits of property businesses: lease premiums etc), its receipt period within the meaning of that Chapter (see section 288(6) of that Act).

229The additional calculation rule: special cases

(1)This section explains how section 228 operates in some special cases.

(2)If—

(a)the receipt under calculation is under any of sections 217 to 221, and

(b)the lease does not extend to the whole of the premises subject to the taxed lease,

the basic relieving amount by reference to a taxed receipt is calculated by multiplying the amount given by the formula in subsection (4) of section 228 by the fraction of those premises which is subject to the lease.

(3)This fraction is calculated on a just and reasonable basis.

(4)If the basic relieving amount given by section 228(4) or subsection (2) above by reference to a taxed receipt would otherwise exceed the unused amount of the taxed receipt, the basic relieving amount is the unused amount.

(5)If the amount of the reduction under section 228 would otherwise exceed the amount given, in respect of the receipt under calculation, by the formula in section 217, 219, 220, 221 or 222, the amount of the reduction is equal to the amount given by the formula.

230Meaning of “unused amount” and “unreduced amount”

(1)For the purposes of this Chapter, a taxed receipt has an “unused amount” if the unreduced amount exceeds the total of the reductions and deductions referred to in subsection (5).

(2)In this Chapter the “unreduced amount” of a taxed receipt is the amount given, in respect of the taxed receipt, by the formula in—

(a)section 217, 219, 220, 221 or 222 above, or

(b)section 277, 279, 280, 281 or 282 of ITTOIA 2005 (income tax provisions corresponding to those listed in paragraph (a)).

(3)Subsection (4) applies—

(a)to a taxed receipt under section 217 (lease premiums) as a result of section 218 (amount treated as lease premium where work required), and

(b)to a taxed receipt under section 277 of ITTOIA 2005 (lease premiums) as a result of section 278 of that Act (amount treated as lease premium where work required).

(4)If the obligation to carry out work included the carrying out of work which gives, or will give, rise to qualifying expenditure under CAA 2001, the unreduced amount of the taxed receipt is calculated as if the obligation had not included the carrying out of that work.

(5)The reductions and deductions mentioned in subsection (1) are—

(a)the reductions under section 228 above or section 288 of ITTOIA 2005 (the additional calculation rule) by reference to the taxed receipt,

(b)the deductions made in calculating the profits of a trade, profession or vocation for expenses under section 63 above or section 61 of ITTOIA 2005 (tenant under taxed lease who uses land in connection with trade treated as incurring expenses) by reference to the taxed receipt, and

(c)the deductions made in calculating the profits of a property business for expenses under section 232 below or section 292 of ITTOIA 2005 (tenant under taxed lease who uses premises for purposes of property business treated as incurring expenses) by reference to the taxed receipt.

(6)For the purposes of this Chapter references to a reduction under section 228 above or section 288 of ITTOIA 2005 by reference to a taxed receipt are to a reduction under the section concerned so far as attributable to the taxed receipt.

Deductions in relation to certain receipts

231Deductions for expenses under section 232

(1)Section 232 (tenants under taxed leases treated as incurring expenses) applies in calculating the profits of a property business carried on by the tenant under a taxed lease for the purpose of making deductions for the expenses of the property business.

(2)A deduction is allowed for an expense under section 232 for a qualifying day on which the whole or part of the premises subject to the taxed lease is—

(a)occupied by the tenant for the purpose of carrying on the property business, or

(b)sublet.

(3)But any deduction for an expense under section 232 is subject to the application of any provision of Chapter 4 of Part 3 (as applied to property businesses by section 210).

(4)The amount of the deduction for an expense under section 232 for a qualifying day by reference to a taxed receipt may be reduced in order to comply with section 235 (limit on reductions and deductions).

(5)For the meaning of expressions used in this section, see in particular—

232Tenants under taxed leases treated as incurring expenses

(1)The tenant under a taxed lease is treated as incurring an expense of a revenue nature in respect of the premises subject to the taxed lease for each qualifying day.

(2)If there is more than one taxed receipt, this section applies separately in relation to each of them.

(3)A day is a “qualifying day”, in relation to a taxed receipt, if it falls within the receipt period of the taxed receipt.

(4)The amount of the expense for the qualifying day by reference to the taxed receipt is given by the formula—

where—

  • A is the unreduced amount of the taxed receipt, and

  • TRP is the number of days in the receipt period of the taxed receipt.

(5)This section is subject to sections 233 and 234 (restrictions on expenses where the additional calculation rule is relevant).

(6)For the meaning of expressions used in this section, see in particular—

233Restrictions on section 232 expenses: the additional calculation rule

(1)This section applies if—

(a)in calculating the amount of a receipt under this Chapter there is a reduction under section 228 (the additional calculation rule) by reference to a taxed receipt, or

(b)in calculating the amount of a receipt under Chapter 4 of Part 3 of ITTOIA 2005 (profits of a property business: lease premiums etc) there is a reduction under section 288 of that Act (the additional calculation rule) by reference to a taxed receipt.

The receipt that is so reduced is referred to in this section as the “lease premium receipt”.

(2)Subsections (3) to (5) provide for the application of section 232 for a qualifying day that falls within the receipt period of the lease premium receipt.

(3)The tenant under the taxed lease is treated as incurring an expense under section 232 for the qualifying day by reference to the taxed receipt only if the daily amount of the taxed receipt exceeds the daily reduction of the lease premium receipt.

(4)If the condition in subsection (3) is met, the amount of the expense under section 232 for the qualifying day by reference to the taxed receipt is equal to that excess.

(5)If the qualifying day falls within the receipt periods of more than one lease premium receipt, the reference in subsection (3) to the daily reduction of the lease premium receipt is to be read as a reference to the total of the daily reductions of each of the lease premium receipts whose receipt period includes the qualifying day.

(6)In this section—

(7)Section 234 explains how this section operates if the lease premium receipt is in respect of a lease that has been granted out of the taxed lease and does not extend to the whole of the premises subject to the taxed lease.

234Restrictions on section 232 expenses: lease of part of premises

(1)This section applies if—

(a)a lease has been granted out of the taxed lease,

(b)the lease does not extend to the whole of the premises subject to the taxed lease, and

(c)the condition in subsection (2) is met.

(2)The condition is that—

(a)in calculating the amount of a receipt under any of sections 217 to 221 (receipts in respect of lease premiums or sums payable instead of rent, for surrender of lease or for variation or waiver of terms of lease) in respect of the lease, there is a reduction under section 228 by reference to a taxed receipt, or

(b)in calculating the amount of a receipt under any of sections 277 to 281 of ITTOIA 2005 (receipts in respect of lease premiums or sums payable instead of rent, for surrender of lease or for variation or waiver of terms of lease) in respect of the lease, there is a reduction under section 288 of that Act (the additional calculation rule) by reference to a taxed receipt.

The receipt that is so reduced is referred to in this section as the “lease premium receipt”.

(3)Subsections (4) to (6) apply for a qualifying day that falls within the receipt period of the lease premium receipt.

(4)Sections 232 and 233 apply separately in relation to the part of the premises subject to the lease and to the remainder of the premises.

(5)If—

(a)more than one lease that does not extend to the whole of the premises subject to the taxed lease has been granted out of the taxed lease, and

(b)the qualifying day falls within the receipt period of two or more lease premium receipts that relate to different leases,

sections 232 and 233 apply separately in relation to each part of the premises subject to a lease to which such a receipt relates and to the remainder of the premises.

(6)Where sections 232 and 233 apply in relation to a part of the premises, A becomes the amount calculated by multiplying the unreduced amount of the taxed receipt by the fraction of the premises constituted by the part.

(7)This fraction is calculated on a just and reasonable basis.

Limit on effect of additional calculation rule and deductions

235Limit on reductions and deductions

(1)The total of—

(a)the reductions under section 228 by reference to a taxed receipt, and

(b)the deductions allowed in calculating the profits of a property business for expenses under section 232 (tenant under taxed lease which uses premises for purposes of property business treated as incurring expenses) by reference to the taxed receipt,

must not exceed the amount referred to in subsection (2).

(2)The amount mentioned in subsection (1) is the difference between—

(a)the unreduced amount of the taxed receipt, and

(b)the total of the amounts mentioned in subsection (3).

(3)Those amounts are—

(a)the reductions under section 288 of ITTOIA 2005 (the additional calculation rule) by reference to the taxed receipt,

(b)the deductions made in calculating the profits of a property business for expenses under section 292 of ITTOIA 2005 (tenant under taxed lease who uses premises for purposes of property business treated as incurring expenses) by reference to the taxed receipt, and

(c)the deductions made in calculating the profits of a trade, profession or vocation for expenses under section 63 above or section 61 of ITTOIA 2005 (tenant under taxed lease who uses land in connection with trade treated as incurring expenses) by reference to the taxed receipt.

Certain administrative provisions

236Payment of tax by instalments

(1)This section applies if—

(a)there is a receipt under section 217 (lease premiums) in respect of a premium which is payable by instalments, or

(b)there is a receipt under any of sections 219 to 221 (sums payable instead of rent, for surrender of lease or for variation or waiver of terms of lease) in respect of a sum which is payable by instalments.

(2)The company which is liable to pay tax by reference to the receipt may choose to pay the tax by such instalments as an officer of Revenue and Customs may allow.

(3)The period over which the instalments of tax must be paid—

(a)must be 8 years or less, and

(b)must end before, or at the same time as, the time when the last of the instalments mentioned in subsection (1)(a) or (b) is payable.

237Statement of accuracy for purposes of section 222

(1)This section applies if any of the persons mentioned in subsection (3) provides an officer of Revenue and Customs with a statement showing—

(a)whether or not there is, or may be, a receipt under section 222 (assignments for profit of lease granted at undervalue), and

(b)the amount of any receipt.

(2)The officer must certify the accuracy of the statement, if satisfied as to its accuracy.

(3)The persons referred to in subsection (1) are—

(a)the landlord who granted the lease,

(b)a company which assigned it, or

(c)a person to whom it was assigned.

238Claim for repayment of tax payable by virtue of section 224

(1)This section applies if—

(a)there is a receipt under section 224 (sales with right to reconveyance), and

(b)the date on which the estate or interest would fall to be reconveyed was not fixed under the terms of the sale.

(2)If the seller makes a claim, the seller must be repaid the amount by which A exceeds B, where—

(3)The claim must be made within 4 years after the day on which the estate or interest was reconveyed.

239Claim for repayment of tax payable by virtue of section 225

(1)This section applies if—

(a)there is a receipt under section 225 (sale and leaseback transactions), and

(b)the date for the grant of the lease was not fixed under the terms of the sale.

(2)If the seller makes a claim, the seller must be repaid the amount by which A exceeds B, where—

(3)The claim must be made within 4 years after the day on which the lease was granted.

Determinations affecting liability of more than one person

240Appeals against proposed determinations

(1)Subsection (2) applies if it appears to an officer of Revenue and Customs that—

(a)a determination is needed of an amount that is to be brought into account as a receipt under this Chapter in calculating the liability to tax of a person (“the first taxpayer”), and

(b)the determination may affect the liability to corporation tax, income tax or capital gains tax of other persons.

(2)The officer may give notice (a “provisional notice of determination”) to the first taxpayer and the other persons of—

(a)the determination the officer proposes to make, and

(b)their rights under this section and section 242.

(3)A person to whom a provisional notice of determination is given may object to the proposed determination by giving notice (“a notice of objection”) to the officer.

(4)The notice of objection must be given within 30 days of the date on which the provisional notice of determination was given.

(5)If an officer gives provisional notices of determination and no person gives a notice of objection—

(a)a determination must be made by the officer as proposed in the provisional notices, and

(b)the determination is not to be called in question in any proceedings.

241Section 240: supplementary

(1)A provisional notice of determination under section 240(2) may include a statement of the grounds on which the officer proposes to make the determination.

(2)Subsection (1) applies despite any obligation as to secrecy or other restriction on the disclosure of information.

(3)An officer of Revenue and Customs may by notice (a “preliminary notice”) require any person to give any information that appears to the officer to be needed for deciding whether to give any person a provisional notice of determination under section 240(2).

(4)The preliminary notice must state the time within which the information is to be given.

242Determination by tribunal

(1)If a notice of objection is given under section 240(3), the amount mentioned in section 240(1) must be determined in the same way as an appeal.

(2)All persons to whom provisional notices of determination have been given under section 240(2) may take part—

(a)in any proceedings under subsection (1), and

(b)in any appeal arising out of those proceedings.

(3)Those persons are bound by the determination made in the proceedings or on appeal, whether or not they have taken part in the proceedings.

(4)Their successors in title are bound in the same way.

Effective duration of lease

243Rules for determining effective duration of lease

(1)The following rules apply for determining the effective duration of a lease for the purposes of this Chapter.

(2)The rules are to be applied in accordance with section 244.

(3)In Rule 1, “premium” includes—

(a)an amount treated as a premium under section 218 (amount treated as lease premium where work required),

(b)a sum payable by the tenant under the terms subject to which the lease is granted instead of the whole or a part of the rent for a period,

(c)a sum payable by the tenant under the terms subject to which the lease is granted as consideration for the surrender of the lease, and

(d)a sum payable by the tenant (otherwise than by way of rent) as consideration for the variation or waiver of a term of the lease.

(4)In this section and section 244, in relation to Scotland, “term”, where referring to the duration of a lease, means period.

244Applying the rules in section 243

(1)The rules in section 243 apply by reference to the facts known or ascertainable—

(a)at the time of the grant of the lease, or

(b)if the determination is for the purposes of section 221 (sums payable for variation or waiver of terms of lease), at the time when the contract for the variation or waiver is entered into.

(2)In applying those rules, it is assumed that all parties concerned, whatever their relationship, act as if they were at arm’s length.

(3)Subsection (5) applies if—

(a)special benefits were conferred by the lease or in connection with its grant, or

(b)payments were made which one would not expect to be made by parties acting at arm’s length unless such benefits had been conferred.

(4)But subsection (5) does not apply if it can be shown that the special benefits were not conferred nor the payments made for the purpose of securing—

(a)a corporation tax advantage in the application of this Chapter, or

(b)an income tax advantage in the application of Chapter 4 of Part 3 of ITTOIA 2005 (profits of property business: lease premiums etc).

(5)In applying paragraph (b) of Rule 1 in section 243, it is assumed that the special benefits would not have been conferred nor the payments made if the lease had been granted for a term ending on the date mentioned in that rule.

(6)In this section “special benefits” means benefits other than—

(a)vacant possession and beneficial occupation of the premises, or

(b)the right to receive rent at a reasonable commercial rate in respect of the premises.

245Information about effective duration of lease

(1)This section applies if an officer of Revenue and Customs has reason to believe that a person has information relevant to the determination of the effective duration of a lease.

(2)The officer may by notice require the person to provide such information on the matters specified in the notice as is in the person’s possession.

(3)The information must be provided within a time specified in the notice.

(4)In relation to anything done by a solicitor on behalf of a client, the solicitor is required only to—

(a)state that the solicitor was acting on behalf of a client, and

(b)provide the name and address of the client.

Other interpretative provisions

246Provisions about premiums

(1)For the purposes of this Chapter, the presumption is that a sum paid on or in connection with the granting of a tenancy has been paid by way of premium.

(2)This does not apply if the sum is rent.

(3)This also does not apply so far as other sufficient consideration for the payment can be shown to have been given.

(4)In this section “sum” includes the value of any consideration.

(5)Where Rule 3 in section 243 (rules for determining effective duration of lease) applies, the premium, or an appropriate part of it, payable for or in connection with either lease mentioned in that rule may be treated for the purposes of this Chapter as having been required under the other.

247Interpretation

(1)In this Chapter “premium” includes any similar sum payable to the immediate or a superior landlord or to a person connected with such a person.

(2)In subsection (1) “sum” includes the value of any consideration.

(3)In the application of this Chapter to Scotland—

(4)In the application of this Chapter to Scotland—

(a)references to a lease being granted out of a taxed lease are to the grant of a sublease of land subject to the taxed lease, and

(b)references to the lease so granted are to be read as references to the sublease.

Chapter 5Profits of property businesses: other rules about receipts and deductions

Furnished accommodation: receipts and deductions

248Furnished lettings

(1)In calculating the profits of a property business which consists of or includes a furnished letting—

(a)any sum payable for the use of furniture is brought into account as a receipt, and

(b)a deduction is allowed for expenses incurred in connection with the provision of furniture.

(2)But subsection (1) does not apply to receipts or expenses brought into account in calculating the profits of a trade which consists of, or involves, making furniture available for use in premises.

(3)A furnished letting is a lease or other arrangement under which—

(a)a sum is payable in respect of the use of premises, and

(b)the person entitled to the use of the premises is also entitled, in connection with that use, to the use of furniture.

(4)In this section—

(a)“premises” includes a caravan and a houseboat, and

(b)“sum” includes the value of any consideration.

Treatment of receipts on acquisition of business

249Acquisition of business: receipts from transferor’s UK property business

(1)This section applies if—

(a)a person (“the transferor”) permanently ceased to carry on a UK property business (including one within the charge to income tax) at any time,

(b)at that time the transferor transferred to another person (“the transferee”) the right to receive sums arising from the carrying on of any business (“the transferred business”) comprised in the transferor’s UK property business, and

(c)the transferee subsequently carries on the transferred business.

(2)Sums—

(a)which the transferee receives as a result of the transfer, and

(b)which are not brought into account in calculating the profits of the transferor’s UK property business for corporation or income tax purposes of any period before the cessation,

are brought into account in calculating the profits of the transferee’s UK property business in the accounting period in which they are received.

(3)Any sums mentioned in subsection (1)(b) which are received after the cessation of the transferor’s property business are not post-cessation receipts (see Chapter 9).

Reverse premiums as receipts

250Reverse premiums

(1)This section applies if—

(a)a company receives a reverse premium, and

(b)the reverse premium is not brought into account under section 98(2) in calculating the profits of any trade carried on by the company.

(2)The company is treated as—

(a)entering into a transaction mentioned in section 205 (if the land to which the property transaction relates is in the United Kingdom) or section 206 (if that land is outside the United Kingdom), and

(b)receiving the reverse premium as a result of that transaction.

(3)Accordingly, the reverse premium is brought into account as a receipt in calculating the profits of the property business which consists of or includes that transaction.

(4)Subsection (5) applies if—

(a)two or more of the parties to the property arrangements are connected persons, and

(b)the terms of those arrangements are not such as would reasonably have been expected if those persons had been dealing at arm’s length.

(5)The whole amount or value of the reverse premium is brought into account in the period of account in which the property transaction is entered into.

(6)Expressions used in this section and sections 96 to 100 have the same meaning in this section as they do in those sections.

Deductions for expenditure on energy-saving items

251Deduction for expenditure on energy-saving items

(1)This section applies if—

(a)a company carries on a property business in relation to land which consists of or includes a dwelling-house,

(b)the company incurs expenditure in acquiring and installing an energy-saving item in the dwelling-house or in a building containing the dwelling-house (see subsections (5) to (7)),

(c)the expenditure is incurred before 1 April 2015,

(d)a deduction for the expenditure is not prohibited by the wholly and exclusively rule but would otherwise be prohibited by the capital prohibition rule (see subsection (8)), and

(e)no allowance under CAA 2001 may be claimed in respect of the expenditure.

(2)In calculating the profits of the business, a deduction for the expenditure is allowed.

(3)But any deduction is subject to—

(a)section 252 (restrictions on relief), and

(b)any provision made by regulations under section 253.

(4)If, on a just and reasonable apportionment of any expenditure, part of the expenditure would qualify for the relief (but the remainder would not), a deduction is allowed for that part.

(5)“Energy-saving item” means an item of an energy-saving nature of such description as is for the time being specified in regulations made by the Treasury.

(6)The Treasury may by regulations provide for an item to be an energy-saving item only if it satisfies such conditions as may be—

(a)specified in, or

(b)determined in accordance with,

the regulations.

(7)The conditions may include conditions imposed by reference to information or documents issued by any body, person or organisation.

(8)In this section—

252Restrictions on relief

(1)This section restricts deductions that would otherwise be allowable under section 251.

(2)No deduction is allowed if, when the energy-saving item is installed, the dwelling-house—

(a)is in the course of construction, or

(b)is comprised in land in which the company does not have an interest or is in the course of acquiring an interest or further interest.

(3)No deduction is allowed in respect of expenditure in an accounting period if—

(a)the business consists of or includes the commercial letting of furnished holiday accommodation (see Chapter 6), and

(b)the dwelling-house constitutes some or all of that accommodation for the accounting period.

(4)No deduction is allowed in respect of expenditure treated by section 61 (as applied by section 210) as incurred on the date on which the company starts to carry on the business unless the expenditure was incurred not more than 6 months before that date.

(5)No deduction is allowed in respect of expenditure incurred in acquiring and installing the energy-saving item in a building containing the dwelling-house in so far as the expenditure is not for the benefit of the dwelling-house.

253Regulations

(1)In relation to any deduction under section 251, the Treasury may make regulations for—

(a)restricting or reducing the amount of expenditure for which the deduction is allowable,

(b)excluding entitlement to the deduction in such cases as may be specified in, or determined in accordance with, the regulations,

(c)determining who is (and is not) entitled to the deduction if different persons have different interests in land that consists of or includes the whole or part of a building containing one or more dwelling-houses,

(d)making apportionments if the property business is carried on by persons in partnership or an interest in land is beneficially owned by persons jointly or in common.

(2)The apportionments that may be made include apportionments to persons within the charge to income tax.

(3)Regulations under this section may—

(a)make different provision for different cases, and

(b)contain incidental, supplemental, consequential and transitional provision and savings (including provision as to appeals in relation to apportionments mentioned in subsection (1)(d)).

Deductions for expenditure on sea walls

254Deduction for expenditure on sea walls

(1)This section applies if in a tax year a person —

(a)is the owner or tenant of any premises, and

(b)incurs expenditure in making a sea wall or other embankment necessary for the preservation or protection of the premises against the encroachment or overflowing of the sea or any tidal river.

(2)In calculating the profits of any property business (within the charge to tax under Chapter 3) carried on by the person in relation to the premises, a deduction is allowed for the expenditure in each tax year comprised in the deduction period.

(3)The deduction period comprises—

(a)the tax year in which the expenditure is incurred, and

(b)the next 20 tax years.

(4)The amount of the deduction is 1/21 of the expenditure.

(5)The deduction is apportioned between the accounting period or periods comprised in the tax year, but—

(a)no apportionment is made to an accounting period which ends before the expenditure is incurred, and

(b)if the person is entitled to the deduction because of a transfer dealt with by section 255, no apportionment is made to an accounting period which ends before the transfer takes place.

(6)In the case of the transfer of an interest in the premises dealt with by section 255, this section applies as if the reference to the person in subsection (2) above included the transferor and the transferee.

(7)No deduction is allowed for any expenditure in respect of which a capital allowance has been made.

255Transfer of interest in premises

(1)This section applies if, during the deduction period, the whole of the person’s interest in the premises or in any part of them is transferred, whether by operation of law or otherwise.

(2)For the tax year in which the transfer takes place—

(a)the transferor and the transferee are entitled to a part of any deduction under section 254, and

(b)the amount of the deduction is determined by what is just and reasonable.

(3)For subsequent tax years in the deduction period, the entitlement to any deduction under section 254 depends on whether the interest transferred is in the whole of the premises or in part of them.

(4)If the interest transferred is in the whole of the premises, the transferee (but not the transferor) is entitled to any deduction under section 254.

(5)If the interest transferred is in part of the premises—

(a)the transferor and the transferee are entitled to a part of any deduction under section 254, and

(b)the amount of the deduction is determined by reference to what is properly referable to the part of the premises.

(6)This section is supplemented by sections 256 (ending of lease of premises) and 257 (transfer involving person within the charge to income tax).

256Ending of lease of premises

(1)If a person’s interest in the premises is a lease that comes to an end before the end of the deduction period, the interest is treated as if transferred to the following persons.

(2)If a new lease of the premises is granted and the new tenant makes a payment in respect of the embankment in question to the old tenant, the transferee is the new tenant.

(3)Otherwise the transferee is the owner of the interest in immediate reversion on the lease (or, in Scotland, the landlord).

257Transfer involving person within the charge to income tax

(1)This section explains how section 255 works if—

(a)the transferor is a company within the charge to corporation tax and the transferee is a person within the charge to income tax, or

(b)the transferor is a person within the charge to income tax and the transferee is a company within the charge to corporation tax.

(2)Section 255 applies only for the purpose of determining—

(a)whether the company within the charge to corporation tax is entitled to a deduction (or part of a deduction) under section 254, and

(b)the amount of any such deduction.

(3)Accordingly, any reference to—

(a)whether a person is entitled to a deduction (or part of a deduction) under section 254, or

(b)the amount of any such deduction,

is ignored if the person is within the charge to income tax.

(4)For any entitlement of a person within the charge to income tax to a deduction for any of the expenditure, see sections 316 to 318 of ITTOIA 2005 (corresponding income tax provisions).

Mineral royalties

258Relief in respect of mineral royalties

(1)This section applies if in an accounting period a UK resident company carries on a UK property business the receipts of which consist of or include mineral royalties—

(a)which the company is entitled to receive under a mineral lease or agreement, and

(b)which are not chargeable to tax under Chapter 7 (rent receivable in connection with a UK section 39(4) concern).

(2)In calculating the profits of the business, the company is treated as—

(a)entitled to receive only half of the total of the mineral royalties arising under the lease or agreement in the accounting period, and

(b)making in the accounting period only half of the total of the payments made in respect of the management of the property concerned.

(3)Sections 274 to 276 (meaning of “mineral lease or agreement” and “mineral royalties”) apply for the purposes of this section as they apply for the purposes of Chapter 7.

(4)See also section 201 of TCGA 1992 (gains treated as accruing to a company entitled to receive mineral royalties).

Apportionments on sale of land

259Nature of item apportioned on sale of estate or interest in land

(1)This section applies if—

(a)a company sells an estate or interest in land,

(b)on the sale a part of a receipt or outgoing in respect of the estate or interest is apportioned to the seller, and

(c)the receipt or outgoing is receivable or to be paid by the buyer after the apportionment is made.

(2)In calculating the profits of the seller’s property business, the part apportioned is treated as being of the same nature as the receipt or outgoing.

Mutual business

260Mutual business

(1)Nothing in this Part is to be read as applying the rules relating to mutual business to property businesses.

(2)Accordingly, receipts and expenses are to be brought into account in calculating the profits of a company’s property business even if a relationship of mutuality exists between that company and another person.

(3)Nothing in this section affects the operation of section 488 of ICTA (co-operative housing associations).

Adjustment on change of basis

261Adjustment on change of basis

(1)Section 262 applies if—

(a)a company carrying on a UK property business changes, from one period of account to the next, the basis on which profits of the business are calculated for corporation tax purposes,

(b)the old basis accorded with the law or practice applicable in relation to the period of account before the change, and

(c)the new basis accords with the law and practice applicable in relation to the period of account after the change.

(2)The practice applicable in any case means the accepted practice in cases of that description as to how profits of a UK property business should be calculated for corporation tax purposes.

(3)Subsections (3) to (6) of section 180 (what is meant by a company changing the basis on which profits are calculated) apply for the purposes of this section as they apply for the purposes of that section (but as if any reference to a trade were to a UK property business).

262Giving effect to positive and negative adjustments

(1)An amount by way of adjustment must be calculated in accordance with section 182, which applies in relation to a UK property business as it applies in relation to a trade.

(2)If the amount produced by the calculation is positive—

(a)the amount is brought into account as a receipt in calculating the profits of the UK property business, and

(b)the receipt is treated as arising on the first day of the first period of account for which the new basis is adopted.

(3)But if there is a change of basis resulting from a tax adjustment affecting the calculation of any amount brought into account in respect of depreciation, the receipt is treated as arising only when the asset to which it relates is realised or written off.

(4)If the amount produced by the calculation is negative—

(a)a deduction is allowed for the amount as an expense of the UK property business in calculating the profits of that business, and

(b)the expense is treated as arising on the first day of the first period of account for which the new basis is adopted.

(5)But if there is a change of basis resulting from a tax adjustment affecting the calculation of any amount brought into account in respect of depreciation, the expense is treated as arising only when the asset to which it relates is realised or written off.

(6)This section is subject to section 183 (no adjustment for certain expenses previously brought into account) which applies in relation to a UK property business as it applies in relation to a trade.

Integral features

263Expenditure on integral features

Section 33A(3) of CAA 2001 provides that no deduction is allowed in respect of certain expenditure on an integral feature of a building or structure (within the meaning of that section).

Chapter 6Commercial letting of furnished holiday accommodation

Introduction

264Overview of Chapter

(1)This Chapter explains for the purposes of this Part what is meant by the commercial letting of furnished holiday accommodation (see sections 265 to 268).

(2)It matters whether a UK property business consists of or includes the commercial letting of furnished holiday accommodation for the purposes of—

(a)Chapter 2 of Part 10 of ICTA (loss relief: see section 503 of that Act),

(b)certain provisions of TCGA 1992 (see section 241 of that Act), and

(c)CAA 2001 (see, for example, sections 248 and 249 of that Act).

(3)This Chapter also supplements the above provisions by providing in certain circumstances for the profits of the furnished holiday lettings part of a UK property business to be calculated separately (see section 269).

Definition

265Meaning of “commercial letting of furnished holiday accommodation”

(1)A letting is a lease or other arrangement under which a person is entitled to the use of accommodation.

(2)A letting of accommodation is commercial if the accommodation is let—

(a)on a commercial basis, and

(b)with a view to the realisation of profits.

(3)A letting is of furnished holiday accommodation if—

(a)the person entitled to the use of the accommodation is also entitled, in connection with that use, to the use of furniture, and

(b)the accommodation is qualifying holiday accommodation (see sections 267 and 268).

(4)This section applies for the purposes of this Chapter.

266Meaning of “relevant period” in sections 267 and 268

(1)For the purposes of sections 267 and 268 “the relevant period” for accommodation let by a company in an accounting period is determined as follows.

(2)If the accommodation was not let by the company as furnished accommodation in the 12 months immediately before the accounting period, “the relevant period” is 12 months beginning with the first day in the accounting period on which it is let by the company as furnished accommodation.

(3)If the accommodation—

(a)was let by the company as furnished accommodation in the 12 months immediately before the accounting period, but

(b)is not let by the company as furnished accommodation in the 12 months immediately after the accounting period,

(4)Otherwise “the relevant period” is the period of 12 months ending with the last day of the accounting period.

267Meaning of “qualifying holiday accommodation”

(1)Accommodation which is let by a company during an accounting period is “qualifying holiday accommodation” for the accounting period if the availability, letting and pattern of occupation conditions are met.

(2)The availability condition is that, during the relevant period, the accommodation is available for commercial letting as holiday accommodation to the public generally for at least 140 days.

(3)The letting condition is that, during the relevant period, the accommodation is commercially let as holiday accommodation to members of the public for at least 70 days.

(4)For the purposes of the letting condition, a letting of accommodation for a period of longer-term occupation (see subsection (6)) is not a letting of it as holiday accommodation.

(5)The pattern of occupation condition is that, during the relevant period, not more than 155 days fall during periods of longer-term occupation.

(6)For the purposes of this section a “period of longer-term occupation” is a continuous period of more than 31 days during which the accommodation is in the same occupation otherwise than because of circumstances that are not normal.

268Under-used holiday accommodation: averaging elections

(1)This section applies if during an accounting period a company lets both—

(a)qualifying holiday accommodation, and

(b)accommodation that would be qualifying holiday accommodation if the letting condition (see section 267(3)) were met in relation to it (“under-used accommodation”).

(2)The company may make an election for the accounting period specifying—

(a)the qualifying holiday accommodation, and

(b)any or all of the under-used accommodation.

(3)The under-used accommodation so specified is treated as qualifying holiday accommodation for the accounting period if the average of the number of let days for the accounting period of all the accommodation specified in the election is at least 70.

(4)“The number of let days” for an accounting period of any accommodation is the number of days during the relevant period for which it is commercially let by the company as holiday accommodation to members of the public.

(5)Qualifying holiday accommodation may not be specified in more than one election for an accounting period.

(6)An election for an accounting period must be made within the period of two years beginning at the end of the accounting period.

Separate profit calculations

269Capital allowances and loss relief

(1)If a UK property business consists of both—

(a)the commercial letting of furnished holiday accommodation (“the furnished holiday lettings part”), and

(b)other businesses or transactions (“the other part”),

this section requires separate calculations to be made of the profits of the furnished holiday lettings part and the other part.

(2)The calculations must be made if—

(a)section 248 or 249 of CAA 2001 (giving effect to allowances and charges) applies to the furnished holiday lettings part or the other part, or

(b)any provision of Chapter 2 of Part 10 of ICTA (loss relief) applies in relation to a loss made in either of those parts.

(3)If there is a letting of accommodation only part of which is holiday accommodation, such apportionments are to be made for the purposes of this section as are just and reasonable.

Chapter 7Rent receivable in connection with a UK section 39(4) concern

Charge to tax on rent receivable in connection with a UK section 39(4) concern

270Charge to tax on rent receivable in connection with a UK section 39(4) concern

The charge to corporation tax on income applies to rent receivable in connection with a UK section 39(4) concern.

271Meaning of “rent receivable in connection with a UK section 39(4) concern”

(1)For the purposes of this Chapter rent is receivable in connection with a UK section 39(4) concern if—

(a)it is receivable in respect of an estate, interest or right in or over land in the United Kingdom, and

(b)the estate, interest or right is used, occupied or enjoyed in connection with a concern listed in section 39(4).

(2)For the purposes of this Chapter rent is also receivable in connection with a UK section 39(4) concern if—

(a)it is receivable in respect of an estate, interest or right in or over land in the United Kingdom,

(b)the lease or other agreement under which it is receivable provides for its recoupment by reducing royalties or payments of a similar nature, and

(c)the reduction applies if the estate, interest or right is used, occupied or enjoyed in connection with a concern listed in section 39(4).

(3)In this Chapter “rent” includes—

(a)a receipt mentioned in section 207(3), and

(b)any other receipt in the nature of rent.

Management expenses of owner of mineral rights

272Deduction for management expenses of owner of mineral rights

(1)This section applies if in an accounting period—

(a)a company lets a right to work minerals in the United Kingdom, and

(b)the company pays a sum wholly and exclusively as an expense of management or supervision of the minerals in the accounting period.

(2)In calculating the amount of rent receivable in connection with a UK section 39(4) concern, a deduction is allowed for the sum for the accounting period.

(3)This is subject to section 273 (relief in respect of mineral royalties).

Mineral royalties

273Relief in respect of mineral royalties

(1)This section applies if in an accounting period—

(a)a UK resident company is entitled to receive mineral royalties under a mineral lease or agreement, and

(b)the royalties are chargeable to tax under this Chapter.

(2)In calculating the amount of the royalties so chargeable, the company is treated as—

(a)entitled to receive only half of the total of the royalties arising under the lease or agreement in the accounting period, and

(b)paying in the accounting period only half of the total of the expenses mentioned in section 272(1)(b) (deduction for management expenses of owner of mineral rights).

(3)As to the meaning of “mineral lease or agreement” and “mineral royalties”, see sections 274 to 276.

(4)See also section 201 of TCGA 1992 (gains treated as accruing to a company entitled to receive mineral royalties).

274Meaning of “mineral lease or agreement” and “mineral royalties”

(1)In this Chapter “mineral lease or agreement” means—

(a)a lease, profit à prendre, licence or other agreement conferring a right to win and work minerals in the United Kingdom,

(b)a contract for the sale, or a conveyance, of minerals in or under land in the United Kingdom, and

(c)a grant of a right under section 1 of the Mines (Working Facilities and Support) Act 1966 (c. 4) other than an ancillary right (within the meaning of that Act).

(2)In this Chapter “mineral royalties” means so much of any rent receivable under a mineral lease or agreement as relates to the winning and working of minerals.

(3)For the purposes of this section and section 276 “minerals” means all minerals and substances in or under land which are ordinarily worked for removal—

(a)by underground working, or

(b)by surface working,

but excluding water, peat, top-soil and vegetation.

275Extended meaning of “mineral royalties” etc in Northern Ireland

(1)In the application of this Chapter to Northern Ireland references to mineral royalties include the following periodical payments.

(2)The payments are—

(a)payments of compensation under section 29 or 35 of the Mineral Development Act (Northern Ireland) 1969 (c. 35 (N.I.)) (“the 1969 Act”),

(b)payments of compensation under section 4 of the Petroleum (Production) Act (Northern Ireland) 1964 (c. 28 (N.I.)) (“the 1964 Act”),

(c)payments made as mentioned in section 37 of the 1969 Act,

(d)payments made under section 55(4)(b) of the 1969 Act, and

(e)payments made under section 11 of the 1964 Act (payments in respect of minerals to persons entitled to a share of royalties under section 13(3) of the Irish Land Act 1903 (c. 37)).

(3)In the application of this Chapter to Northern Ireland references to the mineral lease or agreement under which mineral royalties are receivable include the enactment under which those payments are made.

276Power to determine what counts as “mineral royalties”

The Commissioners for Her Majesty’s Revenue and Customs may by regulations—

(a)provide whether, and to what extent, rents receivable under a mineral lease or agreement which relate both to the winning and working of minerals and to other matters are treated as mineral royalties, and

(b)provide for treating the whole of such rents as mineral royalties if the extent to which they relate to matters other than the winning and working of minerals is small.

Chapter 8Rent receivable for UK electric-line wayleaves

Charge to tax on rent receivable for UK electric-line wayleaves

277Charge to tax on rent receivable for a UK electric-line wayleave

The charge to corporation tax on income applies to rent receivable for a UK electric-line wayleave.

278Meaning of “rent receivable for a UK electric-line wayleave”

(1)For the purposes of this Chapter rent is receivable for a UK electric-line wayleave if—

(a)it is receivable in respect of an easement, servitude or right in or over land in the United Kingdom, and

(b)the easement, servitude or right is enjoyed in connection with an electric, telegraph or telephone wire or cable.

(2)The reference to the enjoyment of an easement, servitude or right in connection with an electric, telegraph or telephone wire or cable includes (in particular) its enjoyment in connection with—

(a)a pole or pylon supporting such a wire or cable, or

(b)apparatus used in connection with such a wire or cable.

(3)In this Chapter “rent” includes—

(a)a receipt mentioned in section 207(3), and

(b)any other receipt in the nature of rent.

279Extent of charge to tax

(1)Rent receivable for a UK electric-line wayleave is not chargeable to tax under this Chapter for an accounting period if—

(a)a company carries on a UK property business in relation to some or all of the land to which the wayleave relates, and

(b)receipts (other than rents receivable for UK electric-line wayleaves) in respect of some or all of that land are brought into account in calculating the profits of the business of the accounting period.

(2)In such a case, the rent receivable for the UK electric-line wayleave is brought into account in calculating the profits of the company’s UK property business.

(3)The rules for determining whether an amount is chargeable to tax under this Chapter also need to be read with section 45(2) (payments for wayleaves if company carries on a trade).

(4)That subsection secures that an amount which would otherwise be chargeable to tax under this Chapter may be brought into account instead in calculating the profits of a trade.

Chapter 9Post-cessation receipts

Charge to tax on post-cessation receipts

280Charge to tax on post-cessation receipts

The charge to corporation tax on income applies to post-cessation receipts arising from a UK property business.

281Extent of charge to tax

(1)A post-cessation receipt is chargeable to tax under this Chapter only so far as the receipt is not otherwise chargeable to corporation or income tax.

(2)Accordingly, a post-cessation receipt arising from a UK property business is not chargeable to tax under this Chapter so far as it is brought into account in calculating the profits of the business of any period.

Meaning of “post-cessation receipts”

282Basic meaning of “post-cessation receipt”

(1)In this Chapter “post-cessation receipt” means a sum—

(a)which is received after a person permanently ceases to carry on a UK property business, and

(b)which arises from the carrying on of the business before the cessation.

(2)In this Chapter, except in section 284, references to a UK property business include one within the charge to income tax and references to a person permanently ceasing to carry on a UK property business include—

(a)in the case of a company, the occurrence of an event treated under section 362 of ITTOIA 2005 (company starting or ceasing to be within charge to income tax) as the company permanently ceasing to carry on the business, and

(b)in the case of a UK property business carried on by a person in partnership, the occurrence of an event treated under section 353(3) of ITTOIA 2005 (basic meaning of “post-cessation receipt”) as the person permanently ceasing to carry on the business.

283Other rules about what counts as a “post-cessation receipt”

(1)Section 284 (transfer of rights if transferee does not carry on UK property business) treats certain amounts as being, or not being, post-cessation receipts for the purposes of this Chapter.

(2)The following provisions (which treat certain amounts as post-cessation receipts) apply for the purposes of this Chapter as they apply for the purposes of Chapter 15 of Part 3 (but as if any reference to a trade were to a UK property business)—

(3)This Chapter also needs to be read with—

(a)section 249(3) (which treats certain amounts as not being post-cessation receipts), and

(b)section 1277 (which treats certain income as a post-cessation receipt: unremittable income).

284Transfer of rights if transferee does not carry on UK property business

(1)This section applies if—

(a)a company (“the transferor”) permanently ceases to carry on a UK property business,

(b)the transferor transfers to another person (“the transferee”) for value the right to receive sums arising from the carrying on of any business (“the transferred business”) comprised in the transferor’s UK property business, and

(c)the transferee does not subsequently carry on the transferred business.

(2)The transferor is treated as receiving a post-cessation receipt.

(3)The amount of the receipt is—

(a)the amount or value of the consideration for the transfer, if the transfer is at arm’s length, or

(b)the value of the rights transferred as between parties at arm’s length, if the transfer is not at arm’s length.

(4)Any sums mentioned in subsection (1)(b) which are received after the cessation of the property business are not post-cessation receipts.

Deductions

285Allowable deductions

Sections 196 and 197 apply for the purposes of this Chapter as they apply for the purposes of Chapter 15 of Part 3 (but as if any reference to a trade were to a UK property business).

Election to carry back

286Election to carry back

Sections 198 to 200 apply for the purposes of this Chapter as they apply for the purposes of Chapter 15 of Part 3 (but as if any reference to a trade were to a UK property business).

Chapter 10Supplementary

Priority rules

287Provisions which must be given priority over this Part

Any receipt or other credit item, so far as it falls within—

(a)Chapter 3 of this Part so far as it relates to an overseas property business or Chapter 7 or 8 of this Part (rent receivable in connection with a UK section 39(4) concern or for UK electric-line wayleaves), and

(b)Chapter 2 of Part 3 (receipts of a trade),

is dealt with under Part 3.

288Priority between Chapters within this Part

(1)Any receipt, so far as it falls within—

(a)Chapter 3 so far as it relates to a UK property business, and

(b)Chapter 7 (rent receivable in connection with a UK section 39(4) concern),

is dealt with under Chapter 7.

(2)Any receipt, so far as it falls within—

(a)Chapter 3 so far as it relates to a UK property business, and

(b)Chapter 8 (rent receivable for UK electric-line wayleaves),

is dealt with under Chapter 8.

(3)Any receipt, so far as it falls within Chapter 7 (rent receivable in connection with a UK section 39(4) concern) and Chapter 8 (rent receivable for UK electric-line wayleaves), is dealt with under Chapter 8.

Other supplementary provisions

289Effect of company starting or ceasing to be within charge to corporation tax

(1)This section applies if a company starts or ceases to be within the charge to corporation tax in respect of a property business.

(2)The company is treated for the purposes of this Part—

(a)as starting to carry on the business when it starts to be within the charge, or

(b)as ceasing to carry on the business when it ceases to be within the charge.

290Overseas property businesses and overseas land: adaptation of rules

(1)This section applies if a provision of this Part—

(a)applies to an overseas property business or land outside the United Kingdom, but

(b)is expressed by reference to a domestic concept of law.

(2)In relation to that business or land, the provision is to be read so as to produce the result most closely corresponding with that produced by the provision in relation to a UK property business or land in the United Kingdom.

291Meaning of “lease” and “premises”

(1)In this Part “lease” includes—

(a)an agreement for a lease (so far as the context permits), and

(b)any tenancy,

but does not include a mortgage.

(2)In this Part “premises” includes land.

Part 5Loan Relationships

Chapter 1Introduction

Introduction

292Overview of Part

(1)This Part sets out how profits and deficits arising to a company from its loan relationships are brought into account for corporation tax purposes.

(2)For the meaning of “loan relationship” see section 302 and Part 6 (relationships treated as loan relationships etc).

(3)For how such profits and deficits are calculated and brought into account, see—

(a)section 296 (profits and deficits to be calculated using credits and debits given by this Part),

(b)section 297 (trading credits and debits to be brought into account under Part 3),

(c)section 299 (charge to tax on non-trading profits),

(d)section 300 (method of bringing non-trading deficits into account),

(e)section 301 (calculation of non-trading profits and deficits from loan relationships: non-trading credits and debits), and

(f)Chapter 16 (non-trading deficits).

(4)For the priority of this Part for corporation tax purposes, see Chapter 17.

(5)This Part also contains the following Chapters (which mainly relate to the amounts to be brought into account for the purposes of this Part)—

(a)Chapter 3 (the credits and debits to be brought into account: general),

(b)Chapter 4 (continuity of treatment on transfers within groups or on reorganisations),

(c)Chapter 5 (connected companies relationships: introduction and general),

(d)Chapter 6 (connected companies relationships: impairment losses and releases of debts),

(e)Chapter 7 (group relief claims involving impaired or released consortium debts),

(f)Chapter 8 (connected parties relationships: late interest),

(g)Chapter 9 (partnerships involving companies),

(h)Chapter 10 (insurance companies),

(i)Chapter 11 (other special kinds of company),

(j)Chapter 12 (special rules for particular kinds of securities),

(k)Chapter 13 (European cross-border transfers of business),

(l)Chapter 14 (European cross-border mergers),

(m)Chapter 15 (tax avoidance),

(n)Chapter 18 (general and supplementary provisions).

(6)This Part needs to be read with Part 19 (general exemptions).

293Construction of references to profits or losses from loan relationships

(1)In this Part references to profits or losses from loan relationships include references to profits or losses from related transactions.

(2)For the meaning of “related transaction” see section 304.

(3)Except where the context indicates otherwise, in this Part references to profits or losses from loan relationships include references to profits or losses of a capital nature.

294Matters treated as loan relationships

(1)Part 6 deals with matters treated for some or all purposes as loan relationships or rights, payments or profits under loan relationships.

(2)Except where the context indicates otherwise, references to this Part in this Act and elsewhere in the Tax Acts include references to Part 6.

How profits and deficits from loan relationships are dealt with

295General rule: profits arising from loan relationships chargeable as income

(1)The general rule for corporation tax purposes is that all profits arising to a company from its loan relationships are chargeable to tax as income in accordance with this Part.

(2)But see section 465 (exclusion of distributions except in tax avoidance cases).

296Profits and deficits to be calculated using credits and debits given by this Part

Profits and deficits arising to a company from its loan relationships are to be calculated using the credits and debits given by this Part.

297Trading credits and debits to be brought into account under Part 3

(1)This section applies so far as in any accounting period a company is a party to a loan relationship for the purposes of a trade it carries on.

(2)The credits in respect of the relationship for the period are treated as receipts of the trade which are to be brought into account in calculating its profits for that period.

(3)The debits in respect of the relationship for the period are treated as expenses of the trade which are deductible in calculating those profits.

(4)So far as subsection (3) provides for any amount to be deductible, it has effect despite anything in—

(a)section 53 (capital expenditure),

(b)section 54 (expenses not wholly and exclusively for trade and unconnected losses), or

(c)section 59 (patent royalties).

(5)This section is subject to—

(a)section 330 (debits in respect of pre-trading expenditure),

(b)section 482(1) (under which credits or debits to be brought into account under Chapter 2 of Part 6 (relevant non-lending relationships) are treated as non-trading credits or debits), and

(c)section 494(2A) of ICTA (under which some credits and debits affecting ring-fence profits from petroleum extraction activities are treated as non-trading credits and debits).

298Meaning of trade and purposes of trade

(1)For the purposes of this Part a company is taken to be a party to a creditor relationship for the purposes of a trade it carries on only if it is a party to the relationship in the course of activities forming an integral part of the trade.

(2)For the meaning of “creditor relationship”, see section 302(5).

(3)For the purposes of this Part activities carried on by a company in the course of—

(a)any mutual trading,

(b)any mutual insurance or other mutual business which is not life assurance business, or

(c)any basic life assurance and general annuity business,

are treated as not constituting the whole or any part of a trade.

(4)Subsection (3) applies for the purposes of any other relevant enactment as it applies for the purposes of this Part.

(5)In subsection (4) “relevant enactment” means so much of any enactment as contains provision by reference to which amounts are to be brought into account for the purposes of this Part.

299Charge to tax on non-trading profits

(1)The charge to corporation tax on income applies to any non-trading profits which a company has in respect of its loan relationships.

(2)For the meaning of a company having such profits and how they are calculated, see section 301.

300Method of bringing non-trading deficits into account

(1)Any non-trading deficit which a company has from its loan relationships must be brought into account in accordance with Chapter 16 (non-trading deficits).

(2)For the meaning of a company having such a deficit and how it is calculated, see section 301.

(3)This section and Chapter 16 apply even if none of the company’s loan relationships is regarded as a source of income as a result of this Part.

301Calculation of non-trading profits and deficits from loan relationships: non-trading credits and debits

(1)Whether a company has non-trading profits or a non-trading deficit from its loan relationships for an accounting period is determined as follows, using the non-trading credits and non-trading debits given by this Part for the accounting period.

(2)In this Part—

(a)“non-trading credits” means credits for any accounting period in respect of a company’s loan relationships that are not brought into account under section 297(2), and

(b)“non-trading debits” means debits for any accounting period in respect of a company’s loan relationships that are not brought into account under section 297(3).

(3)But see also—

(a)section 330 (debits in respect of pre-trading expenditure), and

(b)section 482(1) (under which credits or debits to be brought into account under Chapter 2 of Part 6 (relevant non-lending relationships) are treated as non-trading credits or debits).

(4)A company has non-trading profits for an accounting period from its loan relationships if the non-trading credits for the period exceed the non-trading debits for the period or there are no such debits.

(5)The non-trading profits are equal to those credits, less any such debits.

(6)A company has a non-trading deficit for an accounting period from its loan relationships if the non-trading debits for the period exceed the non-trading credits for the period or there are no such credits.

(7)The non-trading deficit is equal to those debits, less any such credits.

Chapter 2Basic definitions

302“Loan relationship”, “creditor relationship”, “debtor relationship”

(1)For the purposes of the Corporation Tax Acts a company has a loan relationship if—

(a)the company stands in the position of a creditor or debtor as respects any money debt (whether by reference to a security or otherwise), and

(b)the debt arises from a transaction for the lending of money.

(2)References to a loan relationship and to a company being a party to a loan relationship are to be read accordingly.

(3)For cases where this Part applies as if a relationship were a loan relationship despite the money debt not arising from a transaction for the lending of money see Chapter 2 of Part 6 (relevant non-lending relationships).

(4)See also the following provisions of Part 6 (under which other matters are treated as loan relationships or rights, payments or profits under loan relationships)—

(a)Chapter 3 (OEICs, unit trusts and offshore funds),

(b)Chapter 4 (building societies),

(c)Chapter 5 (industrial and provident societies),

(d)Chapter 6 (alternative finance arrangements),

(e)Chapter 7 (shares with guaranteed returns etc),

(f)Chapter 8 (returns from partnerships),

(g)Chapter 9 (manufactured interest etc),

(h)Chapter 10 (repos), and

(i)Chapter 11 (investment life insurance contracts).

(5)In this Part “creditor relationship”, in relation to a company, means any loan relationship of the company where it stands in the position of a creditor as respects the debt in question.

(6)In this Part “debtor relationship”, in relation to a company, means any loan relationship of the company where it stands in the position of a debtor as respects the debt in question.

303“Money debt”

(1)For the purposes of this Part a money debt is a debt which—

(a)falls to be settled—

(i)by the payment of money,

(ii)by the transfer of a right to settlement under a debt which is itself a money debt, or

(iii)by the issue or transfer of any share in any company,

(b)has at any time fallen to be so settled, or

(c)may at the option of the debtor or the creditor fall to be so settled.

(2)For the purposes of subsection (1) any option exercisable by either party to settle the debt in any other way than is mentioned in subsection (1)(a) is ignored.

(3)A money debt is a debt arising from a transaction for the lending of money for the purposes of this Part if an instrument is issued by any person for the purpose of representing—

(a)security for the debt, or

(b)the rights of a creditor in respect of the debt.

(4)A debt does not arise from a transaction for the lending of money for the purposes of this Part so far as it arises from rights conferred by shares in a company.

(5)But see the following provisions (as a result of which some such rights are within this Chapter)—

(a)Chapter 3 of Part 6 (OEICs, unit trusts and offshore funds),

(b)Chapter 7 of that Part (shares with guaranteed returns etc).

(6)For the meaning of “share” see section 476(1).

304“Related transaction”

(1)In this Part “related transaction”, in relation to a loan relationship, means any disposal or acquisition (in whole or in part) of rights or liabilities under the relationship.

(2)For this purpose the cases where there is taken to be such a disposal and acquisition include those where rights or liabilities under the loan relationship are transferred or extinguished by any sale, gift, exchange, surrender, redemption or release.

305Payments, interest, rights and liabilities under a loan relationship

(1)For the purposes of this Part references to payments or interest under a loan relationship are references to payments or interest paid or payable in pursuance of any of the rights or liabilities under that relationship.

(2)For the purposes of this Part references to rights or liabilities under a loan relationship are references to any of the rights or liabilities under the arrangements as a result of which that relationship subsists.

(3)For the purposes of this Part rights or liabilities under a loan relationship are taken to include the rights or liabilities attached to any security that is issued in relation to the money debt in question (and so is a security representing that relationship).

(4)But for the treatment of funding bonds see—

(a)section 413 (issue of funding bonds), and

(b)section 414 (redemption of funding bonds).

Chapter 3The credits and debits to be brought into account: general

Introduction

306Overview of Chapter

(1)This Chapter contains rules of general application about the credits and debits to be brought into account for the purposes of this Part.

(2)In particular, it—

(a)provides for the application of generally accepted accounting practice in determining the amounts to be brought into account as credits and debits and makes provision where accounts do not comply with that practice (see sections 307 to 312),

(b)makes provision about bases of accounting (see sections 313 and 314),

(c)provides for adjustments on changes of accounting policy (see sections 315 to 319),

(d)sets out some general rules that differ from generally accepted accounting practice (see sections 320 to 327),

(e)provides for exchange gains and losses to be included in the profits and losses of a company from loan relationships (see section 328),

(f)makes provision about debits for pre-loan relationship, abortive or pre-trading expenses (see sections 329 and 330),

(g)makes provision for companies ceasing to be a party to loan relationships (see sections 331 and 332), and

(h)provides for deemed assignments where a company’s residence or operations move abroad (see sections 333 and 334).

(3)For further rules about the credits and debits to be brought into account in particular situations and cases, see—

(a)Chapter 4 (continuity of treatment on transfers within groups or on reorganisations),

(b)Chapter 5 (connected companies relationships: introduction and general),

(c)Chapter 6 (connected companies relationships: impairment losses and releases of debts),

(d)Chapter 7 (group relief claims involving impaired or released consortium debts),

(e)Chapter 8 (connected parties relationships: late interest),

(f)Chapter 9 (partnerships involving companies),

(g)Chapter 10 (insurance companies),

(h)Chapter 11 (other special kinds of company),

(i)Chapter 12 (special rules for particular kinds of securities),

(j)Chapter 13 (European cross-border transfers of business),

(k)Chapter 14 (European cross-border mergers), and

(l)Chapter 15 (tax avoidance).

General principles about the bringing into account of credits and debits

307General principles about the bringing into account of credits and debits

(1)This Part operates by reference to the accounts of companies and amounts recognised for accounting purposes.

(2)The general rule is that the amounts to be brought into account by a company as credits and debits for any period for the purposes of this Part are those that are recognised in determining the company’s profit or loss for the period in accordance with generally accepted accounting practice.

(3)The credits and debits to be brought into account in respect of a company’s loan relationships are the amounts that, when taken together, fairly represent for the accounting period in question—

(a)all profits and losses of the company that arise to it from its loan relationships and related transactions (excluding interest or expenses),

(b)all interest under those relationships, and

(c)all expenses incurred by the company under or for the purposes of those relationships and transactions.

(4)Expenses are only treated as incurred as mentioned in subsection (3)(c) if they are incurred directly—

(a)in bringing any of the loan relationships into existence,

(b)in entering into or giving effect to any of the related transactions,

(c)in making payments under any of those relationships or as a result of any of those transactions, or

(d)in taking steps to ensure the receipt of payments under any of those relationships or in accordance with any of those transactions.

(5)For the treatment of pre-loan relationship and abortive expenses, see section 329.

(6)Subsection (2) is subject to the provisions of this Part and, in particular, subsection (3).

Amounts recognised in determining a company’s profit or loss

308Amounts recognised in determining a company’s profit or loss

(1)References in this Part to an amount recognised in determining a company’s profit or loss for a period are references to an amount recognised in—

(a)the company’s profit and loss account, income statement or statement of comprehensive income for that period,

(b)the company’s statement of total recognised gains and losses, statement of recognised income and expense, statement of changes in equity or statement of income and retained earnings for that period, or

(c)any other statement of items taken into account in calculating the company’s profits and losses for that period.

(2)If, in accordance with generally accepted accounting practice, an amount is shown as a prior period adjustment in any statement within subsection (1), it must be brought into account for the purposes of this Part in calculating the company’s profits and losses for the period to which the statement relates.

(3)Subsection (2) does not apply to an amount recognised for accounting purposes by way of correction of a fundamental error.

309Companies without GAAP-compliant accounts

(1)If a company—

(a)draws up accounts which are not GAAP-compliant accounts, or

(b)does not draw up accounts at all,

this Part applies as if GAAP-compliant accounts had been drawn up.

(2)Accordingly, references in this Part to amounts recognised for accounting purposes are references to the amounts that would have been recognised if GAAP-compliant accounts had been drawn up for the period of account in question and any relevant earlier period.

(3)For this purpose a period of account is relevant to a later period if the accounts for the later period rely to any extent on amounts derived from the earlier period.

(4)In this section “GAAP-compliant accounts” means accounts drawn up in accordance with generally accepted accounting practice.

310Power to make regulations about recognised amounts

(1)The Treasury may by regulations—

(a)make provision excluding from section 308(1) or (2) amounts of a specified description, and

(b)make provision for or in connection with bringing into account in specified circumstances amounts in relation to which section 308(1) or (2) does not have effect as a result of regulations under paragraph (a).

(2)The regulations may provide that section 308(1) or (2) does not apply to specified amounts in a period of account so far as they derive from or otherwise relate to amounts brought into account in a specified way in a previous period of account.

(3)The regulations may—

(a)make different provision for different cases, and

(b)make provision subject to an election or to other specified conditions.

(4)The regulations may apply to periods of account beginning before they are made, but not earlier than the beginning of the calendar year in which they are made.

(5)The power to make regulations under this section does not apply to exchange gains or losses (but see section 328(4) to (7)).

311Amounts not fully recognised for accounting purposes: introduction

(1)Section 312 applies for the purpose of determining the credits and debits which a company is to bring into account for a period for the purposes of this Part in the following case.

(2)The case is where—

(a)the company is, or is treated as, a party to a creditor relationship in the period,

(b)an amount is not fully recognised for the period in respect of the relationship as a result of the application of generally accepted accounting practice in relation to the relationship (see subsection (6)), and

(c)condition A or B is met.

(3)Condition A is that—

(a)the company is or is treated as a party to a debtor relationship in the period, and

(b)an amount is not fully recognised for the period in respect of the debtor relationship as a result of the application of generally accepted accounting practice in relation to the relationship.

(4)Condition B is that—

(a)an amount (a “relevant capital contribution”) has at any time been contributed to the company which forms part of its capital for the period, and

(b)an amount is not fully recognised for the period in respect of the relevant capital contribution as a result of the application of generally accepted accounting practice in relation to the contribution.

(5)It does not matter for the purposes of subsection (4) whether the contribution forms part of the company’s share capital or other capital for the period.

(6)For the purposes of this section an amount is not fully recognised for a period in respect of a relationship of a company or a relevant capital contribution to it if—

(a)no amount in respect of the relationship or contribution is recognised in determining its profit or loss for the period, or

(b)an amount is so recognised in respect of only part of the relationship or contribution.

312Determination of credits and debits where amounts not fully recognised

(1)In determining the credits and debits which a company is to bring into account for the period referred to in section 311(1) for the purposes of this Part in respect of—

(a)the creditor relationship mentioned in section 311(2), or

(b)in a case where condition A in section 311(3) is met, the debtor relationship by reference to which that condition is met,

the assumption in subsection (2) is to be made.

(2)The assumption is that an amount in respect of the whole of the relationship in question is recognised in determining the company’s profit or loss for the period.

(3)But the amount of any debits to be brought into account by the company for a period as a result of this section applying in respect of its debtor relationships must not exceed the amount of any credits to be brought into account by it for the period as a result of this section applying in respect of its creditor relationships.

(4)Subsection (5) applies in any case where—

(a)apart from this section any credits or debits are brought into account for a period for the purposes of this Part by the company in respect of a loan relationship, and

(b)the relationship is a creditor relationship within subsection (1)(a) or a debtor relationship within subsection (1)(b).

(5)The credits and debits which are to be so brought into account as a result of this section are to be determined on the same basis of accounting as that on which the credits or debits mentioned in subsection (4)(a) are determined.

(6)In any other case, the credits and debits which are to be so brought into account as a result of this section are to be determined on an amortised cost basis of accounting.

Accounting bases

313Basis of accounting: “amortised cost basis”, “fair value accounting” and “fair value”

(1)The general rule is that the amounts to be brought into account by a company as credits and debits for any period of account for the purposes of this Part may be determined on any basis of accounting that is in accordance with generally accepted accounting practice and, in particular, an amortised cost basis of accounting or fair value accounting.

(2)But subsection (1) is subject to sections 307(3) and (4) and the following provisions (which require a particular accounting basis to be used)—

(a)section 312(5) and (6) (determination of credits and debits where amounts not fully recognised for accounting purposes),

(b)section 349(2) (application of amortised cost basis to connected companies relationships),

(c)section 382(2) (company partners using fair value accounting),

(d)section 399(2) (index-linked gilt-edged securities: application of fair value accounting),

(e)section 453(2) (application of fair value accounting where connected parties derive benefit from creditor relationships),

(f)section 454(4) (application of fair value accounting: reset bonds etc),

(g)section 482(2) (application of amortised cost basis of accounting to discounts arising from a money debt under a relevant non-lending relationship),

(h)section 490(3) (holdings in OEICs, unit trusts and offshore funds: application of fair value accounting), and

(i)section 534(1) (application of fair value accounting where section 523 applies).

(3)See also section 314.

(4)In this Part “amortised cost basis of accounting”, in relation to a company’s loan relationship, means a basis of accounting under which an asset or liability representing the loan relationship is shown in the company’s accounts at cost adjusted for cumulative amortisation and any impairment, repayment or release.

(5)In this Part “fair value accounting” means a basis of accounting under which assets and liabilities are shown in the company’s balance sheet at their fair value.

(6)In this Part “fair value”, in relation to a loan relationship of a company, means the amount which, at the time as at which the value is to be determined, is the amount which the company would obtain from or, as the case may be, would have to pay to a knowledgeable and willing person dealing at arm’s length for—

(a)the transfer of all the company’s rights under the relationship, and

(b)the release of all the company’s liabilities under it.

314Power to make regulations about changes from amortised cost basis

(1)This section applies if the credits or debits to be brought into account for the purposes of this Part in respect of assets or liabilities of a company—

(a)are required in accordance with generally accepted accounting practice to be dealt with for accounting purposes using fair value accounting, and

(b)were previously dealt with for those purposes on an amortised cost basis.

(2)The Treasury may by regulations provide that the credits or debits must continue to be determined on an amortised cost basis of accounting.

(3)The regulations may—

(a)make different provision for different cases,

(b)make incidental, supplemental, consequential and transitional provision and savings, and

(c)make provision subject to an election or to other specified conditions.

Adjustments on change of accounting policy

315Introduction to sections 316 to 319

(1)Sections 316 to 319 apply if—

(a)there is a change of accounting policy in drawing up a company’s accounts from one period of account to the next, and

(b)the accounting policy in each of those periods accords with the law and practice applicable in relation to that period.

(2)In this section and sections 316 to 319—

(a)the first of those periods of account is referred to as “the earlier period”, and

(b)the next is referred to as “the later period”.

(3)Sections 316 to 319 apply, in particular, if—

(a)the company prepares accounts for the earlier period in accordance with UK generally accepted accounting practice and for the later period in accordance with international accounting standards, or

(b)the company prepares accounts for the earlier period in accordance with international accounting standards and for the later period in accordance with UK generally accepted accounting practice.

(4)For a case where this section and sections 316 to 318 apply as if a change of accounting policy had occurred, see section 416(5) (election for application of sections 415 and 585).

316Change of accounting policy involving change of value

(1)If there is an increase in the carrying value of an asset representing a loan relationship of the company between—

(a)the end of the earlier period, and

(b)the beginning of the later period,

a credit equal to the increase must be brought into account for the purposes of this Part for the later period.

(2)If there is a decrease in the carrying value of such an asset between—

(a)the end of the earlier period, and

(b)the beginning of the later period,

a debit equal to the decrease must be brought into account for the purposes of this Part for the later period.

(3)If there is an increase in the carrying value of a liability representing a loan relationship of the company between—

(a)the end of the earlier period, and

(b)the beginning of the later period,

a debit equal to the increase must be brought into account for the purposes of this Part for the later period.

(4)If there is a decrease in the carrying value of such a liability between—

(a)the end of the earlier period, and

(b)the beginning of the later period,

a credit equal to the decrease must be brought into account for the purposes of this Part for the later period.

(5)This section does not apply so far as such a credit or debit as is mentioned in this section falls to be brought into account apart from this section.

317Carrying value

(1)In section 316 “carrying value” means the carrying value of the asset or liability recognised for accounting purposes, except as provided in subsection (4).

(2)For the purposes of this section the “carrying value” of an asset or liability includes amounts recognised for accounting purposes in relation to the loan relationship in respect of—

(a)accrued amounts,

(b)amounts paid or received in advance, or

(c)impairment losses (including provisions for bad or doubtful debts).

(3)For the meaning of “impairment loss” see section 476(1).

(4)In determining the profits and losses to be recognised in determining the carrying value of the asset or liability for the purposes of this section, the provisions specified in subsection (5) apply as they apply for the purposes of determining the credits and debits to be brought into account under this Part.

(5)Those provisions are—

(a)sections 340 and 341 (continuity of treatment on group transfers and transfers of insurance business),

(b)section 349(2) (application of amortised cost basis of accounting to connected companies relationships),

(c)section 354 (exclusion of debits for impaired or released connected companies debts),

(d)section 360 (exclusion of credits on reversal of impairments of connected companies debts),

(e)sections 361 to 363 (deemed debt releases on impaired debts becoming held by connected company),

(f)Chapter 8 (connected parties relationships: late interest),

(g)sections 399 and 400 (treatment of index-linked gilt-edged securities),

(h)section 404 (restriction on deductions etc relating to FOTRA securities),

(i)sections 409 to 412 (deeply discounted securities of close companies),

(j)section 415(2) (loan relationships with embedded derivatives),

(k)sections 422 and 423 (transfer of loan relationships on European cross-border transfers of business),

(l)sections 433 and 434 (transfer of loan relationships on European cross-border mergers),

(m)section 454(4) (accounting method where rate of interest is reset),

(n)section 465 (exclusion of distributions except in tax avoidance cases),

(o)paragraph 62 of Schedule 2 (disregard of pre-2005 disallowed debits), and

(p)paragraph 69 of Schedule 2 (5½% Treasury Stock 2008-2012 not redeemed before 6 April 2009).

318Change of accounting policy following cessation of loan relationship

(1)This section applies if—

(a)the company has ceased to be a party to a loan relationship in an accounting period (“the cessation period”),

(b)section 331 (company ceasing to be party to loan relationship) applied to the cessation, and

(c)there is a difference between the amount outstanding in respect of the loan relationship (see subsection (5))—

(i)at the end of the earlier period, and

(ii)at the beginning of the later period.

(2)In the case of an increase in that amount—

(a)if the company was the creditor under the loan relationship, it must bring into account for the later period a credit equal to the increase for the purposes of this Part, and

(b)if the company was the debtor under the loan relationship, it must bring into account for the later period a debit equal to the increase for the purposes of this Part.

(3)In the case of a decrease in that amount—

(a)if the company was the creditor under the loan relationship, it must bring into account for the later period a debit equal to the decrease for the purposes of this Part, and

(b)if the company was the debtor under the loan relationship, it must bring into account for the later period a credit equal to the decrease for the purposes of this Part.

(4)Subsections (2) and (3) do not apply so far as the credit or debit falls to be brought into account apart from this section.

(5)In this section “the amount outstanding in respect of the loan relationship” means so much of the recognised deferred income or recognised deferred loss from the loan relationship as has not been represented by credits or debits brought into account under this Part in respect of the relationship.

(6)In subsection (5)—

319General power to make regulations about changes in accounting policy

(1)The Treasury may by regulations make provision for cases where there is a change of accounting policy in drawing up a company’s accounts from one period of account to the next which affects the amounts to be brought into account for accounting purposes in respect of the company’s loan relationships.

(2)The regulations may provide for any credits or debits which would otherwise be brought into account for the purposes of this Part—

(a)not to be brought into account,

(b)to be brought into account only to a prescribed extent, or

(c)to be brought into account over a prescribed period or in prescribed circumstances.

(3)Regulations under this section may, in particular, modify the operation of sections 315 to 318.

(4)The regulations may make—

(a)different provision for different cases, and

(b)incidental, supplemental, consequential and transitional provision and savings.

(5)The regulations may apply to periods of account beginning before they are made, but not earlier than the beginning of the calendar year in which they are made.

Rules differing from generally accepted accounting practice

320Credits and debits treated as relating to capital expenditure

(1)This section applies if generally accepted accounting practice allows a credit or debit for an accounting period in respect of a company’s loan relationship to be treated in the company’s accounts as an amount brought into account in determining the value of a fixed capital asset or project.

(2)Despite that treatment, the credit or debit is to be brought into account for the purposes of this Part, for the accounting period in which it is given, in the same way as a credit or debit which is brought into account in determining the company’s profit or loss for that period in accordance with generally accepted accounting practice.

(3)But subsection (2) does not apply to a debit which is taken into account in arriving at the amount of expenditure in relation to which a debit may be given by Part 8 (intangible fixed assets).

(4)Subsections (5) and (6) apply if a debit is brought into account as mentioned in subsection (2).

(5)No debit may be brought into account in respect of the writing down of so much of the value of the asset or project as is attributable to that debit.

(6)No debit may be brought into account in respect of so much of any amortisation or depreciation as represents a writing off of the interest component of the asset.

321Credits and debits recognised in equity

(1)This section applies if in accordance with generally accepted accounting practice a credit or debit for a period in respect of a company’s loan relationship—

(a)is recognised in equity or shareholders' funds, and

(b)is not recognised in any of the statements mentioned in section 308(1).

(2)The credit or debit is to be brought into account for the period for the purposes of this Part in the same way as a credit or debit which is brought into account in determining the company’s profit or loss for the period in accordance with generally accepted accounting practice.

322Release of debts: cases where credits not required to be brought into account

(1)This section applies if—

(a)a liability to pay an amount under a company’s debtor relationship is released, and

(b)the release takes place in an accounting period for which an amortised cost basis of accounting is used in respect of that relationship.

(2)The company is not required to bring into account a credit in respect of the release for the purposes of this Part if condition A, B or C is met.

(3)Condition A is that the release is part of a statutory insolvency arrangement.

(4)Condition B is that the release is—

(a)in consideration of shares forming part of the ordinary share capital of the debtor company, or

(b)in consideration of any entitlement to such shares.

(5)Condition C is that—

(a)the debtor company meets one of the insolvency conditions (see subsection (6)), and

(b)the debtor relationship is not a connected companies relationship (see section 348).

(6)For the purposes of this section a company meets the insolvency conditions if—

(a)it is in insolvent liquidation,

(b)it is in insolvent administration,

(c)it is in insolvent administrative receivership,

(d)an appointment of a provisional liquidator is in force in relation to the company under section 135 of the Insolvency Act 1986 (c. 45) or Article 115 of the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)), or

(e)under the law of a country or territory outside the United Kingdom circumstances corresponding to those mentioned in paragraph (a), (b), (c) or (d) exist.

(7)Section 323 applies for the interpretation of subsection (6).

(8)For further cases where no credit in respect of the release is to be brought into account, see—

(a)section 358 (exclusion of credits on release of connected companies debts: general), and

(b)section 359 (exclusion of credits on release of connected companies debts during creditor’s insolvency).

323Meaning of expressions relating to insolvency etc

(1)For the purposes of section 322(6) a company is in insolvent liquidation during the period—

(a)beginning when it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up, and

(b)ending when the winding up is completed or otherwise brought to an end (whether under paragraph 37 or 38 of Schedule B1 to the Insolvency Act 1986 (c. 45) or otherwise).

(2)In subsection (1) “liquidation” has the meaning given in—

(a)section 247(2) of the Insolvency Act 1986, or

(b)Article 6(2) of the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)).

(3)For the purposes of section 322(6) a company in administration is in insolvent administration if it entered administration under—

(a)Schedule B1 to the Insolvency Act 1986, or

(b)Schedule B1 to the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)),

at a time when its assets were insufficient for the payment of its debts and other liabilities and the expenses of the administration.

(4)For the purposes of section 322(6) a company is in insolvent administrative receivership if—

(a)an appointment of an administrative receiver is in force in relation to the company, and

(b)the company was put into administrative receivership at a time when its assets were insufficient for the payment of its debts and other liabilities and the expenses of administrative receivership.

(5)In subsection (4) “administrative receiver” has the same meaning as in—

(a)Chapter 1 or 2 of Part 3 of the Insolvency Act 1986 (c. 45), or

(b)Part 4 of the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)),

and “administrative receivership” is to be read accordingly.

324Restriction on debits resulting from revaluation

(1)No debit is to be brought into account for the purposes of this Part as a result of the revaluation of an asset representing a creditor relationship of a company except—

(a)an impairment loss, or

(b)a debit resulting from a release by the company of any liability under the relationship.

(2)For the meaning of “impairment loss” see section 476(1).

(3)The reference in subsection (1) to revaluation of an asset includes any case where a provision or allowance is made by the company reducing the carrying value of the asset or of a group of assets including the asset in question.

(4)This section does not affect the debits to be brought into account in respect of exchange gains or losses.

(5)This section does not apply if fair value accounting is used.

325Restriction on credits resulting from reversal of disallowed debits

(1)No credit is to be brought into account for the purposes of this Part in respect of the reversal of a debit disallowed by section 324(1).

(2)This section does not apply if fair value accounting is used.

(3)See also paragraph 61 of Schedule 2 (restriction on bringing into account credits resulting from reversal of debits disallowed in a period of account beginning before 1 January 2005).

326Writing off government investments

(1)This section applies if a government investment in a company is written off by the release of a liability to pay any amount under a debtor relationship of the company.

(2)The company is not required to bring into account a credit for the purposes of this Part in respect of the release.

(3)Section 400(7) and (8) of ICTA (write-off of government investment) applies for interpreting the reference in subsection (1) to a government investment in a company being written off as it applies for the purposes of section 400(1) of that Act.

327Disallowance of imported losses etc

(1)This section applies for an accounting period of a company (“the loss period”) if—

(a)apart from this section, a loss arising in connection with a loan relationship of the company would fall to be brought into account for the purposes of this Part, and

(b)the loss is wholly or partly referable to a time when the relationship was not subject to United Kingdom taxation.

(2)The amounts brought into account for the loss period for the purposes of this Part must be such as to secure that none of the loss referable to a time when the relationship was not so subject is treated for those purposes as arising in the loss period or any other accounting period of the company.

(3)For the purposes of this section a loss is referable to a time when a relationship is not subject to United Kingdom taxation so far as, at the time to which the loss is referable, the company would not have been chargeable to corporation tax in the United Kingdom on any profits arising from the relationship.

(4)If the company was not a party to the relationship at the time to which the loss is referable, subsection (3) applies as if the reference to the company were a reference to the person who at that time was in the same position as respects the relationship as is subsequently held by the company.

(5)An amount which would be brought into account for the purposes of this Part in respect of any matter apart from this section is treated for the purposes of section 464(1) (amounts brought into account under this Part excluded from being otherwise brought into account) as if it were so brought into account.

(6)Accordingly, that amount must not be brought into account for corporation tax purposes as respects that matter either under this Part or otherwise.

(7)This section does not apply if fair value accounting is used.

Exchange gains and losses

328Exchange gains and losses

(1)The reference in section 307(3) to the profits and losses arising to a company from its loan relationships and related transactions includes a reference to exchange gains and losses so arising.

(2)But subsection (1) is subject to subsections (3) and (4).

(3)Subsection (1) does not apply to an exchange gain or loss of a company so far as—

(a)it arises—

(i)in relation to an asset or liability representing a loan relationship of the company, or

(ii)as a result of the translation from one currency to another of the profit or loss of part of the company’s business, and

(b)it is recognised in the company’s statement of total recognised gains and losses, statement of recognised income and expense, statement of changes in equity or statement of income and retained earnings.

(4)Subsection (1) does not apply to so much of an exchange gain or loss arising to a company in relation to an asset or liability representing a loan relationship of the company as is within a description specified for the purpose in regulations made by the Treasury.

(5)The Treasury may by regulations make provision for or in connection with bringing into account in specified circumstances amounts to which subsection (1) does not apply because of subsection (3) or (4).

(6)The reference in subsection (5) to bringing amounts into account is a reference to bringing amounts into account for the purposes of this Part as credits or debits arising to a company from its loan relationships.

(7)The regulations may—

(a)make different provision for different cases, and

(b)make provision subject to an election or to other specified conditions.

(8)For the meaning of references to exchange gains or losses from loan relationships, see section 475.

Pre-loan relationship, abortive and pre-trading expenses

329Pre-loan relationship and abortive expenses

(1)This section applies if—

(a)a company may enter into a loan relationship or related transaction but has not yet done so,

(b)it incurs any expenses for purposes connected—

(i)with entering into it, or

(ii)with giving effect to any obligation which might arise under it, and

(c)had the company entered into the relationship or transaction, the expenses would be expenses within section 307(3)(c).

(2)The expenses are treated as expenses in relation to which debits may be brought into account in accordance with section 307(3) to the same extent as if the company had entered into the relationship or transaction.

330Debits in respect of pre-trading expenditure

(1)This section applies if—

(a)a non-trading debit is given for an accounting period of a company for the purposes of this Part, and

(b)within the period of 2 years beginning with the end of the period the company makes an election for the purposes of this section in respect of the debit.

(2)The debit must not be brought into account for the purposes of this Part as a non-trading debit for that period.

(3)Instead, if conditions A and B are met in respect of a trade, the debit—

(a)is treated for the purposes of this Part as if it were a debit for the accounting period in which the company begins to carry on the trade, and

(b)is to be brought into account in accordance with section 297(3) (trading debits).

(4)Condition A is that the company begins to carry on the trade within the period of 7 years after the end of the accounting period for which a non-trading debit is given for the purposes of this Part.

(5)Condition B is that that debit is such that, if it were given for the accounting period in which the company begins to carry on the trade, it would be brought into account by reference to that trade in accordance with section 297(3).

Company ceasing to be party to loan relationship

331Company ceasing to be party to loan relationship

(1)This section applies if—

(a)a company ceases to be a party to a loan relationship in an accounting period (“the cessation period”),

(b)profits or losses arise to the company from the loan relationship in that period, and

(c)the credits or debits brought into account for the purposes of this Part for that period do not include credits or debits representing the whole of those profits or losses.

(2)Credits or debits in respect of so much of those profits or losses as are not represented by credits or debits brought into account for the cessation period must continue to be brought into account under this Part over one or more subsequent accounting periods (“post-cessation periods”) as in the case of a loan relationship to which the company is a party in those periods.

(3)Subsection (4) applies if any question arises how far in a post-cessation period—

(a)the company is a party to the loan relationship—

(i)for the purposes of a trade it carries on, or

(ii)for any other particular purpose or purposes, or

(b)the loan relationship is referable to a particular business the company carries on or a particular description of such business.

(4)The question is to be determined by reference to the circumstances immediately before the company ceased to be a party to the loan relationship, instead of the circumstances in the post-cessation period.

(5)Subsection (6) applies if any question arises—

(a)how far the loan relationship has a particular purpose in a post-cessation period, or

(b)whether there is a connection between the company and any other person for a post-cessation period for the purposes of this Part.

(6)The question is to be determined by reference to the circumstances in the cessation period instead of the circumstances in the post-cessation period.

332Repo, stock lending and other transactions

(1)This section applies if—

(a)a company ceases to be a party to a loan relationship in any accounting period, for example as a result of the disposal of the rights or liabilities under the relationship under a repo or stock lending arrangement, but

(b)nonetheless, in accordance with generally accepted accounting practice, amounts in respect of the relationship are recognised in determining the profit or loss of the company for that or any subsequent accounting period.

(2)Despite ceasing to be a party to the relationship, the company must bring amounts in respect of the relationship into account for those periods for the purposes of this Part.

(3)The amounts that must be so brought into account are those that are so recognised in respect of the relationship (but subject to the provisions of this Part, including, in particular, section 307(3)).

(4)This section does not apply in relation to any amount in respect of a loan relationship which is brought into account for this Part as a result of—

(a)section 331 (company ceasing to be party to a loan relationship), or

(b)section 550 (ignoring effect on borrower of sale of securities: debtor repos, debtor quasi-repos and other arrangements).

(5)Section 331(3) and (4) applies in relation to any time after the company ceases to be a party to a loan relationship in a case where this section applies as it applies where section 331 applies.

Company moving abroad

333Company ceasing to be UK resident

(1)If a company ceases to be UK resident, this Part applies as if—

(a)immediately before so ceasing the company had assigned the assets and liabilities which represent its loan relationships for consideration of an amount equal to their fair value at that time, and

(b)it had immediately reacquired them for consideration of the same amount.

(2)Subsection (1) does not apply in relation to an asset or liability so far as immediately after the company ceases to be UK resident the asset is held or the liability is owed for the purposes of a permanent establishment of the company in the United Kingdom.

(3)Subsection (1) does not apply if—

(a)the conditions in section 344(1)(a) to (c) are met in relation to the company (transferee leaving group after replacing transferor as party to loan relationship), and

(b)it ceases to be UK resident at the same time as it ceases to be a member of the relevant group.

(4)In subsection (3) “the relevant group” has the meaning given in section 344(4).

334Non-UK resident company ceasing to hold loan relationship for UK permanent establishment

(1)This section applies if an asset or liability representing a loan relationship of a company which is not UK resident ceases to be held or owed for the purposes of a permanent establishment of the company in the United Kingdom in circumstances not involving a related transaction (but see subsection (3)).

(2)This Part applies as if—

(a)immediately before the asset or liability so ceases the company had assigned it, so far as so ceasing, for consideration of an amount equal to its fair value at that time, and

(b)the company had immediately reacquired it for consideration of the same amount.

(3)This section does not apply if—

(a)the conditions in section 344(1)(a) to (c) are met in relation to the company (transferee leaving group after replacing transferor as party to loan relationship), and

(b)the asset or liability mentioned in subsection (1) ceases to be held or owed for the purposes of the permanent establishment at the same time as the company ceases to be a member of the relevant group.

(4)In subsection (3) “the relevant group” has the meaning given in section 344(4).

Chapter 4Continuity of treatment on transfers within groups or on reorganisations

Application of this Chapter

335Introduction to Chapter

(1)This Chapter applies in the cases mentioned in—

(a)section 336 (transfers of loans on group transactions),

(b)section 337 (transfers of loans on insurance business transfers), and

(c)section 339 (issues of new securities on certain cross-border reorganisations).

(2)The following sections make provision about how the credits and debits to be brought into account under this Part in those cases are determined—

(a)sections 340 and 341 (which apply in the cases mentioned in sections 336 and 337), and

(b)sections 342 and 343 (which apply in the case mentioned in section 339).

(3)Sections 344 to 346 provide for the treatment of a loan relationship in respect of which section 336 has applied where the company replacing another as a party to a loan relationship later leaves the group of companies of which they were members.

(4)Section 347 (disapplication of Chapter where transferor party to avoidance involving subsequent transfer by transferee) disapplies this Chapter in some circumstances in the cases mentioned in 336 and 337.

(5)For the meaning of references in this Chapter to a company replacing another as a party to a loan relationship, see section 338.

(6)In this Chapter references to a company being a member of a group of companies are to be read in accordance with section 170 of TCGA 1992 (interpretation of sections 171 to 181 of that Act: groups).

336Transfers of loans on group transactions

(1)The case referred to in section 335(1)(a) is where—

(a)there is a transaction within subsection (2) or a series of transactions within subsection (3), and

(b)as a result one of the companies involved (“the transferee”) directly or indirectly replaces the other (“the transferor”) as a party to a loan relationship.

(2)A transaction is within this subsection if it is a related transaction between two companies which are—

(a)members of the same group, and

(b)within the charge to corporation tax in respect of that transaction.

(3)A series of transactions is within this subsection if it is a series having the same effect as a related transaction between two companies each of which—

(a)has been a member of the same group at any time in the course of that series, and

(b)would be within the charge to corporation tax in respect of such a related transaction.

(4)This Chapter does not apply as a result of this section in relation to—

(a)a transfer of an asset, or

(b)a transfer of rights under, or an interest in, an asset,

as a result of a transaction within subsection (2) or a series of transactions within subsection (3) if immediately before or after the transfer the asset is within one of the categories set out in section 440(4)(a), (d) and (e) of ICTA (assets held for certain categories of long-term business).

(5)In this Chapter, in relation to a case within subsection (1), “the transferee” and “the transferor” have the same meaning as in that subsection.

337Transfers of loans on insurance business transfers

(1)The case referred to in section 335(1)(b) is where—

(a)a transfer between two companies occurs to which this section applies, and

(b)as a result one of the companies (“the transferee”) directly or indirectly replaces the other (“the transferor”) as a party to a loan relationship.

(2)This section applies to the transfers specified in subsection (3), so far as they are not excluded by subsection (4).

(3)They are—

(a)a transfer between two companies of business consisting of the effecting or carrying out of contracts of long-term insurance which has effect under an insurance business transfer scheme, and

(b)any transfer between two companies which is a qualifying overseas transfer.

(4)Subsection (3) does not apply to a transfer of an asset, or of rights under or an interest in an asset, if the asset—

(a)was within one of the categories set out in section 440(4) of ICTA immediately before the transfer, and

(b)is not within that category immediately after it.

(5)Subsection (6) applies for the purposes of subsection (4) if one of the companies mentioned in subsection (3) is an overseas life insurance company.

(6)An asset is taken as being in the same category both immediately before and immediately after a transfer if the asset—

(a)was in one category immediately before the transfer, and

(b)is within the corresponding category immediately after it.

(7)In this Chapter, in relation to a case within subsection (1), “the transferee” and “the transferor” have the same meaning as in that subsection.

338Meaning of company replacing another as party to loan relationship

(1)References in this Chapter to one company (“A”) replacing another company (“B”) as a party to a loan relationship include references to A becoming a party to a loan relationship which—

(a)confers rights within subsection (2),

(b)imposes obligations within subsection (2), or

(c)both confers such rights and imposes such obligations.

(2)Rights or obligations are within this subsection if they are equivalent to those of B under a loan relationship to which B has previously ceased to be a party.

(3)For the purposes of subsection (2), A’s rights under a creditor relationship are equivalent to rights under another creditor relationship if each set of rights gives the holder of an asset representing the relationship in question—

(a)the same rights against the same persons as to capital, interest and dividends, and

(b)the same remedies to enforce those rights.

(4)For the purposes of subsection (3), any difference in—

(a)the total nominal amounts of the assets representing each relationship,

(b)the form in which they are held, or

(c)the way in which they can be transferred,

is ignored.

(5)For the purposes of subsection (2), A’s obligations under a debtor relationship are equivalent to obligations under another debtor relationship if each set of obligations subjects the holder of the liability representing the relationship in question to—

(a)the same obligations to the same persons as to capital, interest and dividends, and

(b)the same remedies to enforce those obligations.

(6)For the purposes of subsection (5), any difference in—

(a)the total nominal amounts of the assets representing the creditor relationship corresponding to each relationship,

(b)the form in which those assets are held, or

(c)the way in which they can be transferred,

is ignored.

339Issues of new securities on certain cross-border reorganisations

(1)The case referred to in section 335(1)(c) is where each of conditions A to D is met.

(2)Condition A is that sections 127 to 130 of TCGA 1992 (reorganisations: equation of original shares and new holding)—

(a)apply in relation to an exchange as a result of section 135(3) of that Act (which provides for sections 127 to 130 to apply to an exchange of securities for those in another company as if it were a reorganisation), or

(b)would so apply but for section 116(5) of that Act (which disapplies sections 127 to 130 where the original shares or the new holding consist of or include a qualifying corporate bond).

(3)Condition B is that the original shares consist of or include an asset representing a loan relationship.

(4)Condition C is that company A is resident in one member State and company B is resident in another member State.

(5)For the purposes of this section a company is resident in a member State if—

(a)it is within a charge to tax under the law of the State as being resident for that purpose, and

(b)it is not regarded, for the purpose of any double taxation relief arrangements to which the State is a party, as resident in a territory not within a member State.

(6)Condition D is that neither Chapter 13 (European cross-border transfers of business) nor Chapter 14 (European cross-border mergers) applies in relation to the exchange.

(7)In this section—

(a)“company A” and “company B” have the same meaning as in section 135 of TCGA 1992,

(b)“original shares” has the same meaning as it has for the purposes of sections 126 to 131 of that Act, as applied by section 135 of that Act, and

(c)“receiving company” means the company to which the issue of shares in or debentures of company B mentioned in section 135(1) of that Act is made.

(8)If company B is a company to which section 135(5) of TCGA 1992 applies (companies with no share capital), the reference in subsection (7)(c) to the shares in or debentures of company B includes a reference to any interests in the company possessed by its members.

Continuity of treatment: transfer of loan at notional carrying value

340Group transfers and transfers of insurance business: transfer at notional carrying value

(1)This section applies in the cases mentioned in—

(a)section 336 (transfers of loans on group transactions), and

(b)section 337 (transfers of loans on insurance business transfers).

(2)The credits and debits to be brought into account for the purposes of this Part in respect of the loan relationship referred to in section 336(1)(b) or section 337(1)(b) are determined in accordance with subsections (3) to (5).

(3)For the accounting period in which the transaction or, as the case may be, the first of the series of transactions takes place, the transferor is treated as having entered into that transaction for consideration of an amount equal to the notional carrying value of the asset or liability representing the relationship (see subsection (6)).

(4)For any accounting period in which the transferee is a party to the relationship, it is treated as if it had acquired the asset or liability representing the relationship for consideration of an amount equal to its notional carrying value.

(5)If a discount arises in respect of the transaction or series of transactions, the consideration is increased for the purposes of subsection (3) (but not subsection (4)) by the amount of the discount.

(6)For the purposes of this section—

(a)“carrying value” has the same meaning as it has for the purposes of section 316 (see section 317),

(b)section 480(5) (when discount arises) applies as it applies for the purposes of section 480, and

(c)“notional carrying value”, in relation to an asset or liability, means the amount which would have been its carrying value in the accounts of the transferor if a period of account had ended immediately before the date when the transferor ceased to be a party to the loan relationship.

(7)Schedule 28AA to ICTA (provision not at arm’s length) does not apply in relation to the amounts in respect of which credits or debits are to be brought into account under this section.

(8)This section is subject to sections 332 and 341.

341Transferor using fair value accounting

(1)This section applies instead of section 340 if, in a case where that section would otherwise apply, the transferor is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship (see subsection (5)).

(2)The amount which is to be brought into account by the transferor in respect of the transaction or the series of transactions referred to in section 340(3) (“the transferor’s amount”) is—

(a)if an asset is to be brought into account, its fair value as at the date when the transferee becomes party to the loan relationship, or the fair value of the rights under or interest in it as at that date, and

(b)if a liability is to be brought into account, its fair value as at that date.

(3)For any accounting period in which the transferee is a party to the loan relationship, for the purpose of determining the credits and debits to be brought into account in respect of the relationship for the purposes of this Part, the transferee is treated as if it had acquired the asset or liability representing the relationship for consideration of an amount equal to the transferor’s amount.

(4)If a discount arises in respect of the transaction or series of transactions, the transferor’s amount is increased for the purposes of subsection (2) (but not subsection (3)) by the amount of the discount.

(5)The transferor is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship only if the credits and debits to be brought into account for the purposes of this Part as respects the relationship are determined on that basis.

(6)It does not matter for the purposes of subsection (5) if the transferor does not otherwise use fair value accounting in respect of the loan relationship.

(7)For the purposes of this section, section 480(5) (when discount arises) applies as it applies for the purposes of section 480.

(8)This section is subject to section 332.

342Issues of new securities on reorganisations: disposal at notional carrying value

(1)This section applies in the case mentioned in section 339.

(2)For the purposes of this Part such debits and credits are to be brought into account as would be brought into account if the exchange were a disposal of the asset representing the loan relationship referred to in section 339(3) for consideration of an amount equal to its notional carrying value.

(3)For the purposes of this section, the notional carrying value of that asset is the amount that would have been its carrying value in the accounts of the receiving company if a period of account had ended immediately before the date when the exchange occurred.

(4)In this section—

(5)This section is subject to section 343.

343Receiving company using fair value accounting

(1)This section applies instead of section 342 if, in a case where that section would otherwise apply, the receiving company is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship constituting or included in the original shares.

(2)The amount which is to be brought into account by the receiving company in respect of the exchange (“the disposal amount”) is the fair value of the asset representing the loan relationship as at the date when the exchange occurred, or of the rights under or interest in that relationship as at that date.

(3)For any accounting period in which company B is a party to the loan relationship, for the purpose of determining the credits and debits to be brought into account in respect of the relationship for the purposes of this Part, company B is treated as if it had acquired the asset representing the relationship for consideration of an amount equal to the disposal amount.

(4)Subsections (5) and (6) of section 341 apply for the purposes of this section as they apply for the purpose of that section, taking references in that section to the transferor as references to the receiving company.

(5)In this section “company B”, “original shares” and “receiving company” have the meaning given in section 339(7).

Transferee leaving group after replacing transferor as party to loan relationship

344Introduction

(1)Sections 345 and 346 apply if—

(a)this Chapter applies in the case mentioned in section 336 (transfers of loans on group transactions),

(b)section 341 (transferor using fair value accounting) does not apply, and

(c)before the end of the relevant 6 year period and while still a party to the relevant loan relationship, the transferee ceases to be a member of the relevant group.

(2)But the transferee is not treated for the purposes of this section and sections 345 and 346 as having left the relevant group if—

(a)an asset or liability which represents a loan relationship is transferred in the course of a transfer or merger in relation to which Chapter 13 (European cross-border transfers of business) or Chapter 14 (European cross-border mergers) applies, and

(b)the transferee ceases to be a member of the relevant group in consequence of the transfer or merger.

(3)In a case where subsection (2) applies, if the transferee becomes a member of another group in consequence of the transfer or merger, it is treated for the purposes of this section and sections 345 and 346 as if the relevant group and the other group were the same.

(4)In this section and sections 345 and 346—

345Transferee leaving group otherwise than because of exempt distribution

(1)This section applies if—

(a)the transferee ceases to be a member of the relevant group, and

(b)it does not so cease just because of a distribution which is exempt as a result of—

(i)section 213(2) of ICTA (exempt distributions), or

(ii)section 213A of ICTA (exempt distributions: division of business).

(2)If condition A or B is met, this Part applies as if—

(a)the transferee had assigned the asset or liability representing the relevant loan relationship immediately before ceasing to be a member of the relevant group,

(b)the assignment had been for consideration of an amount equal to the fair value of the asset or liability at that time, and

(c)the transferee had immediately reacquired the asset or liability for consideration of the same amount.

(3)Condition A is that if this Part applied as mentioned in subsection (2) because of that subsection applying, a credit would be brought into account for the purposes of this Part by the transferee because of subsection (2)(a) and (b).

(4)Condition B is that—

(a)the relevant loan relationship is a creditor relationship,

(b)the transferee has a hedging relationship between a derivative contract and the creditor relationship, and

(c)because of section 631(2)(a) and (b) (transferee leaving group otherwise than because of exempt distribution) a credit is to be brought into account by the transferee for the purposes of Part 7 (derivative contracts) in respect of the derivative contract.

(5)Section 707 (meaning of “hedging relationship”) applies for the purposes of this section.

346Transferee leaving group because of exempt distribution

(1)This section applies if—

(a)the transferee ceases to be a member of the relevant group just because of a distribution which is exempt as a result of—

(i)section 213(2) of ICTA (exempt distributions), or

(ii)section 213A of that Act (exempt distributions: division of business), and

(b)there is a chargeable payment within the meaning of section 214(2) of that Act (chargeable payments connected with exempt distributions) within 5 years after the making of that distribution.

(2)If condition A or B is met, this Part applies as if—

(a)the transferee had assigned the asset or liability representing the relevant loan relationship immediately before the chargeable payment was made,

(b)the assignment had been for consideration of an amount equal to the fair value of the asset or liability immediately before the transferee ceased to be a member of the relevant group, and

(c)the transferee had immediately reacquired the asset or liability for consideration of the same amount.

(3)Condition A is that if subsection (2) applied a credit would be brought into account for the purposes of this Part by the transferee because of subsection (2)(a) and (b).

(4)Condition B is that—

(a)the relevant loan relationship is a creditor relationship,

(b)the transferee has a hedging relationship between a derivative contract and the creditor relationship, and

(c)because of section 632(2)(a) and (b) (transferee leaving group because of exempt distribution) a credit is to be brought into account by the transferee for the purposes of Part 7 (derivative contracts) in respect of the derivative contract.

(5)Section 707 (meaning of “hedging relationship”) applies for the purposes of this section.

Disapplication of Chapter where transferor party to avoidance

347Disapplication of Chapter where transferor party to avoidance

(1)This Chapter does not apply in the cases mentioned in—

(a)section 336 (transfers of loans on group transactions), and

(b)section 337 (transfers of loans on insurance business transfers),

if conditions A and B are met.

(2)Condition A is that the transferor is a party to arrangements in accordance with which there is likely to be a transfer of rights or liabilities under the loan relationship by the transferee to another person in circumstances in which section 336 or 337 would not apply.

(3)Condition B is that the purpose or one of the main purposes of the arrangements is to secure a tax advantage for the transferor or a person connected with it.

(4)This Chapter does not apply in relation to a disposal in the cases mentioned in subsection (1) if section 455 (disposals for consideration not fully recognised by accounting practice) applies in relation to the disposal.

(5)In this section—

Chapter 5Connected companies relationships: introduction and general

348Introduction: meaning of “connected companies relationship”

(1)This Chapter contains some general rules relating to connected companies relationships.

(2)For the purposes of this Part a debtor relationship of a company is a connected companies relationship if there is a connection between—

(a)the company, and

(b)another company standing in the position of a creditor as respects the debt in question.

(3)For the purposes of subsection (2) a company is treated as standing in the position of a creditor if it indirectly stands in that position by reference to a series of loan relationships or relevant money debts.

(4)For the purposes of this Part a creditor relationship of a company is a connected companies relationship if there is a connection between—

(a)the company, and

(b)another company standing in the position of a debtor as respects the debt in question.

(5)For the purposes of subsection (4) a company is treated as standing in the position of a debtor if it indirectly stands in that position by reference to a series of loan relationships or relevant money debts.

(6)For the purposes of this Part, if a loan relationship is a connected companies relationship at any time in an accounting period, it is treated as being such a relationship for the period.

(7)In this section “relevant money debt” means a money debt which would be a loan relationship if a company directly stood in the position of creditor or debtor.

(8)Section 466 (companies connected for an accounting period) applies for the purposes of this section.

349Application of amortised cost basis to connected companies relationships

(1)This section applies if a loan relationship is a connected companies relationship for an accounting period.

(2)The credits and debits which are to be brought into account for the purposes of this Part in respect of the relationship for the period are determined on an amortised cost basis of accounting.

(3)Subsection (2) does not apply if section 454(4) (which requires fair value accounting to be applied to reset bonds etc) applies.

(4)See also section 534(8) (which disapplies this section where the requirement to apply fair value accounting under section 534(1) applies).

350Companies beginning to be connected

(1)This section applies if—

(a)a company’s loan relationship becomes a connected companies relationship, and

(b)as a result of the application of section 349 the company—

(i)brings into account credits or debits determined in accordance with fair value accounting for one accounting period (“the earlier period”), and

(ii)brings into account credits or debits determined in accordance with an amortised cost basis of accounting for the next accounting period (“the later period”).

(2)If—

(a)the fair value of a relevant asset at the end of the earlier period (“FVA”), exceeds

(b)the cost of the asset which would be given at that time on an amortised cost basis of accounting (“ACA”),

the excess must be brought into account for the later period as a debit for the purposes of this Part.

(3)If ACA exceeds FVA, the excess must be brought into account for the later period as a credit for the purposes of this Part.

(4)If—

(a)the fair value of a relevant liability at the end of the earlier period (“FVL”), exceeds

(b)the cost of the liability which would be given at that time on an amortised cost basis of accounting (“ACL”),

the excess must to be brought into account for the later period as a credit for the purposes of this Part.

(5)If ACL exceeds FVL, the excess must to be brought into account for the later period as a debit for the purposes of this Part.

351Companies ceasing to be connected

(1)This section applies if—

(a)a company’s loan relationship ceases to be a connected companies relationship, and

(b)as a result of section 349 ceasing to apply the company—

(i)brings into account credits or debits determined in accordance with an amortised cost basis of accounting for one accounting period (“the earlier period”), and

(ii)brings into account credits or debits determined in accordance with a fair value basis of accounting for the next accounting period (“the later period”).

(2)If—

(a)the fair value of a relevant asset at the end of the earlier period (“FVA”), exceeds

(b)the cost of the asset which would be given at that time on an amortised cost basis of accounting (“ACA”),

the excess must be brought into account for the later period as a credit for the purposes of this Part.

(3)If ACA exceeds FVA, the excess must be brought into account for the later period as a debit for the purposes of this Part.

(4)If—

(a)the fair value of a relevant liability at the end of the earlier period (“FVL”), exceeds

(b)the cost of the liability which would be given at that time on an amortised cost basis of accounting (“ACL”),

the excess must be brought into account for the later period as a debit for the purposes of this Part.

(5)If ACL exceeds FVL, the excess must be brought into account for the later period as a credit for the purposes of this Part.

352Disregard of related transactions

(1)This section applies in an accounting period if—

(a)section 349 applies in respect of a creditor relationship of a company for the period, and

(b)a related transaction takes place in relation to the relationship in the period.

(2)The credits brought into account in respect of the relationship for the period for the purposes of this Part must not be less than they would have been if—

(a)the transaction had not taken place, and

(b)no amounts had accrued after the transaction took place.

(3)The debits brought into account in respect of the loan relationship for the period for the purposes of this Part must not be more than they would have been in that case.

(4)Nothing in this section affects the credits or debits to be brought into account for the purposes of this Part in respect of exchange gains or losses arising from a debt.

Chapter 6Connected companies relationships: impairment losses and releases of debts

Introduction

353Introduction to Chapter

(1)This Chapter contains rules about impairment losses and releases of debts in the case of companies connected with other companies.

(2)In particular, see—

(a)sections 354 to 357 (which prevent debits in respect of impairment losses and release debits from being brought into account in the case of connected companies relationships, subject to some exceptions),

(b)sections 358 to 360 (which exclude credits in respect of the release of debts or the reversal of impairments from being brought into account in that case, except where the release is a deemed release under section 361 or 362), and

(c)sections 361 to 363 (which treat debt releases as occurring when impaired debts become held by companies which might otherwise benefit from the exclusion under section 358).

(3)In this Chapter “release debit” means a debit in respect of a release by a company of liability under a creditor relationship of the company.

(4)Section 466 (companies connected for an accounting period) applies for the purposes of sections 354 to 360.

(5)For the circumstances in which companies are connected for sections 361 and 362, see section 363.

(6)For the meaning of “impairment loss” see section 476(1).

Exclusion of debits for impaired or released connected companies debts

354Exclusion of debits for impaired or released connected companies debts

(1)The general rule is that no impairment loss or release debit in respect of a company’s creditor relationship is to be brought into account for the purposes of this Part for an accounting period if section 349 (application of amortised cost basis to connected companies relationship) applies to the relationship for the period.

(2)That rule is subject to—

(a)section 356 (swapping debt for equity), and

(b)section 357 (insolvent creditors).

(3)Nothing in this section affects the debits to be brought into account for the purposes of this Part in respect of exchange gains or losses arising from a debt.

355Cessation of connection

(1)This section applies if, in the case of a creditor relationship of a company—

(a)an impairment loss or release debit is excluded by section 354 from being brought into account for any accounting period, and

(b)there is a later accounting period for which the creditor relationship in respect of the debt is not a connected companies relationship.

(2)So far as any amount represents the impairment loss or release debit, no debit may be brought into account in respect of it—

(a)for the first accounting period within subsection (1)(b), or

(b)for any subsequent such accounting period.

356Exception to section 354: swapping debt for equity

(1)An impairment loss or release debit in relation to a liability to pay any amount to a company (“the creditor company”) under its creditor relationship is not prevented from being brought into account by section 354 if conditions A, B and C are met.

(2)Condition A is that the creditor company treats the liability as discharged.

(3)Condition B is that it does so in consideration of—

(a)any shares forming part of the ordinary share capital of the company on which the liability would otherwise have fallen, or

(b)any entitlement to such shares.

(4)Condition C is that there would be no connection between the two companies for the accounting period in which the consideration is given if the question whether there is such a connection were determined by reference only to times before the creditor company—

(a)acquired possession of the shares, or

(b)acquired any entitlement to them.

357Exception to section 354: insolvent creditors

(1)An impairment loss or release debit is not prevented from being brought into account by section 354 in relation to an amount accruing to a company (“the creditor”) if—

(a)condition A, B, C, D or E is met in relation to the creditor, and

(b)the amount accrues to the creditor at a time which is the relevant time for the condition in question.

(2)Condition A is that the creditor is in insolvent liquidation, and for this condition the relevant time is any time in the course of the winding up.

(3)Condition B is that the creditor is in insolvent administration, and for this condition the relevant time is any time in the course of the administration.

(4)Condition C is that the creditor is in insolvent administrative receivership, and for this condition the relevant time is any time when the appointment of the administrative receiver is in force.

(5)Condition D is that an appointment of a provisional liquidator is in force in relation to the creditor under section 135 of the Insolvency Act 1986 (c. 45) or Article 115 of the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)), and for this condition the relevant time is any time when the appointment is in force.

(6)Condition E is that under the law of a country or territory outside the United Kingdom, circumstances exist corresponding to those described in condition A, B, C or D, and for this condition the relevant time is any time corresponding to that described in the case of the condition in question.

(7)Section 323 applies for interpreting this section as it applies for interpreting section 322(6).

Exclusion of credits for connected companies debts on release or reversal of impairments

358Exclusion of credits on release of connected companies debts: general

(1)This section applies if—

(a)a liability to pay an amount under a company’s debtor relationship is released,

(b)the release takes place in an accounting period for which—

(i)an amortised cost basis of accounting is used in respect of the relationship, and

(ii)the relationship is a connected companies relationship.

(2)The company is only required to bring a credit into account in respect of the release for the purposes of this Part if it is a deemed release.

(3)In subsection (2) “deemed release” means a release which is deemed to occur because of—

(a)section 361 (acquisition of creditor rights by connected company at undervalue), or

(b)section 362 (parties becoming connected where creditor’s rights subject to impairment adjustment).

359Exclusion of credits on release of connected companies debts during creditor’s insolvency

(1)This section applies if—

(a)a liability to pay an amount under a company’s debtor relationship is released,

(b)the release takes place in an accounting period for which an amortised cost basis of accounting is used in respect of that relationship,

(c)condition A, B, C, D or E in section 357 is met in relation to the company releasing the amount,

(d)immediately before the time when the condition in question was first met the relationship was a connected companies relationship, and

(e)immediately after that time it was not such a relationship.

(2)The company is not required to bring into account a credit in respect of the release for the purposes of this Part.

360Exclusion of credits on reversal of impairments of connected companies debts

(1)If an impairment loss is prevented from being brought into account by section 354, no credit in respect of any reversal of the impairment may be brought into account for the purposes of this Part.

(2)Nothing in this section affects the credits to be brought into account for the purposes of this Part in respect of exchange gains or losses arising from a debt.

Deemed debt releases on impaired debts becoming held by connected company

361Acquisition of creditor rights by connected company at undervalue

(1)This section applies if—

(a)a company (“D”) is a party to a loan relationship as debtor,

(b)another company (“C”) becomes a party to it as creditor,

(c)immediately after it does so C and D are connected,

(d)in a case where the person from whom C acquires its rights under the loan relationship is a company, in the period of account in which C acquires them there is no connection between C and that company,

(e)the amount or value of any consideration given by C for the acquisition is less than the pre-acquisition carrying value (see subsection (5)), and

(f)at least one of the conditions in subsection (2) is met.

(2)The conditions are that—

(a)the acquisition is not an arm’s length transaction, and

(b)there was a connection between C and D at any time in the period of 3 years beginning 4 years before the date of the acquisition.

(3)C is treated as releasing its rights under the loan relationship when it acquires them.

(4)The amount treated as released is the amount of the difference referred to in subsection (1)(e).

(5)In subsection (1)(e) “the pre-acquisition carrying value” means the amount which would be the carrying value of the liability under the loan relationship in D’s accounts if a period of account had ended immediately before C became a party to it.

(6)For the purposes of subsection (5) the carrying value is determined taking no account of—

(a)accrued amounts, or

(b)amounts paid or received in advance.

362Parties becoming connected where creditor’s rights subject to impairment adjustment

(1)This section applies if—

(a)a company (“D”) is a party to a loan relationship as debtor,

(b)another company (“C”) which—

(i)is a party to the loan relationship as creditor, and

(ii)is not connected with D,

becomes connected with D, and

(c)the pre-connection carrying value would have been adjusted for impairment if a period of account had ended immediately before the companies became connected.

(2)C is treated as releasing its rights under the loan relationship when C and D become connected.

(3)The amount treated as released is the amount of the impairment adjustment referred to in subsection (1)(c).

(4)In subsection (1)(c) “the pre-connection carrying value” means the amount that would be the carrying value of the asset representing the loan relationship in C’s accounts if a period of account had ended immediately before the companies became connected.

(5)For the purposes of subsection (4) the carrying value is determined taking no account of—

(a)accrued amounts,

(b)amounts paid or received in advance, or

(c)impairment losses.

363Companies connected for sections 361 and 362

(1)For the purposes of sections 361 and 362 there is a connection between two companies at any time if condition A or B is met at that time.

(2)Condition A is that one company has control of the other.

(3)Condition B is that both companies are under the control of the same person (but see subsection (6)).

(4)For the purposes of sections 361 and 362 there is a connection between two companies in a period of account if there is a connection between them (within subsection (1)) at any time in the period.

(5)Section 472 (meaning of “control”) applies for the purposes of this section.

(6)Condition B is not taken to be met just because two companies have been under the control of—

(a)the Crown,

(b)a Minister of the Crown,

(c)a government department,

(d)a Northern Ireland department,

(e)a foreign sovereign power, or

(f)an international organisation.

(7)Section 468 (connection between companies to be ignored in some circumstances) applies for the purposes of this section as it applies for the purposes of the provisions which apply section 466, taking references in sections 468 and 469 to the accounting period as references to the period of account.

(8)For the meaning of “international organisation”, see section 476(2) and (3).

Chapter 7Group relief claims involving impaired or released consortium debts

364Introduction to Chapter

(1)This Chapter applies if—

(a)there is (or was) a relevant consortium creditor relationship (see subsection (2)), and

(b)either—

(i)an impairment loss is or has been brought into account for the purposes of this Part for any group accounting period by the creditor, or

(ii)a debit in respect of a release of liability under the relationship is or has been so brought into account.

(2)For the purposes of this Chapter a relationship is a relevant consortium creditor relationship if—

(a)it is a creditor relationship of—

(i)a company (the “member company”), which is a member of a consortium by which a consortium company is owned, or

(ii)a company (a “group member”) which is a member of the same group of companies as the member company but is not itself a member of the consortium, and

(b)the consortium company or, if that company is a holding company, a consortium company which is a subsidiary of that company is (or was) the debtor (the “debtor consortium company”).

(3)The provisions of this Chapter—

(a)reduce debits for impairment losses and release debits under relevant consortium creditor relationships where an amount surrendered as group relief by the consortium company is claimed by a member company or group member (see section 365),

(b)provide for a corresponding reduction in credits in respect of such relationships where a reduction within paragraph (a) has occurred (see section 367),

(c)reduce claims for group relief where debits within paragraph (a) for earlier group accounting periods exceed reductions within paragraph (b) (see section 368), and

(d)provide for such claims to be carried forward where they exceed such debits (see section 369).

(4)In this Chapter “release debit” means a debit in respect of a release of liability under a relevant consortium creditor relationship.

(5)If section 403C of ICTA (amount of relief in consortium cases) applies, effect must be given to that section before effect is given to this Chapter.

(6)Expressions defined in this section have the same meaning in the other provisions of this Chapter, and sections 370 and 371 also apply for the interpretation of this Chapter.

(7)For the meaning of “impairment loss” see section 476(1).

365Reduction of impairment loss debits where group relief claimed

(1)This section applies for any group accounting period for which there is a net consortium debit.

(2)For the purposes of this Chapter there is a net consortium debit for a group accounting period if—

(a)the total of the impairment losses and release debits brought into account for that period in respect of relevant consortium creditor relationships by—

(i)the member company, and

(ii)every group member,

exceeds

(b)the total credits so brought into account by them in connection with debts owed by the companies which are the debtor consortium companies in respect of those relationships.

(3)The net consortium debit is equal to that excess.

(4)If there is a claim for that group accounting period by the member company or a group member for group relief in respect of an amount which may be surrendered as group relief by the debtor consortium companies, the debits brought into account in respect of the impairment losses and the release debits mentioned in subsection (2)(a) are reduced.

(5)The amount of reduction in the case of each of the debits referred to in subsection (4) (“the relevant debits”) is calculated as follows.

(6)This section is subject to section 366.

366Effect where credit for release brought into account on amortised cost basis

(1)This section applies if—

(a)a company releases liability under a relevant consortium creditor relationship of the company (“the release amount”), and

(b)the debtor consortium company brings into account an amount in respect of the release for any accounting period in accordance with an amortised cost basis of accounting.

(2)An amount equal to the release amount is treated for the purposes of this Chapter as not being a debit brought into account for that period in relation to the relevant consortium creditor relationship.

367Reduction of credits exceeding impairment losses

(1)This section applies if, apart from this section, for any group accounting period—

(a)the total of the impairment losses and release debits brought into account for that period in respect of relevant consortium creditor relationships by—

(i)the member company, and

(ii)every group member,

is less than

(b)the total credits so brought into account by them in connection with debts owed by the companies which are the debtor consortium companies in respect of those relationships.

(2)Those credits are reduced (but not below nil) in accordance with subsection (3).

(3)The amount of reduction in the case of each credit is calculated as follows.

368Reduction of claims where there are earlier net consortium debits

(1)This section applies if—

(a)for any group accounting period there is a claim by the member company or a group member for group relief in respect of an amount which may be surrendered as group relief by debtor consortium companies, and

(b)the total amount of the net consortium debits for earlier group accounting periods in respect of the relevant consortium creditor relationships exceeds any reductions in respect of those debits falling to be made under section 365(4).

(2)In this section that excess is referred to as “the unreduced debits amount”.

(3)If—

(a)the claim is the only claim for that period, and

(b)it exceeds the unreduced debits amount,

the claim is reduced by the unreduced debits amount.

(4)If—

(a)the claim is not the only claim for that period, and

(b)the total of the claims exceeds the unreduced debits amount,

the claim is reduced by the same proportion of the unreduced debits amount as the claim bears to that total.

(5)In any other case, the claim is reduced to nil.

369Carry forward of claims where there are no net consortium debits

(1)This section applies if for any group accounting period there is—

(a)a claim by the member company or a group member for group relief in respect of an amount which may be surrendered as group relief by debtor consortium companies (as reduced under section 368, if it applies), and

(b)no net consortium debit in respect of the relevant consortium creditor relationships.

(2)The claim (as so reduced) is carried forward and treated for the purposes of section 365—

(a)as increasing any such claim for group relief made by the claimant company for its next accounting period, or

(b)if apart from this subsection there would be no such claim, as being such a claim.

370Group accounting periods

(1)In this Chapter “group accounting period” means—

(a)any accounting period of the member company beginning on or after 1 October 2002, or

(b)any accounting period of a group member which—

(i)begins on or after that date, and

(ii)corresponds to such an accounting period of the member company.

(2)Any such accounting period of the member company and any such corresponding accounting periods of group members are treated for the purposes of this Chapter as being the same accounting period.

(3)For the purposes of this Chapter an accounting period of a group member corresponds to an accounting period of the member company if condition A, B or C is met.

(4)Condition A is that the periods coincide.

(5)Condition B is that the accounting period of the member company includes more than half of the accounting period of the group member.

(6)Condition C is that—

(a)the accounting period of the member company includes part of the accounting period of the group member, and

(b)the remainder of that period is not within any accounting period of the member company.

371Interpretation

(1)In this Chapter—

(2)Any reference in this Chapter to a company being owned by a consortium is to be read in accordance with section 413(6) of ICTA.

(3)Any reference in this Chapter to two companies being members of the same group of companies is a reference to those companies being members of the same group of companies for the purposes of Chapter 4 of Part 10 of ICTA (group relief) (see section 413(3)(a) of that Act).

Chapter 8Connected parties relationships: late interest

372Introduction to Chapter

(1)This Chapter makes provision about the debits to be brought into account for the purposes of this Part in cases where certain conditions relating to interest that is not paid or is paid late are met and there is a connection between the parties to the loan relationship.

(2)For those conditions and the rule that applies in those cases, see section 373 (late interest treated as not accruing until paid in some cases).

(3)For the kinds of connections where the rule applies, see—

(a)section 374 (connection between debtor and person standing in position of creditor),

(b)section 375 (loans to close companies by participators etc),

(c)section 377 (party to loan relationship having major interest in other party), and

(d)section 378 (loans by trustees of occupational pension schemes).

(4)For the meaning of “standing in the position of a creditor” in this Chapter, see section 379(1) (persons indirectly standing in the position of creditor).

373Late interest treated as not accruing until paid in some cases

(1)Debits relating to interest payable under a company’s debtor relationship are to be brought into account for the purposes of this Part on the assumption that the interest does not accrue until it is paid if—

(a)conditions A and B are met, and

(b)the case is within section 374, 375, 377 or 378.

(2)Condition A is that the interest is not paid within the period of 12 months following the end of the accounting period in which it would be treated as accruing apart from subsection (1).

(3)Condition B is that credits representing the full amount of the interest are not brought into account for the purposes of this Part in respect of the corresponding creditor relationship for any accounting period.

(4)For the meaning of “corresponding creditor relationship” in cases where persons indirectly stand in the position of creditor, see section 379(2).

(5)References in this Chapter to “the actual accrual period” are references to the accounting period in which the interest would be treated as accruing apart from subsection (1).

374Connection between debtor and person standing in position of creditor

(1)The case to which this section applies is where there is for the actual accrual period a connection between—

(a)the company which has the debtor relationship, and

(b)a company standing in the position of creditor as respects the loan relationship.

(2)Section 466 (companies connected for an accounting period) applies for the purposes of this section.

375Loans to close companies by participators etc

(1)The case to which this section applies is where—

(a)there is a time in the actual accrual period when the close company conditions are met, and

(b)neither the CIS-based close company conditions nor the CIS limited partnership conditions are met.

(2)The close company conditions are that—

(a)the company which has the debtor relationship (“D”) is a close company, and

(b)a person (“C”) standing in the position of creditor as respects the loan relationship is—

(i)a participator in D,

(ii)the associate of a person who is participator in D,

(iii)a company of which a participator in D has control,

(iv)a company in which a participator in D has a major interest,

(v)a person who controls a company which is a participator in D,

(vi)the associate of a person within sub-paragraph (v), or

(vii)a company controlled by a person within sub-paragraph (v).

(3)The CIS-based close company conditions are that—

(a)D is a CIS-based close company at all times when the close company conditions are met,

(b)C is not resident in a non-qualifying territory at any such time, and

(c)D is a small or medium-sized enterprise for the actual accrual period.

(4)The CIS limited partnership conditions are that—

(a)the debt is one which is owed to, or to persons acting for, a CIS limited partnership,

(b)no member of that partnership is resident in a non-qualifying territory at any time in the actual accrual period,

(c)D has received written notice from the partnership containing information from which it appears that the condition in paragraph (b) is met, and

(d)D is a small or medium-sized enterprise for the actual accrual period.

(5)Section 376 applies for the interpretation of this section.

376Interpretation of section 375

(1)For the purposes of section 375 and this section, section 414 of ICTA (meaning of “close company” in the Tax Acts) applies with the omission of section 414(1)(a) (exclusion of non-UK resident companies).

(2)A person who is a participator in a company which controls another company is treated for the purposes of section 375 and this section as being a participator in that other company also.

(3)Subject to that, in section 375 and this section “participator”, in relation to a company, means a person who is a participator in the company for the purposes of Part 11 of ICTA because of section 417 of that Act, but not a person who is a participator for those purposes just because of being a loan creditor of the company.

(4)Section 472 (meaning of “control”) applies for the purposes of section 375 and this section.

(5)In section 375—

377Party to loan relationship having major interest in other party

The case to which this section applies is where—

(a)a person (“C”) standing in the position of a creditor as respects the loan relationship is a company, and

(b)there is a time in the actual accrual period when—

(i)the company which has the debtor relationship (“D”) has a major interest in C, or

(ii)C has a major interest in D.

378Loans by trustees of occupational pension schemes

(1)The case to which this section applies is where—

(a)the loan is one made by trustees of an occupational pension scheme, and

(b)condition A, B or C is met.

(2)Condition A is that there is a time in the actual accrual period when the company which has the debtor relationship (“D”) is the employer of employees to whom the scheme relates.

(3)Condition B is that there is a connection between D and such an employer for the actual accrual period.

(4)Condition C is that a company is such an employer and there is a time in the actual accrual period when—

(a)D has a major interest in that company, or

(b)that company has a major interest in D.

(5)In this section “occupational pension scheme” has the meaning given in section 150(5) of FA 2004.

(6)Section 466 (companies connected for an accounting period) applies for the purposes of this section.

379Persons indirectly standing in the position of creditor

(1)For the purposes of this Chapter a person is treated as standing in the position of a creditor as respects a loan relationship if the person indirectly stands in that position by reference to a series of loan relationships or relevant money debts.

(2)If—

(a)a person (“C”) indirectly stands in the position of creditor as respects a loan relationship by reference to such a series of relationships or debts, and

(b)section 373 (late interest treated as not accruing until paid in some cases) applies in relation to the debtor relationship because of subsection (1),

the reference in section 373(3) to the corresponding creditor relationship is a reference to C’s creditor relationship.

(3)In subsection (1) “relevant money debt” means a money debt which would be a loan relationship if a company directly stood in the position of creditor or debtor.

Chapter 9Partnerships involving companies

380Partnerships involving companies

(1)This section applies if—

(a)a trade or business is carried on by a firm,

(b)any of the partners in the firm is a company (a “company partner”), and

(c)a money debt is owed by or to the firm.

(2)In calculating the profits and losses of the trade or business for corporation tax purposes under section 1259 (calculation of firm’s profits or losses), no credits or debits may be brought into account under this Part—

(a)in relation to the money debt, or

(b)in relation to any loan relationship that would fall to be treated for the purposes of the calculation as arising from the money debt.

(3)Instead, each company partner must bring credits and debits into account under this Part in relation to the debt or relationship for each of its accounting periods in which the conditions in subsection (1) are met.

(4)The following provisions of this Chapter contain special rules about the credits and debits to be brought into account under subsection (3)—

(a)section 381 (determinations of credits and debits by company partners: general),

(b)section 382 (company partners using fair value accounting),

(c)section 383 (lending between partners and the partnership),

(d)section 384 (treatment of exchange gains and losses), and

(e)section 385 (company partners' shares where firm owns deeply discounted securities).

(5)In those provisions “company partner” has the same meaning as in this section.

381Determinations of credits and debits by company partners: general

(1)The credits and debits to be brought into account under section 380(3) are to be determined separately for each company partner as follows.

(2)The money debt owed by or to the firm is treated as if—

(a)it were owed by or, as the case may be, to the company partner, and

(b)it were so owed for the purposes of the trade or business which the company partner carries on.

(3)If the money debt arises from a transaction for the lending of money—

(a)it continues to be treated as so arising, and

(b)accordingly the company partner is treated as having a loan relationship.

(4)Anything done by or in relation to the firm in connection with the money debt is treated as done by or in relation to the company partner.

(5)The credits and debits in the case of each company partner are the partner’s appropriate share of the total credits and debits determined in accordance with subsections (2) to (4) (without any reduction for the fact that the debt is treated as owed by or to each company partner).

(6)A company partner’s “appropriate share” is the share that would be apportioned to it on the assumption in subsection (7).

(7)The assumption is that the total credits and debits determined in accordance with subsections (2) to (4) are apportioned between the partners in the shares in which any profit or loss would be apportioned between them in accordance with the firm’s profit-sharing arrangements.

382Company partners using fair value accounting

(1)This section applies if a company partner uses fair value accounting in relation to its interest in the firm.

(2)The credits and debits to be brought into account by the company partner under section 380(3) are to be determined on the basis of fair value accounting.

383Lending between partners and the partnership

(1)This section applies if—

(a)the money debt owed by or to the firm arises from a transaction for the lending of money, and

(b)there is a time in an accounting period of a company partner (“the relevant accounting period”) when conditions A, B and C are met.

(2)Condition A is that—

(a)if the debt is owed by the firm, the company partner stands in the position of a creditor and accordingly has a creditor relationship, and

(b)if the debt is owed to the firm, the company partner stands in the position of a debtor and accordingly has a debtor relationship.

(3)Condition B is that the company partner controls the firm either alone or taken together with one or more other company partners connected with the company partner (see subsection (7)).

(4)Condition C is that the company partner or any other company partner is treated under section 381(3) as if—

(a)it had the debtor relationship which corresponds to the creditor relationship mentioned in subsection (2)(a), or

(b)it had the creditor relationship which corresponds to the debtor relationship mentioned in subsection (2)(b).

(5)If this section applies, for the purposes of this Part for the relevant accounting period there is taken to be a connection between—

(a)the company partner, and

(b)each company partner that is within subsection (4) (including the company partner itself if it is within that subsection),

as a result of one of them having control of the other at a time in the period for the purposes of section 466(2).

(6)The provisions of this Part about connected companies relationships apply accordingly.

(7)For the purposes of subsection (3), one company partner is connected with another at any time in an accounting period if at that or any other time in the accounting period—

(a)one controls the other, or

(b)both are under the control of the same person.

(8)Section 472 (meaning of “control”) applies for the purposes of this section.

384Treatment of exchange gains and losses

(1)Whether credits and debits in respect of exchange gains and losses are to be brought into account by a company partner under this Chapter as a result of section 328(1), or that section is disapplied by section 328(3), depends on the firm’s accounts.

(2)Section 328(3) applies only so far as exchange gains and losses are recognised in the firm’s statement of total recognised gains and losses, statement of recognised income and expense, statement of changes in equity or statement of income and retained earnings.

(3)Accordingly, a company partner must bring credits and debits into account under this Chapter in respect of exchange gains and losses which are not so recognised.

(4)For the meaning of references in this section to exchange gains and losses, see section 475.

385Company partners' shares where firm owns deeply discounted securities

(1)This section applies if the firm holds a deeply discounted security.

(2)Each partner is treated for the purposes of this Chapter as beneficially entitled to the share of the security specified in subsection (3).

(3)That share is the share to which the partner would be entitled if—

(a)all the partners were companies, and

(b)the security were apportioned in the shares in which any profit or loss would be apportioned between them in accordance with the firm’s profit-sharing arrangements.

(4)In this section “deeply discounted security” has the same meaning as in Chapter 8 of Part 4 of ITTOIA 2005 (profits from deeply discounted securities) (see section 430 of that Act).

Chapter 10Insurance companies

Introduction

386Overview of Chapter

(1)This Chapter contains special rules about the treatment of the loan relationships of insurance companies.

(2)In particular, it—

(a)provides for special rules to apply in relation to an insurance company’s non-trading deficits referable to BLAGAB instead of those in Chapter 16 (see sections 387 to 391),

(b)excludes some loan relationships of corporate members of Lloyd’s from this Part (see section 392), and

(c)provides for the determination of questions concerning how far certain matters are referable to any particular category of a company’s long-term business (see sections 393 and 394).

(3)For further special rules affecting insurance companies, see—

(a)section 298(3) (under which activities carried on by a company in the course of mutual insurance business which is not life assurance business or of BLAGAB are treated as not constituting a trade or part of a trade),

(b)Chapter 4 (continuity of treatment on transfers within groups or on reorganisations), and, in particular, sections 335(1) and (2), 336(4) and 337,

(c)section 405 (certain non-UK residents with interest on 3½% War Loan 1952 Or After),

(d)sections 468 and 471 (connection between creditor and debtor companies to be ignored in some cases where creditor is insurance company carrying on BLAGAB),

(e)section 483(6) (treatment of deferred acquisition costs and provision for unearned premiums or for unexpired risks as a money debt for the purposes of Chapter 2 of Part 6 in the case of companies carrying on insurance business), and

(f)section 486(4) (no exchange gains or losses to arise for the purposes of that Chapter where relevant debts prevented from being deductible as expenses of insurance companies at Step 1 of section 76(7) of ICTA).

(4)In this Chapter “BLAGAB” means basic life assurance and general annuity business.

Treatment of deficit on basic life assurance and general annuity business

387Treatment of deficit on basic life assurance and general annuity business: introduction

(1)Sections 388 to 391 apply instead of Chapter 16 (non-trading deficits) if a company has a non-trading deficit from its loan relationships for BLAGAB for any accounting period.

(2)In those sections “the deficit” and “the deficit period” mean that deficit and that period respectively.

388Basic rule: deficit set off against income and gains of deficit period

(1)The basic rule is that the deficit must be set off against any income and gains of the deficit period which are referable to BLAGAB.

(2)The income and gains are reduced accordingly.

(3)Any such reduction is made before any expenses deduction under section 76 of ICTA (expenses of insurance companies).

389Claim to carry back deficit

(1)If the deficit exceeds the income and gains for the deficit period referred to in section 388(1), the company may make a claim for the whole or part of the excess (“the claim amount”)—

(a)to be carried back for up to 3 accounting periods ending within the permitted period, and

(b)to be set off against the available profits of the company in those periods in accordance with subsection (2).

(2)The claim amount reduces the company’s available profits in the most recent accounting period of the company, before any remainder reduces those in the next most recent accounting period and then those in the next most recent accounting period.

(3)For the meaning of “available profits”, see section 390.

(4)In this section and that section “permitted period” means the period of 12 months immediately before the deficit period.

(5)A claim under this section must be made—

(a)within the period of 2 years after the end of the deficit period, or

(b)within such further period as an officer of Revenue and Customs allows.

390Meaning of “available profits”

(1)For the purposes of section 389 the available profits of the company for an accounting period are its BLAGAB non-trading loan relationships profits for the period (see subsection (4)), less the unused part of the relevant deductions for the period (see subsection (5)).

(2)If an accounting period ending within the permitted period begins before it, only a part of the amount which would otherwise be the available profit for that accounting period is available profit.

(3)That part is so much as is proportionate to the part of the accounting period in the permitted period.

(4)References in this section to a company’s BLAGAB non-trading loan relationships profits for an accounting period are references to the amount (if any) which is chargeable to tax for that period under section 299 (charge to tax on non-trading profits) for the company’s BLAGAB.

(5)The unused part of the relevant deductions for an accounting period is found as follows.

(6)In the case of any claim under section 389, the reference in Step 1(a) in subsection (5) to the expenses deduction for an accounting period given by Step 8 in section 76(7) of ICTA and the reference in Step 2(a) in subsection (5) to the deduction for expenses as a result of section 76 of ICTA for an accounting period are references to the deduction for expenses that would have been made as a result of that section for that period on the assumptions in subsections (7) and (8).

(7)The first assumption is that no account is taken of—

(a)that claim, or

(b)any other claim under section 389 relating to a deficit for an accounting period after the deficit period.

(8)The second assumption is that all such adjustments are made as are required as a result of any sum having been carried back under the Corporation Tax Acts to the accounting period mentioned in subsection (5), otherwise than as a result of—

(a)the claim mentioned in subsection (6), or

(b)any such other claim as is mentioned in subsection (7)(b).

391Carry forward of surplus deficit to next accounting period

(1)This rule applies if any of the deficit is not—

(a)set off against the income and gains referred to in section 388(1), or

(b)set off against the profits referred to in section 389(1) as the result of a claim under that section.

(2)That deficit must be carried forward to the accounting period immediately after the deficit period (“the next period”).

(3)Any deficit so carried forward is treated for the purposes of the Corporation Tax Acts (including sections 388 to 390) as expenses payable which—

(a)are referable to the next period, and

(b)are to be brought into account at Step 3 in section 76(7) of ICTA (expenses of insurance companies).

Exclusion of loan relationships of members of Lloyd's

392Exclusion of loan relationships of members of Lloyd's

(1)This section applies to any loan relationship of a corporate member of Lloyd's.

(2)This Part does not apply as respects the relationship so far as rights or liabilities under it or securities representing it are—

(a)assets forming part of the member’s premium trust fund, or

(b)liabilities attached to that fund.

(3)In this section “corporate member” and “premium trust fund” have the same meaning as in Chapter 5 of Part 4 of FA 1994 (Lloyd’s underwriters: corporations etc) (see section 230(1) of that Act).

Determination of questions requiring apportionments

393General rules for some debtor relationships

(1)This section applies if a debtor relationship of an insurance company is represented by a liability which is a liability of its long-term insurance fund.

(2)Any question arising for the purposes of the Corporation Tax Acts as to how far any credits or debits given for the purposes of this Part in respect of the liability are referable to any particular category of the company’s long-term business is determined as follows.

(3)In the case of credits and debits within the rules in section 394, that section applies.

(4)In the case of other credits and debits, the relevant fraction of the credits or debits is referable to a category of long-term business.

(5)That fraction is determined by applying section 432A(6) to (6B) and (8) of ICTA (apportionment of income and gains) as if—

(a)the credits or debits were income not directly referable to any category of business, and

(b)the references in section 432A(6) to assets directly referable to a category of business were references to assets linked to that category.

394Special rules for some debtor relationships

(1)This section sets out the rules referred to in section 393(3) as to how far certain credits or debits given for the purposes of this Part in respect of liabilities representing a debtor relationship of an insurance company which are liabilities of its long-term insurance fund are referable to any particular category of its long-term business.

(2)If the liabilities are liabilities of an internal linked fund of the company relating to one category of long-term business, the credits or debits are referable to that category.

(3)If the liabilities are liabilities of an internal linked fund of the company relating to two or more such categories, the credits or debits are referable to those categories in the same proportions as the linked assets in the fund are apportioned to them under section 432ZA(4) of ICTA (linked assets).

(4)If—

(a)the liabilities arise from deposit back arrangements, and

(b)the business reinsured by the arrangements under which the deposit back arrangements are made (“the reinsurance arrangements”) is within one category of long term business,

the credits or debits are referable to that category.

(5)If—

(a)the liabilities arise from deposit back arrangements, and

(b)the business reinsured by the reinsurance arrangements is within two or more such categories,

the credits or debits are referable to those categories in the same proportions as the relevant proportions of the liabilities reinsured by the arrangements which are liabilities relating to those categories.

(6)For the purposes of subsection (5) “relevant proportion”, in relation to reinsured liabilities of any particular category of business, means the average of—

(a)the proportion of all the reinsured liabilities that are liabilities relating to that category at the beginning of the period of account, and

(b)the proportion of all the reinsured liabilities that are liabilities relating to that category at the end of that period.

(7)Debits relating to interest payable in respect of the late payment of any benefits are referable to the category of long-term business that comprises the effecting and carrying out of the policies or contracts under which the benefits are payable.

Chapter 11Other special kinds of company

Investment trusts' and venture capital trusts' creditor relationships

395Investment trusts: profits or losses of a capital nature

(1)Profits or losses of a capital nature arising to an investment trust from a creditor relationship may not be brought into account as credits or debits for the purposes of this Part.

(2)For the purposes of this section “profits or losses of a capital nature” means profits or losses that—

(a)are accounted for through the capital column of the income statement in accordance with the Statement of Recommended Practice, or

(b)would have been so accounted for if that Statement had been applied correctly.

(3)“The Statement of Recommended Practice”, in relation to an accounting period for which it is required or permitted to be used, means—

(a)the Statement of Recommended Practice relating to Investment Trust Companies, issued by the Association of Investment Trust Companies in January 2003, as from time to time modified, amended or revised, or

(b)any subsequent Statement of Recommended Practice relating to investment trusts, as from time to time modified, amended or revised.

(4)The Treasury may by order amend the definition of “profits or losses of a capital nature” in subsection (2), so far as it applies in relation to an investment trust that prepares accounts in accordance with international accounting standards.

(5)An order under subsection (4) may make—

(a)different provision for different cases, and

(b)incidental, supplemental, consequential and transitional provision and savings.

396Venture capital trusts: profits or losses of a capital nature

(1)Profits or losses of a capital nature arising to a venture capital trust from a creditor relationship may not be brought into account as credits or debits for the purposes of this Part.

(2)For the purposes of this section “profits or losses of a capital nature” means profits or losses that—

(a)are accounted for through the capital column of the income statement in accordance with the Statement of Recommended Practice, or

(b)would have been so accounted for if the venture capital trust had been an investment trust and that Statement had been applied correctly.

(3)In this section “the Statement of Recommended Practice” has the meaning given in section 395(3) (investment trusts: profits or losses of a capital nature).

(4)The Treasury may by order amend the definition of “profits or losses of a capital nature” in subsection (2), so far as it applies in relation to a venture capital trust that prepares accounts in accordance with international accounting standards.

(5)An order under subsection (4) may make—

(a)different provision for different cases, and

(b)incidental, supplemental, consequential and transitional provision and savings.

Credit unions

397Credit unions

(1)In calculating the income of a credit union for any accounting period, no credit is to be brought into account for the purposes of this Part in respect of a loan relationship of the union if a member of the union stands in the position of debtor in relation to the debt in question.

(2)But subsection (1) does not apply if the credit union—

(a)is obliged to make a return under section 887(2) of ITA 2007 for the accounting period, and

(b)has not done so within—

(i)3 months after the end of the period, or

(ii)such longer period as an officer of Revenue and Customs allows.

(3)No debit is to be brought into account for the purposes of this Part in respect of a loan relationship of a credit union if a member of the union stands in the position of creditor in relation to the debt in question.

Chapter 12Special rules for particular kinds of securities

Introduction

398Overview of Chapter

(1)This Chapter sets out rules relating to the holding of particular kinds of securities.

(2)In particular, see—

(a)sections 399 to 405 (gilt-edged securities),

(b)sections 406 to 412 (deeply discounted securities: connected companies and close companies),

(c)sections 413 and 414 (funding bonds),

(d)sections 415 to 419 (derivatives), and

(e)section 420 (assumptions where options etc apply).

(3)For other special rules about deeply discounted securities, see section 385 (company partners' shares where firm owns deeply discounted securities).

Gilt-edged securities

399Index-linked gilt-edged securities: basic rules

(1)This section applies if a loan relationship is represented by an index-linked gilt-edged security.

(2)The amounts to be brought into account for the purposes of this Part are to be determined using fair value accounting.

(3)But, in calculating those amounts, the adjustment specified in section 400 (adjustments for changes in index) must be made if that section applies.

(4)In this section and section 400 “index-linked gilt-edged securities” means any gilt-edged securities under which the amounts of the payments are determined wholly or partly by reference to the retail prices index.

(5)For the meaning of “gilt-edged securities”, see section 476(1).

400Index-linked gilt-edged securities: adjustments for changes in index

(1)This section applies if—

(a)the amounts to be brought into account for the purposes of this Part in respect of a gilt-edged security fall to be determined by reference to its value at two different times, and

(b)there is a change in the retail prices index between the earlier and the later time.

(2)If that change is an increase, the carrying value of the security at the earlier time is increased by the same percentage as the percentage increase in the retail prices index betwee