INTRODUCTION

1.     These explanatory notes relate to the Corporation Tax Bill as introduced in the House of Commons on 4 December 2008. They have been prepared by the Tax Law Rewrite project at HMRC to assist readers of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of its contents. So if a clause or part of a clause does not seem to require explanation or comment, none is given.

3.     The commentary on each clause indicates the main origin or origins of the clause. A full statement of the origins of each clause is contained in the Bill’s Table of Origins.

4.     At the end of the commentary there is supporting material in two annexes.

• Annex 1 contains details of the minor changes in the law made by the Bill.

• Annex 2 contains lists of:

• the Extra-Statutory Concessions to which the Bill gives effect;

• the minor changes made by the Bill which involve giving statutory effect to principles derived from case law; and

• provisions not included in the Bill on the grounds of redundancy.

Summary

5.     The main purpose of the Corporation Tax Bill is to rewrite the charge to corporation tax and the primary corporation tax legislation used by companies in computing their income.

6.     The Bill does not generally change the meaning of the law when rewriting it. The minor changes which it does make are within the remit of the Tax Law Rewrite project and the Parliamentary process for the Bill. In the main, such minor changes are intended to clarify existing provisions, make them consistent or bring the law into line with well established practice.

Background

The Tax Law Rewrite project

7.     In December 1995 the Inland Revenue presented a report to Parliament on the scope for simplifying the United Kingdom tax system (The Path to Tax Simplification). The main recommendation was that United Kingdom direct tax legislation should be rewritten in clearer, simpler language.

8.     This recommendation was warmly welcomed, both in Parliament and in the tax community. In his November 1996 Budget speech the then Chancellor of the Exchequer (the Rt Hon Kenneth Clarke QC MP) announced that the Inland Revenue would propose detailed arrangements for a major project to rewrite direct tax legislation in plainer language.

9.     The project team has been carrying out this work. The aim is that the rewritten legislation should use simpler language and structure than previous tax legislation. The members of the project are drawn from different backgrounds. They include longstanding HMRC employees, former private sector tax professionals and parliamentary counsel including (as head of the drafting team) a senior member of the Parliamentary Counsel Office.

Steering Committee

10.     The work of the project is overseen by a Steering Committee, chaired by the Rt Hon the Lord Newton of Braintree OBE DL. The membership of the Steering Committee as at 31 October 2008 was:

The Rt Hon the Lord Newton of Braintree OBE DL (Chairman)

Dr John Avery Jones CBE

Adam Broke

Baron Christopher of Leckhampton CBE

Nicholas Dee

Dave Hartnett CB

The Rt Hon Michael Jack MP

Eric Joyce MP

District Judge Rachel Karp

Professor John Tiley CBE

John Whiting CBE

Consultative Committee

11.     The work is also reviewed by a Consultative Committee, representing the accountancy and legal professions and the interests of taxpayers. The membership of the Consultative Committee as at 31 October 2008 was:

Robina Dyall      Chairman

Brian Atkinson     100 Group

Adam Broke      Special Committee of Tax Law Consultative Bodies

Colin Campbell      Confederation of British Industry

Russell Chaplin     London Chamber of Commerce & Industry

Mary Fraser      Association of Chartered Certified Accountants

Malcolm Gammie CBE QC     The Law Society of England and Wales

Julian Ghosh QC     Revenue Bar Association

Keith Gordon     Chartered Institute of Taxation

Terry Hopes      Institute of Chartered Accountants in England and Wales

Bob McInerney     Federation of Small Businesses

Isobel d’Inverno      Law Society of Scotland

Amy Jones     Institute of Chartered Accountants of Scotland

Simon McKie      Institute of Chartered Accountants in England and Wales

Lakshmi Narain     Chartered Institute of Taxation

Francis Sandison     The Law Society of England and Wales

Michael Templeman     Institute of Directors

Professor David Williams      Office of the Social Security Commissioners

Mervyn Woods      Confederation of British Industry

Consultation

12.     The work produced by the project has been subject to public consultation. This has allowed all interested parties an opportunity to comment on draft clauses.

13.     This consultation took the form of a series of papers which published clauses in draft. There were 20 of these, published between July 2006 and November 2008 and a draft Bill was published for consultation in February 2008. All these documents are available on the Tax Law Rewrite website.

14.     The project also held detailed informal discussions and workshops with leading private sector tax professionals and HMRC specialists to consider the drafting of the more complex areas of rewritten tax legislation, for example, loan relationships and derivative contracts.

15.     Those who responded to one or more of the papers, or to the draft Bill, include:

Alma Consulting Group

Chartered Institute of Taxation

Confederation of British Industry

Deloitte & Touche LLP

Ernst & Young LLP

Institute of Chartered Accountants in England and Wales

International Swaps and Derivatives Association, Inc.

KPMG LLP

Law Society

London Investment Banking Association

London Society of Chartered Accountants

PricewaterhouseCoopers LLP

Note: this list excludes those who asked that their responses be treated in confidence.

This Bill

The end of the Schedules

16.     ITTOIA completed the abolition of Schedules for charging income for income tax. This Bill repeals the Schedules so far as they remain for corporation tax and therefore marks the end of the Schedules.

Features of the Bill

17.     The Bill:

• contains the basic corporation tax provisions including the charge to tax, accounting periods and provisions relating to residence;

• contains provisions relating to trading and property income and income from other sources;

• contains special provisions for companies affecting the calculation of income, such as those for loan relationships, derivative contracts and intangible fixed assets;

• contains provisions governing particular types of expenditure, for example, expenditure on research and development and films; and

• will take the place of many provisions within ICTA, FA 1996, FA 2001 and FA 2002 as the main Act for the areas of corporation tax covered by this Bill.

18.     The Bill has 1330 clauses and four Schedules.

19.     The clauses are arranged as follows:

Part 1: Introduction

Part 2: Charge to corporation tax: basic provisions

Part 3: Trading income

Part 4: Property income

Part 5: Loan relationships

Part 6: Relationships treated as loan relationships etc

Part 7: Derivative contracts

Part 8: Intangible fixed assets

Part 9: Intellectual property: know-how and patents

Part 10: Miscellaneous income

Part 11: Relief for particular employee share acquisition schemes

Part 12: Other relief for employee share acquisitions

Part 13: Additional relief for expenditure on research and development

Part 14: Remediation of contaminated land

Part 15: Film production

Part 16: Companies with investment business

Part 17: Partnerships

Part 18: Unremittable income

Part 19: General exemptions

Part 20: General calculation rules

Part 21: Other general provisions

20.     The Schedules are:

Schedule 1: Minor and consequential amendments

Schedule 2: Transitionals and savings

Schedule 3: Repeals and revocations

Schedule 4: Index of defined expressions

21.     Tables of Origins and Destinations have also been prepared. The Table of Destinations shows the destination not only of repealed provisions but of all provisions rewritten in the Bill.

Glossary

22.     The commentary uses a number of abbreviations. They are listed below.

COMMENTARY ON CLAUSES

Part 1: Introduction

Clause 1: Overview of Act

23.     This clause describes the content of the Bill. It is new.

24.     Subsections (1) and (2) make it clear that that a large part of the Bill is directly concerned with the application of the charge to corporation tax on income.

25.     Subsection (3) notes that Part 7 also includes provision for the charge to corporation tax on chargeable gains in relation to derivative contracts.

26.     Subsection (4) notes that Parts 5 to 8 have a role in relation to the treatment of deficits and losses in connection with the matters to which the Parts relate.

27.     Subsections (5) and (6) describe the particular cases covered by Parts 11 to 18 and subsection (7) the provisions of general application in Parts 19 to 21.

28.     Subsection (8) notes where abbreviations and defined expressions used in the Bill can be found.

Part 2: Charge to corporation tax: basic provisions

Chapter 1: The charge to corporation tax

Overview

29.     The process of separating income tax and corporation tax began with ITTOIA and continued with ITA, which substantially completed the rewrite of income tax legislation for income tax purposes. Following that there were two parallel sets of income tax principles. Those in rewrite style apply only for income tax purposes and, for example, no longer include Schedules such as Schedule D and its Cases.

30.     Prior to this Bill corporation tax has been dependent on the continuing existence of the income tax rules in unrewritten style so that, for example, those Schedules and Cases continue to be applied for the purposes of corporation tax.

31.     This Bill continues and finalises the separation process so that the relevant principles apply separately for corporation tax. The adoption of this approach means that section 9 of ICTA (computation of income: application of income tax principles) is repealed by this Bill (apart from section 9(5) which theoretically could have a continuing effect). Some of the provisions of section 9 of ICTA are rewritten in clause 969 and there is a transitional provision in Schedule 2.

32.     This Chapter deals with the charge to corporation tax on profits. The approach retains the principle of a single charge, currently under section 6 of ICTA. The charge under clause 2 is on amounts of income and on chargeable gains that together form the “profits pot”.

33.     This contrasts with the multiple charges to income tax in the Income Tax Acts, primarily ITTOIA, and reflects the different history of the two taxes.

34.     The way the charge on profits operates is explained in the commentary on clause 2. This clause rewrites both section 6(1) and (4) of ICTA and section 9(1) and (4) of that Act. In the light of the separation of corporation tax from income tax it is necessary to find a different way of expressing the relationship between the general charge to corporation tax on income and the provisions that deal with its application.

35.     There are also other charges to corporation tax. These are charges to an amount of corporation tax and they do not feature in the “profits pot”. There is an example of this kind of charge in this Bill - in clause 75{j032704}(2) (retraining courses: recovery of tax).

36.     These are provisions of an administrative nature mainly recovering excessive relief. In some of the charges of this kind there are references to the assessment being made under Schedule D Case VI. The Case VI label will disappear along with Schedule D and the other Cases with the repeal of section 18 of ICTA. The references are removed by consequential amendments in Schedule 1. An example is the amendment to paragraph 27(4) of Schedule 16 to FA 2002.

Clause 2: Charge to corporation tax

37.     This clause provides the charge to corporation tax on profits. It is based on section 6(1) and (4) and section 9(1) and (4) of ICTA.

38.     Subsection (1) states that corporation tax on profits is charged for a financial year for which an Act provides. It is based on the two overlapping propositions in section 6(1) of ICTA.

39.     Under subsection (2) “profits” in Part 2 means “income and chargeable gains, except in so far as the context otherwise requires”. This interpretation derives from section 6(4) of ICTA. The Bill amends section 6(4) of ICTA in Schedule 1.

40.     Chargeable gains are defined in section 1(1) of TCGA. In subsection (3) “ the charge to corporation tax on income” is introduced as a label. The expression is defined for corporation tax purposes as a result of an amendment to section 834(1) of ICTA made by Schedule 1 to the Bill.

41.     Subsection (4) provides that the charge to corporation tax on income in effect depends on there being another provision of the Corporation Tax Acts that applies it.

42.     This subsection is based on section 9(1) and (4) of ICTA. Section 9(1) in effect controls the meaning of “income” in section 6 of ICTA. As noted in the overview the Bill will complete the split between income tax and corporation tax and the formulation in section 9(1) of ICTA is no longer apposite since its wording is adapted to the circumstances of applying one body of tax law (income tax principles) for the purposes of another tax (corporation tax).

43.     The effect of section 9 of ICTA is that the scope of the charge to income tax determines what is income for corporation tax purposes (except as otherwise provided by the Tax Acts). Income tax, although primarily a charge to tax on things which would be regarded as income in its ordinary sense, is not exclusively a charge on such things. Section 9(4) provides that anything that is within the charge to income tax is within the charge to corporation tax on income “whether expressed to be income or not and whether an actual amount or not”.

44.     So the effect of section 9 of ICTA is that (subject to the provisions of the Corporation Tax Acts) the charge to corporation tax on income is driven by the particular heads of the charge to income tax.

45.     The purpose of this clause is to achieve an equivalent effect, so that the charge to corporation tax on income is driven by the particular heads of the charge to corporation tax on income. In this way the clause substitutes the provisions of the Corporation Tax Acts for the income tax provisions. For example clause 35 applies the charge to corporation tax on income to the profits of a trade.

Clause 3: Exclusion of charge to income tax

46.     This clause ensures that income of a company within the charge to corporation tax is not chargeable to income tax as well as corporation tax. It is based on section 6(2) of ICTA.

Clause 4: Exclusion of charge to capital gains tax

47.     This clause ensures that chargeable gains of a company within the charge to corporation tax are not chargeable to capital gains tax as well as corporation tax. It is based on section 6(3) of ICTA.

Clause 5: Territorial scope of charge

48.     This clause sets out the territorial scope for the charge to corporation tax. It is based on section 8(1) and section 11(1) and (2) of ICTA.

49.     Subsection (1) deals with the position of companies resident in the United Kingdom. It restates section 8(1) of ICTA which, although expressed in general terms, only has effect in relation to UK resident companies (because of the exception under section 11 for non-UK resident companies).

50.     Chapter 3 of this Part sets out the statutory rules for company residence. Chapter 4 explains what are chargeable profits in the case of non-UK resident companies.

Clause 6: Profits accruing in fiduciary or representative capacity

51.     This clause deals with profits accruing directly to the company where it is acting in a fiduciary or representative capacity, for example as a nominee. It is based on section 8(2) of ICTA.

52.     In this case the charge under clause 2 only applies where the company has a beneficial interest in the profits.

53.     When a company goes into liquidation it ceases to be the beneficial owner of its assets. The exception in subsection (2) means that in this case the company’s profits remain within the charge to corporation tax.

Clause 7: Profits accruing under trusts

54.     This clause sets out the treatment of profits that do not accrue to the company directly but in which the company has a beneficial interest under a trust. It is based on section 8(2) of ICTA.

55.     The words “in any case in which it would be so chargeable if the profits accrued to it directly” are not reproduced because the treatment for which the clause provides makes them unnecessary. Profits which are treated as accruing to a company directly are chargeable to corporation tax in the same circumstances that they would have been had they in fact accrued directly to the company.

56.     There is no reference to profits arising under a partnership in contrast to section 8(2) of ICTA. Provisions for the charge to corporation tax on the profits of corporate partners are set out elsewhere in the Bill and in particular in Part 17.

Clause 8: How tax is charged and assessed

57.     This clause sets out how corporation tax is charged and assessed. It is based on section 8(3) and section 12(1) of ICTA.

58.     The reference to deductions in section 8(3) and section 12(1) of ICTA and the words in brackets in section 12(1) “(whether or not received in or transmitted to the United Kingdom)” have not been rewritten since they do not add anything substantive to these provisions. There are rules elsewhere about what deductions can be made and this clause together with clause 5 make it clear that the charge is on profits wherever arising.

59.     Section 70(1) is not rewritten in the Bill but is reflected in subsection (3) of this clause which contains the general rule about the basis of assessment.

Chapter 2: Accounting periods

Overview

60.     This Chapter gives the definition of accounting period. It is based on section 12 of ICTA.

61.     The accounting period is a basic building block of corporation tax because corporation tax is charged by reference to accounting periods. For nearly all established UK resident companies the accounting period coincides with the 12 month period for which it makes up its accounts. Most of the Chapter is taken up with rules explaining what happens outside the usual case.

62.     The Chapter does not rewrite section 12(8) of ICTA. Section 12(8) is an administrative provision that deals with the validity of assessments. The Chapter is concerned with when accounting periods begin and end, and not with the circumstances in which an officer of Revenue and Customs may make an assessment or determination.

Clause 9: Beginning of accounting period

63.     This clause identifies when an accounting period begins. It is based on section 12 and section 342A of ICTA.

64.     Subsection (1)(a) deals with the case in which a company comes within the charge to corporation tax. Subsection (1)(a) states an important general rule. This Bill does not reproduce the two examples given in section 12(2)(a) of ICTA of circumstances in which this general rule would apply (becoming UK resident, acquiring a source of income). The examples add nothing useful and might obscure the general rule.

65.     Subsection (1)(b) deals with the usual case of a company that is already within the charge to corporation tax so that a new accounting period begins when the previous accounting period ends.

66.     Subsection (4) disapplies this clause in the case of a company being wound up. Clause 12, which makes special provision about companies being wound up, applies instead.

67.     Subsection (6) is a general signpost that, in certain circumstances, the rules in this clause are modified by rules in other provisions of the Corporation Tax Acts that deal with particular cases. The implications for accounting periods will be clear when considering the cases in question (for example, paragraph 3 of Schedule 10 to FA 2006 (sale of lessor companies) and paragraph 52 of Schedule 22 to FA 2000 (tonnage tax)).

Clause 10: End of accounting period

68.     This clause identifies the end of an accounting period. It is based on section 12 of ICTA.

69.     The starting point for the clause to apply is that the company has an existing accounting period. The occurrence of any one of the listed events brings that accounting period to an end. In many cases clause 9(1)(b) then applies to start a new accounting period.

70.     The opening words of subsection (1) provide that an accounting period ends “on the first occurrence of any of” the events listed in paragraphs (a) to (j). These words fall to be read in relation to each accounting period which is commenced. The effect of these words is not that the first event on that list to occur settles how all subsequent accounting periods of that company are to end. Rather, the effect is that each accounting period may be ended by the occurrence of a different event, depending on what happens in that particular accounting period.

71.     The rules applying to companies in administration have been integrated into the general rules. The case is different from where a company is being wound up. In that case (see clause 12) there is a self-contained set of rules about when a company’s accounting periods end. In the case of a company in administration, the general rules about when an accounting period of a company end continue to apply, but there are two additional circumstances in which an accounting period ends. These are the circumstances mentioned in subsection (1)(i) and (j).

72.     The legislation rewritten by subsections (1)(i) and (j), (2), (3) and (4) only applies to companies that enter administration on or after 15 September 2003. This limitation is preserved in Schedule 2 (transitionals and savings).