Finance Bill

House of Commons

Session 2002 - 03
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
43

(b)
for the purpose of activities in respect of which the company is
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
5
charged to tax—
(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,—
10
(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),
15

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
20
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)
25
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
30
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
35
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
40
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
45
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”.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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(5)
This section has effect in accordance with sections 42 and 43 (commencement
and transitional provisions).
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
5
(1)
This section has effect for the purpose of determining the accounting
period to which expenses of management are referable for the purposes
of section 75(1).
(2)
Where—
(a)
expenses of management are debited in accounts drawn up by
10
a company for a period of account,
(b)
the treatment of those expenses in those accounts is in
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.
15
(3)
Where—
(a)
expenses of management are debited in accounts drawn up by
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
20
(c)
the period of account does not coincide with an accounting
period,

subsection (4) below applies.
(4)
Where this subsection applies, the expenses of management—
(a)
shall be apportioned between any accounting periods that fall
25
within the period of account, and
(b)
are referable to an accounting period to the extent that they are
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
30
would work unreasonably or unjustly, in which case such other
method shall be used as appears just and reasonable.
(6)
Where—
(a)
expenses of management are not referable to an accounting
period by virtue of subsections (2) to (5) above, but
35
(b)
accounts are drawn up by the company for a period of account,
and
(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,
40

the expenses of management are referable to the accounting period to
which they would have been referable in accordance with subsections
(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
45

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
45

accounting period to which they would be referable in accordance with
subsections (2) to (5) above on the assumptions in subsection (8) below.
(8)
Those assumptions are—
(a)
that for each accounting period that does not coincide with, or
fall within, any period of account, there is a period of account
5
that coincides with that accounting period, and
(b)
that so much of the expenses of management as would fall to be
debited in accordance with generally accepted accounting
practice in accounts drawn up by the company for any such
deemed period of account are so debited.
10
(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
accounting period.
(10)
Any reference in this section to expenses of management being debited
15
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
(b)
in a statement of total recognised gains and losses or other
statement of items brought into account in computing the
20
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.”.
(2)
This section has effect in accordance with sections 42 and 43 (commencement
and transitional provisions).
25
40
Expenses of insurance companies
(1)
For section 76 of the Taxes Act 1988 (expenses of management of insurance
companies) substitute—
“76
Expenses of insurance companies
(1)
In computing for the purposes of corporation tax the profits for any
30
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
Case I of Schedule D,

section 75 is not to apply in computing the profits of that business, but
35
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
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
40
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
(non-trading deficits on loan relationships).

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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(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
subsection (4), (5) or (6) below.
5
(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),
10
(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
15
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
20
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,
25
(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
30
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
35
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—
40
(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
45
the amount as is—

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
47

(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
from the letting of rights to work minerals in the United
5
Kingdom.
    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—
10

section 432AB(3) (Schedule A loss or an overseas property
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
15
assurance business in relation to gifts of shares and securities);

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
20
produced by separate computation for basic life assurance and
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);
25

paragraph 23 of Schedule 22 to the Finance Act 2001 (150% relief
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
30
relevant expenditure on R&D in the case of a life assurance
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);
35

paragraph 36(3) of Schedule 29 to the Finance Act 2002 (relief
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
40
any reductions at Step 2, and
(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.
45
    Step 5

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)—

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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(a)
find the amount (“amount L”) that is equal to so much of the
loss as, in the aggregate, is so set off,
(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),
5
(c)
from amount L deduct amount S, to give the adjusted loss
deduction,

then reduce Subtotal 1 by deducting from it the adjusted loss
deduction,

to give Subtotal 2.
10
    Step 6

Give effect to subsection (6) of section 86 of the Finance Act 1989
(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
15
section) for the accounting period, and
(b)
deducting that amount from Subtotal 2,

to give Subtotal 3.
    Step 7

Add together the following amounts—
20
(a)
Subtotal 3, and
(b)
any amounts carried forward to the accounting period under
subsection (12) or (13) below (unrelieved excesses from earlier
accounting periods),

to give Subtotal 4.
25
    Step 8

Give effect to subsections (8) and (9) of section 86 of the Finance Act
1989 (fraction of adjusted amount of acquisition expenses for earlier
accounting periods) by adding together—
(a)
Subtotal 4, and
30
(b)
any amounts which are to be relieved under this section by
virtue of those subsections,

to give the basic deduction.
    Step 9

If—
35
(a)
amount D1 (see subsection (10) below),
exceeds
(b)
amount R (see subsection (11) below),

deduct an amount equal to the excess from the basic deduction.
    Step 10: the amount of the expenses deduction
40

The amount of the expenses deduction is so much of the basic
deduction (see Step 8) as remains after making any deduction required
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
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Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 2 — Corporation tax: general
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attributable to that business in accordance with proper internal
accounting practice.

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
5
applicable requirements of—
(a)
generally accepted accounting practice, or
(b)
the Prudential Sourcebook (Insurers).
(9)
The following rules have effect for determining for the purposes of
Step 1 the expenses that are referable to an accounting period.
10
    Rule A

Where a period of account coincides with an accounting period, the
expenses brought into account for the period of account are the
expenses referable to the accounting period.
    Rule B
15

Where—
(a)
two or more accounting periods fall within the same period of
account, and
(b)
that period of account is longer than 12 months,

section 834(4) (apportionment on time basis) is to apply.
20
    Rule C

In any other case where two or more accounting periods fall within the
same period of account, the expenses referable to any of those
accounting periods are the expenses that would have been referable to
that accounting period if—
25
(a)
the accounting period had coincided with a period of account,
and
(b)
a separate periodical return had been made for that period of
account,

and section 834(4) (apportionment on time basis) is not to apply.
30
    Rule D

Rules A to C are subject to any provision of the Corporation Tax Acts
which provides for an amount to be treated as expenses payable for, or
referable to, a particular period.
(10)
The amount D1 in Step 9 is the amount that would be the profits of the
35
company’s life assurance business for the accounting period if—
(a)
computed in accordance with the provisions applicable to Case
I of Schedule D, and
(b)
adjusted in respect of losses.

The adjustment in respect of losses is a deduction of the amount which,
40
disregarding sections 434A(2) and 440B, would fall to be set off under
section 393 against the company’s income for that period if the
company had always been charged to tax under Case I of Schedule D
in respect of its life assurance business.
(11)
The amount R in Step 9 (which may be a negative amount) is found for
45
the accounting period by—