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 12 — Deductions from profits: unremittable amounts
75

169
Cost to buyer of stock valued on sale basis of valuation
(1)
This section applies for the purpose of calculating the profits of the trade
carried on by the buyer of trading stock.
(2)
If the value of the stock is determined in accordance with—
(a)
section 164(3) or sections 165 to 167 (sale basis of valuation), or
5
(b)
section 175(3) or sections 176 to 178 of ITTOIA 2005 (corresponding
income tax rules),

the cost of the stock to the buyer is taken to be the value as so determined.
170
Meaning of “sale” and related expressions
(1)
In sections 164 to 167 (except in section 167(5)) references to a sale include a
10
transfer for valuable consideration.
(2)
In relation to a transfer which is not a sale—
“amount realised on the sale” means the value of the consideration given
for the transfer,
“buyer” means the person to whom the transfer is made, and
15
“seller” means the person who makes the transfer.
171
Determination of questions
Any question arising under section 164(3) or sections 165 to 167 (sale basis of
valuation of trading stock) must be determined in the same way as an appeal.
Chapter 12
20
Deductions from profits: unremittable amounts
172
Application of Chapter
(1)
This Chapter applies if—
(a)
an amount received by, or owed to, a company carrying on a trade (“the
trader”) is brought into account as a receipt in calculating the profits of
25
the trade,
(b)
the amount is paid or owed in a territory outside the United Kingdom,
and
(c)
some or all of the amount is unremittable.
(2)
An amount received is unremittable if it cannot be transferred to the United
30
Kingdom merely because of foreign exchange restrictions.
(3)
An amount owed is unremittable if it cannot be paid in the United Kingdom
and—
(a)
it temporarily cannot be paid in the territory in which it is owed merely
because of foreign exchange restrictions, or
35
(b)
it can be paid in that territory but, if it were paid there, the amount paid
would not be transferable to the United Kingdom merely because of
foreign exchange restrictions.
(4)
“Foreign exchange restrictions” are restrictions imposed by any of the
following—
40

Corporation Tax Bill
Part 3 — Trading income
Chapter 12 — Deductions from profits: unremittable amounts
76

(a)
the laws of the territory where the amount is paid or owed,
(b)
executive action of its government, and
(c)
the impossibility of obtaining there currency that could be transferred
to the United Kingdom.
(5)
Section 464(1) (matters to be brought into account in the case of loan
5
relationships) does not prevent any amount from being brought into account
in accordance with section 173 or 175.
173
Relief for unremittable amounts
(1)
If—
(a)
the trader has profits from the trade in a period of account, and
10
(b)
an unremittable amount has been brought into account as a receipt for
that period,

a deduction of the amount is allowed from those profits (but see subsection
(5)).
(2)
If the trader has profits from the trade in a period of account and the total of—
15
(a)
any unremittable amounts brought into account as receipts for that
period, and
(b)
any amount carried forward under this subsection or subsection (3)
from the previous period of account,

exceeds the amount of those profits, the excess may be carried forward to the
20
next period of account.
(3)
If the trader does not have profits from the trade in a period of account and an
unremittable amount has been brought into account as a receipt for that period,
the total of—
(a)
any unremittable amounts brought into account as receipts for that
25
period, and
(b)
any amount carried forward under this subsection or subsection (2)
from the previous period of account,

may be carried forward to the next period of account.
(4)
If an amount is carried forward under this section to a period of account in
30
which the trader has profits from the trade, a deduction of the amount is
allowed from those profits (but see subsection (5)).
(5)
The total amount deducted under this section from the profits from a trade in
a period of account must not exceed the amount of the profits.
174
Restrictions on relief
35
(1)
No deduction is allowed under section 173 in relation to an amount so far as—
(a)
it is used to finance expenditure or investment outside the United
Kingdom, or
(b)
it is applied outside the United Kingdom in another way.
(2)
No deduction is allowed under section 173 in relation to an amount owed so
40
far as a payment under a contract of insurance has been received in relation to
it.

Corporation Tax Bill
Part 3 — Trading income
Chapter 13 — Disposal and acquisition of know-how
77

(3)
No deduction is allowed under section 173 in relation to an amount brought
into account in calculating profits if relief under section 1275 (unremittable
income) may be claimed in relation to that amount.
175
Withdrawal of relief
(1)
This section applies if—
5
(a)
some or all of an unremittable amount has been deducted from profits
under section 173, and
(b)
any of the following events occurs.
(2)
The events are that—
(a)
the amount or part of it ceases to be unremittable,
10
(b)
an allowable provision for impairment loss is made in respect of the
amount or part of it,
(c)
the amount or part of it is used to finance expenditure or investment
outside the United Kingdom,
(d)
the amount or part of it is applied outside the United Kingdom in
15
another way,
(e)
the amount or part of it is exchanged for, or discharged by, an amount
that is not unremittable, and
(f)
if the amount is an amount owed, a payment under a contract of
insurance is received in relation to the amount or part of it.
20
(3)
The amount or the part of it in question is brought into account as a receipt in
calculating the profits of the trade of the period of account in which the event
occurs, but only so far as—
(a)
it has been deducted from profits under section 173, and
(b)
it has not already been brought into account as a receipt in calculating
25
the profits of the trade as a result of this section.
(4)
If the event is the receipt of a payment under a contract of insurance, the
amount brought into account as a receipt must not exceed the amount of the
payment.
(5)
In subsection (2)(b) “allowable provision for impairment loss” means either—
30
(a)
a debit in respect of the impairment of a financial asset (see section
476(1)) which is brought into account under Part 5 (loan relationships),
or
(b)
a provision in respect of which a deduction is allowable under section
55 (bad debts).
35
Chapter 13
Disposal and acquisition of know-how
176
Meaning of “know-how” etc
(1)
In this Chapter “know-how” means any industrial information or techniques
likely to assist in—
40
(a)
manufacturing or processing goods or materials,
(b)
working a source of mineral deposits (including searching for,
discovering or testing mineral deposits or obtaining access to them), or

Corporation Tax Bill
Part 3 — Trading income
Chapter 13 — Disposal and acquisition of know-how
78

(c)
carrying out any agricultural, forestry or fishing operations.
(2)
For this purpose—
“mineral deposits” includes any natural deposits capable of being lifted or
extracted from the earth and for this purpose geothermal energy is
treated as a natural deposit, and
5
“source of mineral deposits” includes a mine, an oil well and a source of
geothermal energy.
(3)
For the purposes of this Chapter any consideration received for giving, or
wholly or partly fulfilling, an undertaking which—
(a)
is given in connection with a disposal of know-how, and
10
(b)
restricts, or is designed to restrict, any person’s activities in any way,

is treated as consideration received for the disposal of the know-how.
(4)
It does not matter whether or not the undertaking is legally enforceable.
(5)
For the purposes of this Chapter references to a sale of know-how include an
exchange of know-how and any provision of this Chapter referring to a sale
15
has effect with the necessary modifications.
(6)
Those modifications include, in particular, reading references to the proceeds
of sale and to the price as including the consideration for the exchange.
177
Disposal of know-how if trade continues to be carried on
(1)
This section applies if—
20
(a)
a company carrying on a trade receives consideration for the disposal
of know-how which has been used in the trade,
(b)
the company continues to carry on the trade after the disposal, and
(c)
neither section 178 (disposal of know-how as part of disposal of all or
part of a trade) nor section 179 (seller controlled by buyer etc) applies.
25
(2)
The amount or value of the consideration is treated for corporation tax
purposes as a trading receipt, except so far as it is brought into account under
section 462 of CAA 2001 (disposal values).
(3)
If the know-how is sold together with other property, the net proceeds of the
sale of the know-how are treated as being so much of the net proceeds of the
30
sale of all the property as, on a just and reasonable apportionment, is
attributable to the know-how.
(4)
For this purpose all property sold as a result of one bargain is treated as sold
together even though—
(a)
separate prices are, or purport to be, agreed for separate items of that
35
property, or
(b)
there are, or purport to be, separate sales of separate items of that
property.
(5)
Any question about the way in which a sum is to be apportioned under this
section must be determined in accordance with section 563(2) to (6) of CAA
40
2001 (procedure for determining certain questions affecting two or more
persons) if it materially affects two or more taxpayers.
(6)
For this purpose a question materially affects two or more taxpayers if, at the
time when the question falls to be determined, it appears that the

Corporation Tax Bill
Part 3 — Trading income
Chapter 13 — Disposal and acquisition of know-how
79

determination is material to the liability to tax (for whatever period) of two or
more persons.
178
Disposal of know-how as part of disposal of all or part of a trade
(1)
This section applies if —
(a)
a person carrying on a trade receives consideration for the disposal of
5
know-how which has been used in the trade, and
(b)
the know-how is disposed of as part of the disposal of all or part of the
trade.
(2)
If the person disposing of the know-how is within the charge to corporation
tax, the consideration is treated for corporation tax purposes as a capital receipt
10
for goodwill.
(3)
If the person acquiring the know-how—
(a)
is within the charge to corporation tax, and
(b)
provided the consideration,

the consideration is treated for corporation tax purposes as a capital payment
15
for goodwill.
(4)
But the consideration is not treated for corporation tax purposes as a capital
payment for goodwill if, before the acquisition, the trade was carried on wholly
outside the United Kingdom.
(5)
If the person disposing of the know-how is within the charge to corporation
20
tax—
(a)
that person, and
(b)
the person acquiring the know-how (whether or not within the charge
to corporation tax),

may jointly elect for this section not to apply (but see section 179).
25
(6)
The election must be made within two years of the disposal.
(7)
If—
(a)
an election is made under section 194 of ITTOIA 2005 (corresponding
income tax provision), and
(b)
the person making the acquisition mentioned in that section is within
30
the charge to corporation tax,

the persons making the election under that section are treated as also making
an election under this section (even though the person disposing of the know-
how is not within the charge to corporation tax).
179
Seller controlled by buyer etc
35
(1)
This section applies if a disposal of know-how is by way of sale and—
(a)
the seller is a body of persons over which the buyer has control,
(b)
the buyer is a body of persons over which the seller has control, or
(c)
both the seller and the buyer are bodies of persons and another person
has control over both of them.
40
(2)
In such a case—
(a)
section 177 does not apply, and
(b)
no election may be made under section 178.

Corporation Tax Bill
Part 3 — Trading income
Chapter 14 — Adjustment on change of basis
80

(3)
For the purposes of this section “body of persons” includes a firm.
Chapter 14
Adjustment on change of basis
Adjustment on change of basis
180
Application of Chapter
5
(1)
This Chapter applies if—
(a)
a company carrying on a trade changes, from one period of account to
the next, the basis on which profits of the trade are calculated for
corporation tax purposes,
(b)
the old basis accorded with the law or practice applicable in relation to
10
the period of account before the change, and
(c)
the new basis accords with the law and practice applicable in relation
to the period of account after the change.
(2)
The practice applicable in any case means the accepted practice in cases of that
description as to how profits of a trade should be calculated for corporation tax
15
purposes.
(3)
A company changes the basis on which profits of a trade are calculated for
corporation tax purposes if the company makes—
(a)
a relevant change of accounting approach (see subsection (4)), or
(b)
a change in the tax adjustments applied (see subsections (5) and (6)).
20
(4)
A “relevant change of accounting approach” means—
(a)
a change of accounting principle or practice that, in accordance with
generally accepted accounting practice, gives rise to a prior period
adjustment, or
(b)
a change from using UK generally accepted accounting practice to
25
using generally accepted accounting practice with respect to accounts
drawn up in accordance with international accounting standards.
(5)
A “tax adjustment” means any adjustment required or authorised by law in
calculating profits of a trade for corporation tax purposes.
(6)
A “change in the tax adjustments applied”—
30
(a)
does not include a change made in order to comply with amending
legislation not applicable to the previous period of account, but
(b)
includes a change resulting from a change of view as to what is
required or authorised by law or as to whether any adjustment is so
required or authorised.
35
181
Giving effect to positive and negative adjustments
(1)
An amount by way of adjustment must be calculated in accordance with
section 182.
(2)
If the amount produced by the calculation is positive—
(a)
the amount is brought into account as a receipt in calculating the profits
40
of the trade, and

Corporation Tax Bill
Part 3 — Trading income
Chapter 14 — Adjustment on change of basis
81

(b)
the receipt is treated as arising on the first day of the first period of
account for which the new basis is adopted.
(3)
If the amount produced by the calculation is negative—
(a)
a deduction is allowed for the amount as an expense of the trade in
calculating the profits of the trade, and
5
(b)
the expense is treated as arising on the first day of the first period of
account for which the new basis is adopted.
(4)
This section is subject to—
(a)
section 183 (no adjustment for certain expenses previously brought into
account),
10
(b)
section 184 (cases where adjustment not required until assets realised
or written off), and
(c)
section 185 (change from realisation basis to mark to market).
182
Calculation of the adjustment
The amount of the adjustment is calculated as follows.
15
Step 1
Add together any amounts representing the extent to which, comparing the
two bases, profits were understated (or losses overstated) on the old basis.
The amounts are—

Amounts

20

1
Receipts which on the new basis would have been brought

into account in calculating the profits of a period of account

before the change, so far as they were not so brought into

account.

2
Expenses which on the new basis fall to be brought into

25

account in calculating the profits of a period of account after

the change, so far as they were brought into account in

calculating the profits of a period of account before the

change.

3
Deductions in respect of opening trading stock or opening

30

work in progress in the first period of account on the new

basis, so far as they—

(a)
are not matched by credits in respect of closing

trading stock or closing work in progress in the last

period of account before the change, or

35

(b)
are calculated on a different basis that if used to

calculate those credits would have given a higher

figure.

4
Amounts recognised for accounting purposes in respect of

depreciation in the last period of account before the change,

40

so far as they were not the subject of an adjustment for

corporation tax purposes, where such an adjustment would

be required on the new basis.