Finance Bill

House of Commons

Session 2002 - 03
Internet Publications
Other Bills before Parliament

Finance Bill

Finance Bill
Schedule 3 — Corporation tax: the non-corporate distribution rate: supplementary provisions
Part 1 — General provisions
277

Schedule 3
Section 28

Corporation tax: the non-corporate distribution rate: supplementary
provisions
Part 1
General provisions
5
Introduction
1
The provisions of this Schedule supplement section 13AB (corporation tax:
the non-corporate distribution rate).
Meaning of “non-corporate distribution”
2     (1)
A “non-corporate distribution” means a distribution made by a company to
10
a recipient who is not a company.

“Recipient” here means the person beneficially entitled to the distribution.
      (2)
A distribution made to a partnership is treated as made to the partners
notwithstanding that the partnership is regarded as a legal person, or as a
body corporate, under the law of the country or territory under which it is
15
formed.
Calculation of company’s “underlying rate of corporation tax”
3     (1)
A company’s underlying rate of corporation tax for an accounting period is
determined as follows:

Step One
20

Take the company’s basic profits for the accounting period (“BP”).

Step Two

Find the amount of corporation tax chargeable on those profits apart from
section 13AB (“CT”).

Step Three
25

The company’s underlying rate of corporation tax is the percentage
determined as follows—
      (2)
In determining CT—
(a)
apply the rate of corporation tax fixed for companies generally, and
(b)
if the company is entitled to and claims relief under section 13 (small
30
companies’ relief) or section 13AA (corporation tax starting rate),
apply the provisions of those sections.

But take no account of any other relief that is given by reducing the amount
or rate of tax payable (as opposed to the amount of the profits chargeable to
tax).
35

Finance Bill
Schedule 3 — Corporation tax: the non-corporate distribution rate: supplementary provisions
Part 2 — Allocation of excess NCDs to other companies
278

Matching: distributions not exceeding basic profits
4
Where in an accounting period the total amount of the distributions made
(or treated as made) by a company does not exceed the amount of its basic
profits, the amount of the company’s basic profits matched with non-
corporate distributions is equal to the total amount of the non-corporate
5
distributions made (or treated as made) by the company in that period.
Matching: distributions exceeding basic profits
5
Where in an accounting period the total amount of the distributions made
(or treated as made) by a company exceeds its basic profits, the amount of
the company’s basic profits for that period matched with non-corporate
10
distributions is—

where—
NCD is the total amount of the non-corporate distributions made (or
treated as made) by the company in that period;
D is the total amount of all the distributions made (or treated as made)
15
by the company in that period; and
BP is the amount of the company’s basic profits for that period.
Part 2
Allocation of excess NCDs to other companies
Allocation of excess NCDs to other companies
20
6     (1)
This Part of this Schedule provides for the allocation to other companies of
any amount by which the total amount of the non-corporate distributions
made (or treated as made) by a company (the “distributing company”) in an
accounting period (the “distribution period”) exceeds the amount of the
company’s basic profits for that period that are matched under paragraph 5.
25
      (2)
That amount is referred to in this Schedule as “excess NCDs”.
      (3)
A company to which an amount of excess NCDs is allocated (a “recipient
company”) is treated as if it had made a non-corporate distribution of that
amount in the period to which it is allocated.
Allocation of excess NCDs to other group companies
30
7     (1)
If at the end of the distribution period the distributing company is a member
of a group, excess NCDs must be allocated, so far as possible, to the other
group companies.

The allocation must be made in accordance with the following rules.
      (2)
Excess NCDs may not be allocated to a recipient company unless it has
35
available profits for the accounting period to which they are to be allocated.
      (3)
The amount of a recipient company’s available profits for an accounting
period is given by:

Finance Bill
Schedule 3 — Corporation tax: the non-corporate distribution rate: supplementary provisions
Part 2 — Allocation of excess NCDs to other companies
279


where—
BP is the amount of that company’s basic profits for that accounting
period, and
NCD is the total amount of non-corporate distributions made (or
treated as made) by that company in that period.
5
      (4)
The maximum amount of excess NCDs that may be allocated to an
accounting period of a recipient company is:

where—
NCD is the total amount of the non-corporate distributions made (or
treated as made) by the distributing company in the distribution
10
period;
D is the total amount of all the distributions made (or treated as made)
by that company in that period; and
AP is the amount of the recipient company’s available profits for that
period.
15
      (5)
In determining the amount of a company’s available profits at any time
account shall only be taken of excess NCDs allocated to it by virtue of an
allocation made before that time that remains (or so far as it remains)
effective.
Allocation of excess NCDs: period or periods to which amount to be allocated
20
8     (1)
Excess NCDs falling to be allocated to another company under paragraph 7
(allocation to other group companies) may be allocated to any accounting
period identified by this paragraph as a corresponding accounting period.

If there is more than one such period, excess NCDs must be allocated to the
first to the full extent possible before any allocation is made to the second,
25
and so on.
      (2)
The accounting period of a recipient company that includes the last day of
the distribution period is its first corresponding accounting period.

Unless that accounting period is shorter than the distribution period, it is the
recipient company’s only corresponding accounting period.
30
      (3)
If the first corresponding accounting period is shorter than the distribution
period, any subsequent accounting period of the recipient company
beginning before the end of the period specified in sub-paragraph (4) is a
corresponding accounting period.
      (4)
The period referred to in sub-paragraph (3) is a period—
35
(a)
of the same length as the distribution period, and
(b)
beginning on the same day as the recipient company’s first
corresponding accounting period.
Allocation of excess NCDs: degrouping
9     (1)
This paragraph applies where a company (“company A”) ceases to be a
40
member of the same group as another company (“company B”) but the
companies remain under the control of the same person or persons.

This is referred to below as “degrouping”.

Finance Bill
Schedule 3 — Corporation tax: the non-corporate distribution rate: supplementary provisions
Part 2 — Allocation of excess NCDs to other companies
280

      (2)
If at the end of any accounting period of company A ending on or after the
degrouping but no more than two years after the degrouping—
(a)
company A has excess NCDs that (apart from this paragraph) cannot
be allocated to other companies,
(b)
the business activities of company A and any other companies in the
5
same group as that company are negligible, and
(c)
the business activities of company B and any other companies in the
same group as that company are not negligible,

the provisions of sub-paragraphs (3) to (5) below apply.

The end of the accounting period when the above conditions are met is
10
referred to in those provisions as “the relevant time”.
      (3)
Company B and any other companies in the same group as that company at
the relevant time (the “B group”) shall be treated for the purposes of
allocating the excess NCDs as if they were members of the same group as
company A.
15
      (4)
Any excess NCDs remaining after any allocation made by virtue of sub-
paragraph (3) must be allocated—
(a)
to company B or, if different, the company in the B group that at the
relevant time has the greatest number of members who are not
companies, and
20
(b)
to the accounting period of that company that includes the relevant
time.

This allocation is not subject to the restrictions in paragraph 7 on the amount
that may be allocated to another company.
      (5)
If there is more than one company answering the description in sub-
25
paragraph (4)(a), the excess NCDs shall be apportioned between them
according to the amount of their basic profits for the accounting period to
which the amount falls to be allocated.
      (6)
In this paragraph “control” shall be construed in accordance with section
416(2) to (6).
30
Allocation of excess NCDs: procedure
10    (1)
The basic rule is that the allocation of excess NCDs to another company must
be made by the distributing company with the agreement of the recipient
company.
      (2)
If excess NCDs are not so allocated within nine months after—
35
(a)
in a case within paragraph 7, the end of the distribution period, or
(b)
in a case within paragraph 9, the relevant time within the meaning of
that paragraph,

they may be allocated at any time thereafter by an officer of the Board.
      (3)
An allocation under sub-paragraph (1) or (2) may be varied—
40
(a)
by agreement between the relevant companies, or
(b)
if further excess NCDs are required to be allocated and no variation
is agreed within one year after its becoming apparent that a variation
is required, by an officer of the Board.

Any such variation may in turn be varied as mentioned in paragraph (a) or
45
(b).

Finance Bill
Schedule 3 — Corporation tax: the non-corporate distribution rate: supplementary provisions
Part 2 — Allocation of excess NCDs to other companies
281

      (4)
No allocation or variation of an allocation of excess NCDs may be made after
the end of the period of one year after whichever of the following last
occurs—
(a)
the final determination of the tax affairs of the distributing company
in relation to the distribution period,
5
(b)
in a case within paragraph 7, the final determination of the tax affairs
of all recipient or potential recipient companies in relation to
accounting periods that are or could be corresponding accounting
periods, or
(c)
in a case within paragraph 9, the final determination of the tax affairs
10
of all recipient or potential recipient companies in relation to
accounting periods to which an allocation may be made under that
paragraph.
      (5)
If circumstances arise as a result of which the tax affairs of any such
company for any such period are reopened, an allocation or variation of an
15
allocation may (and shall if necessary) be made at any time before the end of
the period of one year after the tax affairs of the company are again finally
determined.
      (6)
For the purposes of sub-paragraphs (4) and (5) the tax affairs of a company
for a period are finally determined when the amounts are conclusively
20
determined within the meaning of paragraph 88 of Schedule 18 to the
Finance Act 1998 (company tax returns: conclusiveness of amounts stated in
return).
      (7)
References in this paragraph to variation of an allocation include reducing
the amount allocated to nil.
25
Allocation of excess NCDs: amounts proving to be excessive
11    (1)
This paragraph applies where an amount of excess NCDs allocated to
another company in accordance with this Part of this Schedule later proves
to be excessive.
      (2)
The excess shall revert to the distributing company.
30
      (3)
If allocations to two or more companies are involved, the amounts shall
revert in the opposite order to that in which the allocations were made.
      (4)
In the case of allocations made at the same time, the amounts reverting to the
distributing company shall be in proportion to the original allocations.
Allocation of excess NCDs to companies not resident in the United Kingdom
35
12    (1)
The provisions of this Part of this Schedule as to the allocation of excess
NCDs to other companies apply, with any necessary modifications, to
companies that are not resident in the United Kingdom as they apply to
companies that are so resident.
      (2)
In particular, references to the company’s basic profits and accounting
40
periods shall be read in relation to a company that is not resident in the
United Kingdom as references to what would have been the case if the
company had been resident in the United Kingdom at all material times.

Finance Bill
Schedule 3 — Corporation tax: the non-corporate distribution rate: supplementary provisions
Part 3 — Other supplementary provisions
282

Part 3
Other supplementary provisions
Carry forward of excess NCDs
13    (1)
Any excess NCDs not allocated to another company under Part 2 shall be
carried forward by the distributing company.
5
      (2)
That company shall be treated as if it had made a non-corporate distribution
of the amount carried forward (in addition to any distributions actually
made by it) in its next accounting period.
      (3)
Where an allocation is made under paragraph 9(4) references in this
paragraph to the distributing company shall be read as references to the
10
company to which that allocation is made (which is treated by virtue of
paragraph 6(3) as having made a distribution in the accounting period to
which the allocation is made).
Definition of a group
14    (1)
For the purposes of section 13AB and this Schedule a company and all its
15
51% subsidiaries form a group, and if any of those subsidiaries have 51%
subsidiaries the group includes them and their 51% subsidiaries, and so on.
      (2)
The question whether a company is a 51% subsidiary shall be determined in
accordance with section 838, subject to the following provisions.
      (3)
A company (“company A”) shall be treated for the purposes of this Schedule
20
as if it were a 51% subsidiary of another company (“company B”) if company
B has rights to, or in fact receives, more than 50% of the distributions made
by company A.
      (4)
For the purposes of this paragraph a company shall be treated as not being
the owner—
25
(a)
of any share capital that it owns directly if a profit on the sale of the
shares would be treated as a trading receipt of its trade, or
(b)
of any share capital that it owns indirectly and that is owned directly
by a body corporate for which a profit on the sale of the shares would
be treated as a trading receipt of its trade.
30
Accounting period treated as ending if company ceases to be a member of a group
15    (1)
Section 13AB and this Schedule apply in relation to an accounting period of
a company in which it ceases to be a member of the group as if there were
two accounting periods, one ending immediately before the company ceases
to be a member of the group and the other consisting of the remainder of the
35
period.
      (2)
For this purpose a company ceases to be in a group if it and another
company cease to be in the same group, whether as a result it is no longer in
a group, becomes a member of another group or continues to be in the same
group as one or more other companies.
40
Treatment of distributions made otherwise than in an accounting period
16
For the purposes of section 13AB and this Schedule, a non-corporate
distribution made by a company otherwise than in an accounting period of

Finance Bill
Schedule 4 — Amendments relating to the rate applicable to trusts
283

the company shall be treated as made in the next accounting period of the
company.
Holding companies treated as carrying on a business
17    (1)
For the purposes of section 13AB and this Schedule a holding company that
is not otherwise carrying on a business shall be deemed to be carrying on a
5
business and to be within the charge to corporation tax.
      (2)
For this purpose “a holding company” means a company that has one or
more 51% subsidiaries from which it receives or has received one or more
distributions.
Interpretation
10
18
In section 13AB and this Schedule—

“basic profits” means the amount of a company’s profits for an
accounting period on which corporation tax finally falls to be borne;

“corresponding accounting period”, in relation to a recipient company,
has the meaning given by paragraph 8;
15

“distributing company” has the meaning given by paragraph 6(1);

“distribution” does not include an amount treated as a dividend under
paragraph 2(2) of Schedule 23A (manufactured dividends and
interest);

“distribution period” has the meaning given by paragraph 6(1); and
20

“excess NCDs” has the meaning given by paragraph 6(2);

“group” has the meaning given by paragraph 14 (and references to a
group company and membership of a group have a corresponding
meaning);

“non-corporate distribution” has the meaning given by paragraph 2;
25

“recipient company” has the meaning given by paragraph 6(3);

“underlying rate of corporation tax” has the meaning given by
paragraph 3.
Schedule 4
Section 29

Amendments relating to the rate applicable to trusts
30
Sums paid to settlor otherwise than as income
1     (1)
Section 677 of the Taxes Act 1988 (sums paid to settlor otherwise than as
income) is amended as follows.
      (2)
In subsection (2) (the amount of income available up to the end of a year) in
paragraph (h) (deduction of amount equal to tax at the rate applicable to
35
trusts on the undistributed income less the income etc referred to in certain
paragraphs) for “paragraphs (c), (d), (e), (f) and (g) above” substitute “each
of paragraphs (c) to (g) above”.
      (3)
In subsection (7) (tax to be charged under Case VI of Schedule D, but with a
set-off for the amount described in paragraph (a) or (b), whichever is the
40
less) for the words from “charged,” in paragraph (b) to the end of the