Finance Bill

House of Commons

Session 2003 - 04
Internet Publications
Other Bills before Parliament

Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
42

Expenses of companies with investment business and insurance companies
38
Expenses of management: companies with investment business
(1)
For section 75 of the Taxes Act 1988 (expenses of management: investment
companies) substitute—
“75 Expenses of management: companies with investment business
5
(1)
In computing for the purposes of corporation tax the total profits for an
accounting period of a company with investment business (see section
130) a deduction is to be allowed for any expenses of management of
the company’s investment business (see subsection (4) below) which
are referable to that accounting period in accordance with section 75A.
10

That is subject to the following provisions of this section.
(2)
A deduction is not to be allowed under subsection (1) above for any
expenses to the extent that those expenses are deductible in computing
profits apart from this section.
(3)
Expenses of a capital nature are not expenses of management for the
15
purposes of this section except to the extent that they fall to be treated
as expenses of management for those purposes by virtue of—
(a)
subsection (7) below (capital allowances), or
(b)
any provision of the Tax Acts, other than this section.
(4)
For the purposes of this section, expenses of management are “expenses
20
of management of the company’s investment business” to the extent
that—
(a)
the expenses are in respect of so much of the company’s
business as consists in the making of investments, and
(b)
the investments concerned are not held by the company for an
25
unallowable purpose during the accounting period (see
subsection (5) below),

and references in this section to the company’s investment business
shall be construed accordingly.
(5)
For the purposes of subsection (4)(b) above, investments are held by a
30
company for an unallowable purpose during an accounting period to
the extent that they are held during the period—
(a)
for a purpose that is not a business or other commercial purpose
of the company, or
(b)
for the purpose of activities in respect of which the company is
35
not within the charge to corporation tax.
(6)
For the purposes of subsection (1) above, there shall be deducted from
the amount that would, apart from this subsection, be deductible under
that subsection the amount of any income derived from a source not
charged to tax—
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(a)
which the company has in the course of carrying on its
investment business, and
(b)
which, in a case where the company is not resident in the United
Kingdom,—

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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(i)
the company has in the course of carrying on that
business through a permanent establishment in the
United Kingdom, and
(ii)
is such property or rights as are mentioned in section
11(2A)(b),
5

but which is not franked investment income.
(7)
For the purposes of this section, there shall be added to a company’s
expenses of management referable to any accounting period the
amount of any allowances falling to be made to the company for that
period by virtue of section 15(1)(g) of the Capital Allowances Act (plant
10
and machinery allowances) so far as effect cannot be given to them
under section 253(2) of that Act.
(8)
Subsection (9) below applies in any case where, in an accounting period
of a company with investment business, the sum of—
(a)
the expenses of management deductible under subsection (1)
15
above, and
(b)
any charges on income paid in the accounting period, to the
extent that they are paid for the purposes of so much of the
company’s business as consists in the making of investments,

exceeds the amount of the profits from which those expenses and
20
charges are deductible.
(9)
In any such case—
(a)
the excess shall be carried forward to the succeeding accounting
period; and
(b)
the amount so carried forward to the succeeding accounting
25
period shall be treated for the purposes of this section
(including any further application of this subsection) as if it
were expenses of management deductible for that accounting
period.
(10)
Any apportionment falling to be made for the purposes of this section
30
shall be made on a just and reasonable basis.”.
(2)
Section 130 of the Taxes Act 1988 (meaning of “investment company” for
purposes of Part 4) is amended as follows.
(3)
After “In this Part of this Act” insert the following definition “—

“company with investment business” means any company whose
35
business consists wholly or partly in the making of investments;”.
(4)
The sidenote to the section accordingly becomes “Meaning of “company with
investment business” and “investment company” in Part 4”.
(5)
This section has effect in accordance with sections 42 and 43 (commencement
and transitional provisions).
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Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
44

39
Accounting period to which expenses of management are referable
(1)
After section 75 of the Taxes Act 1988 (which is inserted by section 38) insert—
“75A
Accounting period to which expenses of management are referable
(1)
This section has effect for the purpose of determining the accounting
period to which expenses of management are referable for the purposes
5
of section 75(1).
(2)
Where—
(a)
expenses of management are debited in accounts drawn up by
a company for a period of account,
(b)
the treatment of those expenses in those accounts is in
10
accordance with generally accepted accounting practice, and
(c)
the period of account coincides with an accounting period,

the expenses of management are referable to that accounting period.
(3)
Where—
(a)
expenses of management are debited in accounts drawn up by
15
a company for a period of account, and
(b)
the treatment of those expenses in those accounts is in
accordance with generally accepted accounting practice, but
(c)
the period of account does not coincide with an accounting
period,
20

subsection (4) below applies.
(4)
Where this subsection applies, the expenses of management—
(a)
shall be apportioned between any accounting periods that fall
within the period of account, and
(b)
are referable to an accounting period to the extent that they are
25
so apportioned to it.
(5)
An apportionment under subsection (4) above shall be in accordance
with section 834(4) (time basis) unless it appears that that method
would work unreasonably or unjustly, in which case such other
method shall be used as appears just and reasonable.
30
(6)
Where—
(a)
expenses of management are not referable to an accounting
period by virtue of subsections (2) to (5) above, but
(b)
accounts are drawn up by the company for a period of account,
and
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(c)
if the expenses of management had been treated in those
accounts in accordance with generally accepted accounting
practice, they would fall to be debited in those accounts,

the expenses of management are referable to the accounting period to
which they would have been referable in accordance with subsections
40
(2) to (5) above if they had been so debited in those accounts.
(7)
Where expenses of management are not referable to an accounting
period by virtue of subsections (2) to (6) above, they are referable to the
accounting period to which they would be referable in accordance with
subsections (2) to (5) above on the assumptions in subsection (8) below.
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(8)
Those assumptions are—

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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(a)
that for each accounting period that does not coincide with, or
fall within, any period of account, there is a period of account
that coincides with that accounting period, and
(b)
so much of the expenses of management as would fall to be
debited in accordance with generally accepted accounting
5
practice in accounts drawn up by the company for any such
deemed period of account are so debited.
(9)
This section is without prejudice to any other provision of the
Corporation Tax Acts which provides for amounts to be treated for the
purposes of section 75 as expenses of management referable to an
10
accounting period.
(10)
Any reference in this section to expenses of management being debited
in accounts is a reference to those expenses being brought into account,
in accordance with generally accepted accounting practice, as a debit—
(a)
in the company’s profit and loss account, or
15
(b)
in a statement of total recognised gains and losses or other
statement of items brought into account in computing the
company’s profits and losses for accounting purposes.

For this purpose “debit” means an amount which for accounting
purposes reduces a profit, or increases a loss, for a period of account.”.
20
(2)
This section has effect in accordance with sections 42 and 43 (commencement
and transitional provisions).
40
Expenses of insurance companies
(1)
For section 76 of the Taxes Act 1988 (expenses of management of insurance
companies) substitute—
25
“76
Expenses of insurance companies
(1)
In computing for the purposes of corporation tax the profits for any
accounting period of a company—
(a)
which carries on life assurance business, and
(b)
which is not charged to tax in respect of that business under
30
Case I of Schedule D,

section 75 is not to apply in computing the profits of that business, but
a deduction for expenses payable (the “expenses deduction”) is to be
allowed in accordance with the following provisions of this section.

See also subsection (14) below for the application of this section in
35
relation to a company which carries on capital redemption business.
(2)
The expenses deduction is to be made from so much of the income and
gains of the accounting period referable to basic life assurance and
general annuity business as remains after any deduction falling to be
made by virtue of paragraph 4(2) of Schedule 11 to the Finance Act 1996
40
(non-trading deficits on loan relationships).
(3)
For the purposes of this section “expenses payable” means expenses
brought into account in line 12, 22 or 25 of Form 40 (the revenue
account) in the periodical return of the company for a period of
account, but does not include any of the amounts falling within
45
subsection (4), (5) or (6) below.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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(4)
The amounts falling within this subsection are the following—
(a)
reinsurance premiums,
(b)
refunds of premiums,
(c)
profit commissions and profit participations (however
described),
5
(d)
expenses or other amounts payable, to the extent that the
company’s purpose in incurring the liability to make the
payment is not a business or other commercial purpose of the
company.

For the purposes of paragraph (d) above, it is not one of the business or
10
commercial purposes of a company to incur a liability to pay an amount
of commission or other expenses which exceeds the amount which it
could reasonably be expected to pay if the company were charged to
tax under Case I of Schedule D in respect of its life assurance business.
(5)
The amounts falling within this subsection are any amounts payable in
15
connection with a policy or contract to—
(a)
a policy holder or annuitant under the policy or contract (except
where the policy holder is an insurance company),
(b)
any other person who is entitled to receive benefits under the
policy or contract,
20
(c)
any person acting on behalf of a person falling within
paragraph (a) or (b) above,
(d)
the personal representatives of a deceased person who fell
within paragraphs (a) to (c) above.
(6)
The amounts falling within this subsection are expenses of a capital
25
nature.

But this subsection does not apply in the case of an amount which, by
virtue of any provision of the Tax Acts other than this section, falls to
be treated for the purposes of this section as expenses payable which
fall to be brought into account at Step 1 in subsection (7) below (the
30
reference to Step 1 being express in the provision).
(7)
The amount of the expenses deduction for an accounting period is
found by taking the following steps—
    Step 1

Find so much of the expenses payable as are—
35
(a)
attributable to basic life assurance and general annuity business
(see subsection (8) below), and
(b)
referable to the accounting period (see subsection (9) below).
    Step 2

Reduce each of the amounts found at Step 1 by excluding so much of
40
the amount as is—
(a)
deductible in computing income for the purposes of
Schedule A,
(b)
deductible by virtue of section 85(2B) of the Finance Act 1989, or
(c)
deductible by virtue of section 121(3) in computing income
45
from the letting of rights to work minerals in the United
Kingdom.

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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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    Step 3

Find the amounts (so far as not included at Step 1) which fall to be
treated for the purposes of this section as expenses payable for the
accounting period by virtue of any of the following provisions—

section 432AB(3) (Schedule A loss or an overseas property
5
business loss referable to basic life assurance and general
annuity business);

section 437(1A) (relief for income element of new annuities);

section 587B(8)(b)(i) (relief for company carrying on life
assurance business in relation to gifts of shares and securities);
10

paragraph 16(1) of Schedule 7 to the Finance Act 1991
(transitional relief for old annuities);

paragraph 4(4)(b) of Schedule 11 to the Finance Act 1996
(carried forward non-trading deficit on loan relationships
produced by separate computation for basic life assurance and
15
general annuity business);

section 256(2)(a) of the Capital Allowances Act (capital
allowances on plant and machinery used in the management of
life assurance business);

paragraph 23 of Schedule 22 to the Finance Act 2001 (150% relief
20
in respect of the remediation expenditure on contaminated land
owned by a company carrying on life assurance business and
acquired to be a management asset);

paragraph 13(2) of Schedule 12 to the Finance Act 2002 (125% of
relevant expenditure on R&D in the case of a life assurance
25
company);

paragraph 23(2) of Schedule 13 to the Finance Act 2002 (150% of
relevant expenditure on research into vaccines in the case of a
life assurance company);

paragraph 36(3) of Schedule 29 to the Finance Act 2002 (relief
30
for non-trading loss on intangible fixed assets).
    Step 4

Give effect to the provisions specified in Step 3 by adding together—
(a)
so much of the amounts found at Step 1 as remains after making
any reductions at Step 2, and
35
(b)
the amounts found at Step 3,

and then deduct the amount of any reversal (wherever brought into
account) of an expense included at Step 1 in a previous period,

to give Subtotal 1.
    Step 5
40

If the whole or any part of a loss arising to the company in respect of its
life assurance business in the accounting period is set off under section
393A or 403(1)—
(a)
find the amount (“amount L”) that is equal to so much of the
loss as, in the aggregate, is so set off,
45
(b)
find the sum (“amount S”) of the amounts by which any losses
for that period under section 436 or 439B fall to be reduced
under section 434A(2)(b),
(c)
from amount L deduct amount S, to give the adjusted loss
deduction,
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Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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then reduce Subtotal 1 by deducting from it the adjusted loss
deduction,

to give Subtotal 2.
    Step 6

Give effect to subsection (6) of section 86 of the Finance Act 1989
5
(spreading of acquisition expenses) by—
(a)
finding the amount that is equal to six-sevenths of the adjusted
amount of the acquisition expenses (within the meaning of that
section) for the accounting period, and
(b)
deducting that amount from Subtotal 2,
10

to give Subtotal 3.
    Step 7

Add together the following amounts—
(a)
Subtotal 3, and
(b)
any amounts carried forward to the accounting period under
15
subsection (12) or (13) below (unrelieved excesses from earlier
accounting periods),

to give Subtotal 4.
    Step 8

Give effect to subsections (8) and (9) of section 86 of the Finance Act
20
1989 (fraction of adjusted amount of acquisition expenses for earlier
accounting periods) by adding together—
(a)
Subtotal 4, and
(b)
any amounts which are to be relieved under this section by
virtue of those subsections,
25

to give the basic deduction.
    Step 9

If—
(a)
amount D1 (see subsection (10)),
exceeds
30
(b)
amount R (see subsection (11)),

deduct an amount equal to the excess from the basic deduction.
    Step 10: the amount of the expenses deduction

The amount of the expenses deduction is so much of the basic
deduction (see Step 8) as remains after making any deduction required
35
at Step 9.
(8)
For the purposes of Step 1, the expenses that are attributable to basic life
assurance and general annuity business are the expenses which are
attributable to that business in accordance with proper internal
accounting practice.
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In this subsection “proper internal accounting practice” means the
practice of insurance companies in allocating all the expenses of the
company to particular categories of business in accordance with any
applicable requirements of—
(a)
generally accepted accounting practice, or
45
(b)
the Prudential Sourcebook (Insurers).