Chapter 3: Company with investment business: restrictions on relief: general provision
Overview
2102.Chapter 3 is the second of four Chapters dealing with various kinds of loss buying. It has the following structure.
Section 677 (introduction) lays down the conditions for the Chapter to apply and defines some key terms.
If the Chapter applies, section 678 (notional split of accounting period in which change in ownership occurs) sets the stage. It splits the period in which the change in ownership occurs into two notional accounting periods, and indicates that certain amounts need to be apportioned between these two periods.
Sections 679 to 684 are a group of six sections restricting various kinds of corporation tax relief. If, having reviewed them, the reader is satisfied that in the case under review these sections make no practical difference, the reader is able to conclude that there is in practice no need to make the apportionments required by section 678.
Sections 685 and 686 are the detailed rules for making apportionments of amounts for the purposes of this Chapter.
Section 687 provides for the adjustment of balancing charges in certain cases in which corporation tax relief is restricted.
Sections 688 to 691 define “significant increase in the amount of a company’s capital”.
Section 677: Introduction to Chapter
2103.This section introduces the Chapter. It is based on sections 768B, 768D and 768E of ICTA. If, having read this section, the reader is satisfied that the conditions for this Chapter to apply are not met, the reader need read no further in this Chapter.
2104.Subsections (1) to (4) lay down the conditions for the Chapter to apply.
2105.Subsection (1) is based on, among other things, section 768D(1)(a)(i) of ICTA. Unlike section 768D(1) of ICTA, subsection (1) does not refer to a change in the ownership of a company carrying on a UK property business; it refers to a change in the ownership of a company with investment business. The reason is that, if section 768D(1)(a)(i) of ICTA applies, then:
There is a change in the ownership of a company carrying on a UK property business (see the opening words of section 768D(1)); and
The company whose ownership has changed is a company with investment business (see the opening words of section 768D(1)(a)).
2106.Accordingly, if section 768D(1)(a)(i) of ICTA applies, there is by implication a change in the ownership of a company with investment business. There is therefore no need for section 768D(1)of ICTA to pick up the opening words of section 768B of that Act.
2107.Subsection (5) defines, non-exhaustively, “major change in the nature or conduct of a business”.
Section 678: Notional split of accounting period in which change in ownership occurs
2108.This section deems the accounting period in which the change in ownership occurs to be split into two notional accounting periods for the purposes of this Chapter. It is based on sections 768B, 768D and 768E of ICTA.
2109.Subsection (3) requires amounts for the actual accounting period to be apportioned between the two notional accounting periods in accordance with section 685.
Section 679: Restriction on debits to be brought into account
2110.This section restricts debits on the company’s loan relationships in cases in which this Chapter applies. It is based on section 768B of ICTA and paragraph 9 of Schedule 28A to that Act.
2111.This section is the first of a group of six sections (sections 679 to 684) imposing restrictions on corporation tax relief. The first four of these sections restrict reliefs given by CTA 2009, and are arranged in the order in which those reliefs appear in that Act. The fifth and sixth of those sections restrict relief for property business losses, and are arranged in the order in which those reliefs appear in Chapter 4 of Part 4 of this Act.
2112.Section 574 of CTA 2009 provides that non-trading credits and debits from derivative contracts are to be brought into account as if they were non-trading credits or non-trading debits for the purposes of Part 5 of CTA 2009 in respect of loan relationships of the company. The reference to that section in section 768B(10) of ICTA is otiose. Subsection (1) therefore omits it.
2113.Subsections (2) to (4) set out the consequences of the apportionment made under section 678.
2114.“Relevant non-trading debits” in subsections (2) and (3) translates “debitsfalling within paragraph 11 below” in paragraph 9(2) of Schedule 28A to ICTA. Subsection (5) tells the reader where this expression is defined.
Section 680: Restriction on the carry forward of non-trading deficit from loan relationships
2115.This section restricts relief for the company’s non-trading deficit on its loan relationships in cases in which this Chapter applies. It is based on section 768B of, and paragraph 9A of Schedule 28A to, ICTA.
2116.Debits and deficits have different functions in the loan relationships regime, therefore this Chapter imposes different restrictions on them.
2117.Section 574 of CTA 2009 provides that non-trading credits and debits from derivative contracts are to be brought into account as if they were non-trading credits or non-trading debits for the purposes of Part 5 of CTA 2009 in respect of loan relationships of the company. The reference to that section in section 768B(10) of ICTA is otiose. Subsection (1) therefore omits it.
Section 681: Restriction on relief for non-trading loss on intangible fixed assets
2118.This section restricts relief for the company’s non-trading loss on its intangible fixed assets in cases in which this Chapter applies. It is based on section 768E of ICTA.
2119.Subsection (3) corrects a drafting error in section 768E(5) of ICTA. This is a minor change in the law. See Change 49 in Annex 1. A similar correction is made in section 698(4).
Section 682: Restriction on the deduction of expenses of management
2120.This section restricts relief for the company’s expenses of management in cases in which this Chapter applies. It is based on section 768B of ICTA.
2121.In rewriting section 768B(6), subsection (2) inserts “as” before the second occurrence of “expenses of management”, to correct a drafting slip in paragraph 3(3)(b) of Schedule 6 to FA 2004.
2122.Section 768B(7) and (9)(b) of ICTA are not rewritten. See the commentary on the amendments made to that section by Schedule 1.
Section 683: Disallowance of UK property business losses
2123.This section restricts relief for the company’s UK property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA.
Section 684: Disallowance of overseas property business losses
2124.This section restricts relief for the company’s overseas property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA.
2125.Section 768D(9) of ICTA has to be read as implying that, in a case in which section 768D applies in relation to an overseas property business, references to section 392A of ICTA have to be read as references to the corresponding provisions of section 392B of ICTA. Otherwise section 768D of ICTA applies in such a case but does not actually do anything. This section therefore refers to section 66, which is based on section 392B of ICTA.
2126.Section 768D(5) of ICTA can have no application in relation to an overseas property business, and is therefore not rewritten in this section.
Section 685: Apportionment of amounts
2127.This section stipulates how various amounts are to be apportioned for the purposes of this Chapter. It is based on section 768E of, and paragraphs 6, 7 and 8 of Schedule 28A to, ICTA.
2128.The source legislation obliges the reader to tally sub-paragraphs of paragraph 6 of Schedule 28A to ICTA with sub-paragraphs of paragraph 7(1) of that Schedule. This is inconvenient, as the sub-paragraphs are not always in one-to-one correspondence and the legislation has been amended several times. Paragraphs 6 and 7(1) of that Schedule have therefore been rewritten in subsection (2) as a two-column table.
2129.Detailed comments on the table are given below.
| Row | Origin |
|---|---|
| 1 and 2 | Paragraphs 6(da) and 7(1)(c) of Schedule 28A to ICTA. In rows 1 and 2, the opportunity has been taken to deal with profits and deficits separately. |
| 3 | Paragraphs 6(db) and 7(1)(d)(i) and (e)(i) of Schedule 28A to ICTA. |
| 4 | Paragraphs 6(dc) and 7(1)(b) of Schedule 28A to ICTA. |
| 5 | Paragraphs 6(de) and 7(1)(g) of Schedule 28A to ICTA. |
| 6 | Paragraphs 6(df) and 7(1)(h) of Schedule 28A to ICTA. |
| 7 | Paragraphs 6(a) and 7(1)(a) of Schedule 28A to ICTA. |
| – | Paragraphs 6(b) and 7(1)(aa) of Schedule 28A to ICTA are repealed as obsolete. See the commentary on the amendments made to section 768B of ICTA by Schedule 1. |
| 8 | Paragraphs 6(c) and 7(1)(b) of Schedule 28A to ICTA. |
| 9 | Paragraphs 6(d) and 7(1)(c) of Schedule 28A to ICTA. |
| 10 | Paragraphs 6(e) and 7(1)(c) of Schedule 28A to ICTA. |
2130.In rewriting paragraph 8 of Schedule 28A to ICTA, subsection (3) omits both instances of “appears”. See the commentary on section 674.
Section 686: Meaning of certain expressions in section 685
2131.This interpretative section is based on paragraphs 6, 6A and 7 of Schedule 28A to ICTA. The subsections of this section are arranged in the order of the rows to which they refer in the table in section 685(2).
Section 687: Adjustment to balancing charges if relief is restricted
2132.This section prevents double taxation in certain cases within sections 679, 680 and 682. It is based on sections 768 and 768B of ICTA.
2133.This section has the same function in this Chapter as section 675 has in Chapter 2. See the commentary on that section.
2134.Section 574 of CTA 2009 provides that non-trading credits and debits from derivative contracts are to be brought into account as if they were non-trading credits or non-trading debits for the purposes of Part 5 of that Act in respect of loan relationships of the company. The reference to that section in section 768B(13) of ICTA is otiose. Subsection (2) therefore omits it.
2135.Section 768(6) and (7) of ICTA use the expression “allowance or deduction”. Since “or deduction” adds nothing to “allowance”, subsections (4) to (6) omit “or deduction” as otiose.
Section 688: Meaning of “significant increase in the amount of a company’s capital”
2136.This section is the first of a group of four sections which together define “significant increase in the amount of a company’s capital” for the purposes of condition A in section 677(2). It is based on paragraphs 1 and 2 of Schedule 28A to ICTA.
Sections 689 and 690: Amount A; amount B
2137.Theseinterpretative sectionsare based on paragraphs 3 and 4 of Schedule 28A to ICTA.
Section 691: Meaning of “amount of capital”
2138.This interpretative section is based on paragraph 5 of Schedule 28A to ICTA.
2139.In paragraph 5(1) of Schedule 28A to ICTA, “the capital of a company” has to be read as “the amount of the capital of a company”. Otherwise, in paragraph 3(1) of that Schedule, “the amount of the company’s capital” has to be read as “the amount of the aggregate of (a) the amount of …”. Subsection (2) makes this clear.
2140.Paragraph 5(3) of Schedule 28A to ICTA provides for amounts of capital to be rounded up to the nearest pound.Subsection (4) omits this requirement because it has no practical effect.
