Chapter 5: Companies with relevant IP losses: set-off amount
187.New section 357E identifies a set-off amount where a company has a relevant IP loss for an accounting period that is equal to those losses. This is subject to the transitional rules for the Financial Years 2013 to 2016 whereby the relevant IP profits or losses for the period are reduced to a specified proportion, as set out in paragraph 8(3) of the Schedule.
188.New sections 357EA to EE describe how this set-off amount is to be dealt with in the computations. The principle underlying these rules is that the set-off amount should be matched with an amount of relevant IP profits either in another trade of the company, in other group members who have made an election under new section 357A, or in a later accounting period, to reduce an amount of relevant IP profits in respect of which new section 357A can apply to give a deduction from the corporation profits of the trade.
189.New section 357EA provides that the set-off amount is first allocated against any relevant IP profits arising in the same accounting period in respect of another trade of the company.
190.New section 357EB(1) sets out the rules for allocating a set-off amount where a company is a member of a group in which more than one company has made an election under new section 357A. The effect of the allocation is to reduce both the set-off amount and the relevant IP profits of the other trade to which an election under new section 357A has effect by the lesser of those two amounts.
191.New sections 357EB(2) to (4) provide that where there is another company in the same group that has relevant IP profits for a relevant accounting period, any set-off amount not allocated against another trade of the company is to be allocated against the relevant IP profits of that other company. The effect of the allocation rule is to reduce both the set-off amount, and the relevant IP profits of the trade of other company to which new section 357A can apply, by the lesser of the remaining set-off amount and the relevant IP profits.
192.New section 357EB(5) allows the group companies to jointly determine in which order the set-off amount is to be applied to them where there is more than one company in the group with relevant IP profits against which the set-off amount can be allocated.
193.New section 357EB(6) sets out the order in which the allocation is to be made in the absence of any joint determination by companies in the group. This is firstly to the trade of the company with the highest amount of relevant IP profits, then that with the next highest profits, and so on until the either all of the set-amount has been allocated or there are no relevant IP profits remaining against which to allocate the remainder.
194.New section 357EC sets out the rules for carrying forward a set-off amount.
195.New section 357EC(1) specifies that the rule applies where some of a set-off amount remains after any allocation has been made against relevant IP profits in other trades in the company, or other relevant group members.
196.New sections 357EC(2) and (3) provide that any set-off amount which remains unallocated from an earlier accounting period is first allocated against relevant IP profits of the company in which the set-off amount arose for the following accounting period. New section 357A does not apply to a matching amount of relevant IP profits.
197.New section 357EC(4) sets out that where any of the set-off amount remains after any allocation has been made against relevant IP profits of the company in the following accounting period, it is treated as a set-off amount for this subsequent accounting period. The allocation rules in the chapter, for instance the group rules in new section 357EB, may then apply to that remaining amount.
198.New section 357EC(5) specifies that where a company has carried forward all or part of a set-off amount, this is to be added to any relevant IP losses in the later period, such that the set-off amount for that period is the sum of the two figures, and the allocation rules in the chapter may then apply to that amount.
199.New section 357ED ensures that where a company in a group ceases to carry on a trade, any set-off amount incurred in the trade which has not been reduced to nil by the operation of new sections 357EA or 357EB continues to be carried forward until such time as it has been fully allocated against relevant IP profits of other members of the group.
200.New sections 357ED (1) to (3) set out how any unallocated set-off amount is dealt with where a company in a group ceases to carry on a trade, no longer falls within the charge to corporation tax, or where an election under new section 357A otherwise ceases to have effect for any reason.
201.New section 357ED(3) specifies that new sections 357EA to 357EC will apply with some modifications to any set-off amount incurred in the company’s trade, or trades, which has yet to be allocated against relevant IP profits.
202.New section 357ED(4) modifies the wording of new section 357EB so that it applies in situations where a company ceases to trade, no longer falls within the corporation tax charge or an election under new section 375A ceases to have effect. The modifications act to transfer the unallocated set-off amount to a relevant group member. In the absence of a joint determination to the contrary, this will be the relevant group member with the highest amount of relevant IP profits in that accounting period. However if there are no relevant group members with relevant IP profits for the accounting period, the unallocated set-off amount is to be added to the set-off amount of the company with the largest set-off amount in that accounting period.
203.New sections 357ED(5) to (6) determine when any unallocated set-off amount will finally be extinguished. Where a company is not a member of a group, the amount is extinguished only when the company ceases to carry on any trade. Where a company is a member of a group, the set-off amount will remain to be allocated amongst other members of the group until such time as there is no company in the group that has made an election under new section 357A and is a qualifying company for the accounting period.
204.New section 357EE provides for the transfer of any unallocated set-off amount where the trade of a company is transferred to another group company.
205.New section 357EE(2) directs that in such cases the set-off amount is to become the unallocated set-off amount of the other group company for the accounting period in which it begins to carry on the transferred trade. Where the group company which acquires the trade already has an unallocated set-off amount, the unallocated set-off amount of the transferor company is added to the set-off amount of the transferee company.
206.New section 357EF sets out the tax treatment of payments made between members of a group of companies as compensation for the transfer of relevant IP losses. So long as the payment does not exceed the amount of the relevant IP losses transferred, it will be ignored for the purposes of calculating the corporation tax profits or losses of the company that makes or receives the payment, and neither will it fall to be treated as a distribution.
