Corporation Tax Bill

House of Commons

Session 2008 - 09
Internet Publications
Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 3 — Trading income
Chapter 10 — Trade profits: changes in trading stock
71

Other disposals and acquisitions not made in the course of trade
159
Disposals not made in the course of trade
(1)
This section applies if—
(a)
trading stock of a trade is disposed of otherwise than in the course of
the trade, and
5
(b)
section 157 does not apply.
(2)
In calculating the profits of the trade—
(a)
the amount which the stock disposed of would have realised if sold in
the open market at the time of the disposal is brought into account as a
receipt, and
10
(b)
any consideration obtained for it is left out of account.
(3)
The receipt is treated as arising on the date of the disposal.
(4)
This section is subject to section 161.
160
Acquisitions not made in the course of trade
(1)
This section applies if—
15
(a)
trading stock of a trade has been acquired otherwise than in the course
of the trade, and
(b)
section 158 does not apply.
(2)
In calculating the profits of the trade—
(a)
the cost of the stock is taken to be the amount which it would have
20
realised if sold in the open market at the time of the acquisition, and
(b)
the value of anything in fact given for it is left out of account.
(3)
The cost is treated as being incurred on the date of the acquisition.
(4)
This section is subject to section 161.
Relationship with transfer pricing rules
25
161
Transfer pricing rules to take precedence
(1)
Section 159 or 160 does not apply if the relevant consideration—
(a)
falls to be adjusted for tax purposes under Schedule 28AA to ICTA, or
(b)
falls within that Schedule without falling to be so adjusted.
(2)
For the purposes of subsection (1)(b), the relevant consideration falls within
30
Schedule 28AA to ICTA without falling to be adjusted under that Schedule if
the conditions in paragraph 1(1) of that Schedule are met, but either—
(a)
the actual provision does not differ from the arm’s length provision, or
(b)
one of the exceptions mentioned in subsection (3) applies.
(3)
The exceptions are those in—
35
(a)
section 447(5) (exchange gains or losses from loan relationships)
(b)
section 694(8) (exchange gains or losses from derivative contracts),
(c)
paragraph 10 of Schedule 28AA to ICTA (transactions and deemed
transactions involving oil), and

Corporation Tax Bill
Part 3 — Trading income
Chapter 11 — Trade profits: valuation of stock on cessation of trade
72

(d)
paragraph 13 of Schedule 28AA to ICTA (saving for provisions relating
to capital allowances and capital gains).
(4)
In this section “relevant consideration” means—
(a)
in relation to section 159, the consideration for the disposal of the
trading stock, and
5
(b)
in relation to section 160, the consideration for the acquisition of the
trading stock.
Chapter 11
Trade profits: valuation of stock on cessation of trade
162
Valuation of trading stock on cessation
10
(1)
If a company permanently ceases to carry on a trade, in calculating the profits
of the trade—
(a)
trading stock belonging to the trade at the time of the cessation must be
valued, and
(b)
the value must be determined in accordance with sections 164 to 167
15
(bases of valuation).
(2)
But no valuation of the stock is required under this Chapter if paragraph 1(2)
of Schedule 28AA to ICTA (provision not at arm’s length) has effect in relation
to any provision which—
(a)
is made or imposed in relation to the stock, and
20
(b)
has effect in connection with the cessation.
(3)
If there is partnership change, no valuation of the stock is required under this
Chapter so long as a company carrying on the trade in partnership
immediately before the change continues to carry it on in partnership after the
change.
25
(4)
The reference in subsection (3) to a partnership change is to a change in the
persons carrying on the trade in circumstances where the trade is carried on by
persons in partnership immediately before or immediately after the change (or
at both those times).
163
Meaning of “trading stock”
30
(1)
In this Chapter “trading stock” means—
(a)
any property (whether land or other property) which is sold in the
ordinary course of the trade or would be so sold if it were mature or its
manufacture, preparation or construction were complete, or
(b)
materials used in the manufacture, preparation or construction of any
35
property mentioned in paragraph (a).
(2)
In this Chapter “trading stock” includes also any services performed in the
ordinary course of the trade—
(a)
the performance of which is wholly or partly completed at the time of
the cessation, and
40
(b)
for which it would be reasonable to expect that a charge would be made
if there were no cessation and, in the case of partly completed services,
their performance were fully completed,

Corporation Tax Bill
Part 3 — Trading income
Chapter 11 — Trade profits: valuation of stock on cessation of trade
73


and any article produced, and any material used, in the performance of any
such services.
(3)
In this Chapter references to the sale or transfer of trading stock include the sale
or transfer of any benefits and rights which accrue, or might reasonably be
expected to accrue, from the performance of any such services.
5
164
Basis of valuation of trading stock
(1)
The value of trading stock belonging to the trade at the time of the cessation is
determined as follows.
(2)
If the stock is sold to a person who—
(a)
carries on, or intends to carry on, a trade, profession or vocation in the
10
United Kingdom, and
(b)
is entitled to deduct the cost of the stock as an expense in calculating the
profits of that trade, profession or vocation for corporation or income
tax purposes,

the value is determined in accordance with section 165 (sale to unconnected
15
person), 166 (sale to connected person) or 167 (election by connected persons).
(3)
But if section 125 (preventing abuse of the herd basis rules) applies—
(a)
the value is not determined in accordance with any of those sections,
and
(b)
the value is instead taken to be that given by section 125 (the price
20
which the animals transferred would have fetched if sold in the open
market at the time of the sale).
(4)
In any other case, the value is taken to be the amount which the stock would
have realised if sold in the open market at the time of the cessation.
165
Sale basis of valuation: sale to unconnected person
25
(1)
The value of trading stock is determined in accordance with this section if—
(a)
it is sold to a person who carries on, or intends to carry on, a trade, profession
or vocation in the United Kingdom and is entitled to deduct the cost of the stock
as an expense in calculating the profits of that trade, profession or vocation for
corporation or income tax purposes, and
30
(b)
the buyer is not connected with the seller.
(2)
The value is taken to be the amount in fact realised on the sale.
(3)
If the stock is sold together with other assets, so much of the amount realised
on the sale as, on a just and reasonable apportionment, is properly attributable
to each asset is treated as the amount realised on the sale of that asset.
35
166
Sale basis of valuation: sale to connected person
(1)
The value of trading stock is determined in accordance with this section if—
(a)
it is sold to a person who carries on, or intends to carry on, a trade, profession
or vocation in the United Kingdom and is entitled to deduct the cost of the stock
as an expense in calculating the profits of that trade, profession or vocation for
40
corporation or income tax purposes,
(b)
the buyer is connected with the seller, and
(c)
no election is made under section 167 (election by connected persons).

Corporation Tax Bill
Part 3 — Trading income
Chapter 11 — Trade profits: valuation of stock on cessation of trade
74

(2)
The value is taken to be the amount which would have been realised if the sale
had been between independent persons dealing at arm’s length.
167
Sale basis of valuation: election by connected persons
(1)
The value of trading stock is determined in accordance with this section if—
(a)
it is sold to a person who carries on, or intends to carry on, a trade, profession
5
or vocation in the United Kingdom and is entitled to deduct the cost of the stock
as an expense in calculating the profits of that trade, profession or vocation for
corporation or income tax purposes,
(b)
the buyer is connected with the seller, and
(c)
an election is made under this section.
10
(2)
The parties to the sale may make an election under this section if the value of
the stock determined under section 166 exceeds both—
(a)
its acquisition value, and
(b)
the amount in fact realised on the sale.
(3)
If an election is made, the value is taken to be—
15
(a)
its acquisition value, or
(b)
if greater, the amount in fact realised on the sale.
(4)
An election under this section must be made by both parties not later than two
years after the end of the accounting period in which the cessation occurred.
(5)
The “acquisition value” of trading stock means the amount which would have
20
been deductible as representing its acquisition value, in calculating the profits
of the trade, on the following assumptions—
(a)
that the stock had been sold in the course of the trade, immediately
before the cessation, for a price equal to the value of the stock
determined under section 166, and
25
(b)
that the period for which those profits were to be calculated began
immediately before the sale.
(6)
If the stock is sold together with other assets, so much of the amount realised
on the sale as, on a just and reasonable apportionment, is properly attributable
to each asset is treated as the amount realised on the sale of that asset.
30
168
Connected persons
For the purposes of sections 164 to 167 two persons are connected with each
other if any of the following tests is met—
(a)
they are connected with each other within the meaning of section 839 of
ICTA,
35
(b)
one of them is a firm and the other has a right to a share of the assets or
income of the firm,
(c)
one of them is a body corporate and the other has control over that
body,
(d)
both of them are firms and some other person has a right to a share of
40
the assets or income of both of them, or
(e)
both of them are bodies corporate, or one of them is a firm and the other
is a body corporate, and in either case some other person has control
over both of them.