Section 34, Schedule 14 Transfer of Deductions
Summary
1.Section 34 introduces a new Part 14A in Corporation Tax Act 2010 (CTA 2010) which includes two new substantive restrictions on the circumstances in which deductible amounts may be brought into account where there has been a qualifying in relation to a company (C). The deductible amounts are ones which, at the date of the qualifying change (the “relevant day”), can be regarded as highly likely to arise as deductions for an accounting period ending on or after that day. The first restriction is on claims for group relief and relief for trade losses against total profits for deductible amounts in accounting periods ending on or after the relevant day where the purpose, or one of the main purposes, of arrangements connected to the qualifying change is for the deductible amounts to be the subject of, or brought into account as a deduction in, such a claim. The second restriction is in respect of deductible amounts where there are ‘profit transfer arrangements’ (i.e. arrangements which result in an increase in the total profits of C, or a company connected to C) where the purpose, or one of the main purposes, of those arrangements is to bring the deductible amount into account as a deduction in any accounting period ending on or after the relevant day.
Details of the Schedule
2.Schedule 14 amends CTA 2010 by introducing a new Part 14A with the heading “Transfer of Deductions.”
3.New Section 730A provides an overview of the Part.
4.New Section 730B explains the meaning of “deductible amount” and “qualifying change”. A “deductible amount” is any expense of a trade or property business, an expense of management of an investment business, non-trading debits within the meaning of Parts 5 and 6 of the Corporation Tax Act 2009 (CTA 2009) (loan relationships, derivative contracts) or a non-trading debit within the meaning of Part 8 CTA 2009 (intangible fixed assets). “Deductible amount” does not include any amount that has been taken into account in determining RTWDV within the meaning of Chapter 16A of Part 2 of Capital Allowances Act 2001 (CAA 2001). A “qualifying change” has the same meaning in Part 14A as in Chapter 16A of Part 2 CAA 2001. Subsection (2) explains the references to bringing an amount into account “as a deduction”.
5.New Section 730C provides for the restriction which applies to disallow deductible amounts for relevant claims.
6.Subsection 1 applies the section where a relevant claim is made for an accounting period on or after the qualifying change.
7.Subsection 2 defines a relevant claim as a claim for relief for trade losses against total profits (under section 37 of CTA 2010) or group relief (under Chapter 4 of Part 5 of CTA 2010) by C or a company connected with C.
8.Subsection 3 provides that if two conditions (A and B) are met the deductible amount may not be the subject of, or brought into account as a deduction in, a relevant claim.
9.Subsection 4 applies to allow any amount that could have been claimed or brought into account as a deduction in the claim if there had not been a qualifying change.
10.Subsection 5 explains condition A: on the relevant day it is highly likely that the deductible amount would be the subject of, or brought into account as a deduction in a relevant claim for an accounting period ending on or after the relevant day.
11.Subsection 6 explains that what is “highly likely” is determined having regard to any arrangements or events that take place on or before the qualifying change.
12.Subsection 7 explains condition B: where the purpose, or one of the main purposes, of any “change arrangements” is for the deductible amount to be the subject of, or brought into account as a deduction in a relevant claim.
13.Subsection 8 defines change arrangements as arrangements made to bring about or other connected to the qualifying change.
14.Subsection 9 provides that section 730C does not apply to a deductible amount to the extent that section 730D (2) applies to it (in s.730C(9)(a)) or a loss, or any part of a loss, to which section 433(2) of CTA 2010 applies (“sale of lessors”), derives from it (in s730C(9)(b)).
15.New Section 730D provides the restriction which disallows deductible amounts where there is a profit transfer.
16.Subsection 1 provides that section 703D applies where profits transfer arrangements are made which results in an increase in the total profits of C, or any connected company, in any accounting period ending on or after the relevant day.
17.Subsection 2 provides that if conditions D & E are met a deductible amount may not be brought into account by C, or any connected company, as a deduction in any accounting period ending on or after the relevant day.
18.Subsection 3 explains condition D: on the relevant day it is highly likely that the deductible amount would be brought into account by C or a connected company as a deduction in an accounting period ending on or after the relevant day.
19.Subsection 4 explains arrangements and events to have regard to when considering what is “highly likely”.
20.Subsection 5 explains condition E: where the purpose or one of the main purposes, of the profit transfer arrangements is to bring the deductible amount into account as a deduction in any accounting period ending on or after the relevant day.
21.Subsection 6 applies the just and reasonable provision contained in subsection 7 where if section 730D(2) applies and where the company would have had profits in that accounting period in the absence of any profit transfer arrangements and disregarding any deductible amounts.
22.Subsection 7 provides that the deductible amount is disallowed only in such a proportion that is just and reasonable.
23.Schedule 1 Paragraph 2 makes consequential amendments to CTA 2010.
24.Schedule 1 Paragraph 3 provides the commencement provisions and the date from which section 730C should be applied after section 432.
25.Schedule 1 Paragraph 3 subparagraph 2 provides that the amendments apply to a qualifying change on or after 20 March 2013, unless either arrangements to bring about the qualifying change had been entered into before that date or there was an agreement or common understanding between the parties as to the principal terms on which the qualifying change will be brought about
26.Schedule 1 Paragraph 3 subparagraph 3 provides that the provision in 730C(9)(b) does not apply prior to 26 June 2013.
Background
27.This section is one of two preventing loss buying introduced by this Act.
28.The section uses the term “qualifying change” as defined in Section 212C of Chapter 16A of Part 2 CAA 2001
29.Section 212C CAA2001 defines a qualifying change in relation to a company as -
A change in ownership of a company,
When a company becomes a member of a group
When a company moves from a group into a consortium.
When a consortium member increases it ownership of a consortium company.
Where C ceases to carry on the whole or part of an activity and the activity (or part of it) begins to be carried on in partnership by two or more companies.
When a partner increases its share in a partnership that is carrying out an activity
Current corporate tax loss buying rules
30.The general concept is that losses brought forward or after a change in ownership should be allowable only to the company and trade in which they occurred.
31.Section 39 of CTA 2010 provides that if a company sells its trade to a company that is not within the same 75% ownership then the cessation rules apply and the losses do not transfer.
32.Part 14 of CTA 2010 deals with realised losses where there is a change in ownership of a company (and where other circumstances apply). If the Part applies losses arising prior to the change are no longer available for periods after the change in ownership.
