Clause 832: Procedure on application for clearance

2157.     This clause deals with procedural matters in respect of the clearance application under the previous clause. It is based on paragraph 88 of Schedule 29 to FA 2002.

Clause 833: Decision on application for clearance

2158.     This clause deals with the outcome of a clearance application under clause 831. It is based on paragraph 88 of Schedule 29 to FA 2002.

Chapter 12: Related parties

Clause 834: Overview of Chapter

2159.      This clause introduces the Chapter that gives rules to determine whether parties to a transaction are “related parties” and therefore subject to special rules (set out in Chapter 13 of this Part). It is new.

2160.     The approach in this Bill to “related parties” differs in two ways from that in the source legislation.

2161.     First, the provisions that define who are “related parties” precede the rules that then apply to them.

2162.     Second, those two groups of rules are separated into different Chapters.

Clause 835: “Related party”

2163.     This clause defines “related party”. It is based on paragraph 95 of Schedule 29 to FA 2002.

2164.     The definition depends on terms that are defined in the eight clauses that immediately follow this clause.

Clause 836: “Control”

2165.     This clause defines “control” for the related party rules. It is based on paragraph 96 of Schedule 29 to FA 2002.

Clause 837: “Major interest”

2166.     This clause defines “major interest” for the related party rules. It is based on paragraph 96 of Schedule 29 to FA 2002.

Clause 838: General rule

2167.     This clause gives a general rule about the attribution of rights and powers for the related party rules. It is based on paragraph 97 of Schedule 29 to FA 2002.

Clause 839: Rights and powers held jointly

2168.     This clause gives a further rule about the attribution of rights and powers, held jointly, for the related party rules. It is based on paragraph 98 of Schedule 29 to FA 2002.

Clause 840: Partnerships

2169.     This clause gives a further rule about the attribution of rights and powers for the related party rules. It is based on paragraph 99 of Schedule 29 to FA 2002.

Clause 841: “Participator” and “associate”

2170.     This clause defines certain terms used in the related party rules. It is based on paragraph 100 of Schedule 29 to FA 2002.

Clause 842: Introduction

2171.      This clause introduces the rules that determine whether a person is connected with another for the purposes of the related party rules. It is based on paragraph 101 of Schedule 29 to FA 2002.

Clause 843: Who are connected persons

2172.     This clause states which persons are connected for the purposes of the related party rules. It is based on paragraph 101 of Schedule 29 to FA 2002.

Chapter 13: Transactions between related parties

Clause 844: Overview of Chapter

2173.     This clause gives a “route map” of the Chapter. It is new.

2174.     The Chapter sets out the special rules that apply to transactions between persons who are “related parties” within the meaning of the rules in Chapter 12 of this Part.

Clause 845: Transfer between company and related party treated as at market value

2175.     This clause gives the main related party, market value rule. It is based on paragraph 92 of Schedule 29 to FA 2002.

2176.     Paragraph 92 of Schedule 29 to FA 2002 also sets out the exceptions to the basic rule. When the intangible fixed assets rules were first introduced there were only two exceptions. But, subsequently, further exceptions were added and the paragraph grew in both length and complexity with little commonality in the substance of the exceptions. It is therefore rewritten in five clauses in this Bill, the first stating the basic market value rule and the four immediately following stating the exceptions.

Clause 846: Transfers not at arm’s length

2177.     This clause disapplies the market value rule in clause 845 when a transfer falls within the provisions mentioned because it is not at arm’s length. It is based on paragraph 92 of Schedule 29 to FA 2002.

Clause 847: Transfers involving other taxes

2178.      This clause partially disapplies the market value rule in clause 845 in prescribed circumstances. It is based on paragraph 92 of Schedule 29 to FA 2002.

2179.     Where the clause has effect, it is only in respect of the party to the transaction that is not within the intangible fixed asset rules.

Clause 848: Tax-neutral transfers

2180.      This clause disapplies the market value rule in clause 845 when the transfer is “tax-neutral” within the meaning of this Part. It is based on paragraph 92 of Schedule 29 to FA 2002.

Clause 849: Transfers involving gifts of business assets

2181.      This clause disapplies the market value rule in clause 845 when the transfer is a gift of a business asset qualifying for relief under the capital gains rules. It is based on paragraph 92 of Schedule 29 to FA 2002.

Clause 850: Part realisation involving related party acquisition: exclusion of roll-over relief

2182.     This clause prohibits roll-over relief under Chapter 7 of this Part if an intangible fixed asset is partly realised and an interest in it is acquired by a related party. It is based on paragraph 93 of Schedule 29 to FA 2002.

Clause 851: Delayed payment of royalty by company to related party

2183.     This clause gives a timing rule for the deduction of a royalty paid to a related party. It is based on paragraph 94 of Schedule 29 to FA 2002.

2184.     The effect of subsection (2) is to bring approximate symmetry to the timing of the charge on the recipient of the royalty and relief for the payer.

Chapter 14: Miscellaneous provisions

Overview

2185.     This Chapter groups together a number of miscellaneous rules, many of relatively limited or specialised application.

Clause 852: Treatment of grants and other contributions to expenditure

2186.     This clause brings grants and other contributions in respect of intangible fixed assets into account. It is based on paragraph 102 of Schedule 29 to FA 2002.

2187.     Subsection (2) refers to a gain recognised in the profit and loss account. This includes amounts recognised separately as incomings or netted off against expenditure.

Clause 853: Grants to be left out of account for tax purposes

2188.      This clause excludes from the previous clause certain grants made out of UK public funds. It is based on paragraph 103 of Schedule 29 to FA 2002.

Clause 854: Finance leasing etc

2189.     This clause provides for finance leased intangible fixed assets to be brought within this Part, in respect of the lessor. It is based on paragraph 104 of Schedule 29 to FA 2002.

2190.      The rules in this Part apply automatically without adaptation to a finance leased intangible fixed asset of the lessee in the same way as they would if the asset were simply purchased with the aid of a loan. But special provisions are required to bring finance leased assets within the scope of this Part for the lessor. That is because finance leases are, for the lessor, financial assets and financial assets are excluded by clause 806(1).

Clause 855: Further provision about regulations under section 854

2191.     This clause states the regulations that may be made in respect of finance leased intangible fixed assets under clause 854. It is based on paragraph 104 of Schedule 29 to FA 2002.

2192.     Regulations have been made and are in SI 2002/1967.

Clause 856: Assets acquired or realised together

2193.     This clause requires individual values to be allocated to assets acquired or realised together with others as part of the same bargain. It is based on paragraph 105 of Schedule 29 to FA 2002.

Clause 857: Deemed market value acquisition: adjustment where nil accounting value

2194.     This clause provides for accounting entries based on market value for the purposes of the calculation rules. It is based on paragraph 106 of Schedule 29 to FA 2002.

2195.     This clause is relevant when an intangible fixed asset is transferred at a nil accounting value but is treated under the rules in this Part as acquired at market value. The most common example is internally-generated goodwill.

Clause 858: Fungible assets

2196.     This clause gives a “single asset” rule for assets that are “fungible”. It is based on paragraph 107 of Schedule 29 to FA 2002.

2197.     Subsection (2) defines “fungible assets”. An example (from the dairy farming industry) is milk quota.

Clause 859: Asset ceasing to be chargeable intangible asset: deemed realisation at market value

2198.     This clause gives a market value deemed realisation and reacquisition rule in three particular cases. It is based on paragraph 108 of Schedule 29 to FA 2002.

2199.     Subsection (2) lists the cases to which the clause applies. In each, without changing ownership, the asset ceases to be a “chargeable intangible asset”. That is, any gain on realisation would cease to fall within the intangible fixed assets rules (see clause 741).

2200.     There is an obverse rule in clause 863 which applies when an asset becomes a chargeable intangible asset.

Clause 860: Asset ceasing to be chargeable intangible asset: postponement of gain

2201.     This clause gives relief in certain cases where clause 859(2)(a) applies. It is based on paragraph 109 of Schedule 29 to FA 2002.

Clause 861: Treatment of postponed gain on subsequent realisation

2202.     This clause recovers the relief given under clause 860 if there is a subsequent realisation of the intangible fixed asset within six years of the company ceasing to be UK resident. It is based on paragraph 109 of Schedule 29 to FA 2002.

Clause 862: Treatment of postponed gain in other cases

2203.     This clause recovers the relief given under clause 860 in three other particular cases. It is based on paragraph 109 of Schedule 29 to FA 2002.

Clause 863: Asset becoming chargeable intangible asset

2204.     This clause gives an accounting value deemed acquisition rule in three particular cases. It is based on paragraph 110 of Schedule 29 to FA 2002.

2205.     Subsection (1) lists the cases to which the clause applies. In each, without changing ownership, the asset becomes a “chargeable intangible asset”. That is, any gain on realisation would fall within the intangible fixed assets rules (see clause 741).

2206.     This is the obverse of the rule in clause 859 which applies when an asset ceases to be a chargeable intangible asset.

Clause 864: Tax avoidance arrangements to be ignored

2207.     This clause neutralises the effect on the calculations where there are transactions intended to exploit the intangible fixed asset rules. It is based on paragraph 111 of Schedule 29 to FA 2002.

2208.     If “tax avoidance arrangements” are entered into they are ignored in calculating entitlement to credits and debits in respect of intangible fixed assets.

Clause 865: Debits for expenditure not generally deductible for tax purposes

2209.     This clause applies some general rules, outside this Part, which restrict deductions. It is based on paragraph 112 of Schedule 29 to FA 2002.

Clause 866: Delayed payment of employees’ remuneration

2210.     This clause prevents a deduction for employees’ remuneration paid late. It is based on paragraph 113 of Schedule 29 to FA 2002.

2211.     It is possible, in certain circumstances, for employees’ remuneration to come within the intangible fixed asset rules. An example might be the remuneration of staff employed in promoting a company’s product brands. If the remuneration is not paid within nine months from the end of the accounting period for which it is charged in the accounts, paragraph 113 of Schedule 29 to FA 2002 defers the tax deduction for that remuneration until it is paid.

2212.     Paragraph 113 of Schedule 29 to FA 2002 is modelled on section 43 of FA 1989 which applies the same restriction outside this Part to other income types. For income tax, section 43 was rewritten in sections 36 and 37 of ITTOIA as two sections. For clarity and consistency that model is followed for corporation tax. This clause rewrites that part of paragraph 113 of Schedule 29 to FA 2002 that states the main restriction and, in so doing, is consistent with the approach to rewriting section 43 of FA 1989.

Clause 867: Provisions supplementing section 866

2213.     This clause gives interpretative and other supporting rules for the previous clause. It is based on paragraph 113 of Schedule 29 to FA 2002.

2214.     Subsection (5) rewrites paragraph 113(5) of Schedule 29 to FA 2002 and contains a Change. Subsection (4) deals with the case in which the company submits its tax return before the end of the nine months period mentioned in clause 866(2) and all or any of the remuneration is unpaid. The company must assume the remuneration will remain unpaid. If, subsequently, the remuneration is paid within the time limit the calculation can be adjusted and the return amended. The Bill drops the requirement under paragraph 113(5) of a claim for that adjustment. This mirrors the rewrite of section 43(5) of FA 1989 as a general calculation rule in clause 1289(3). See Change 68 in Annex 1.

Clause 868: Delayed payment of pension contributions

2215.     This clause delays a deduction for employees’ pension contributions paid late. It is based on paragraph 114 of Schedule 29 to FA 2002.

Clause 869: Bad debts etc

2216.     This clause gives special rules applying to debts. It is based on paragraph 115 of Schedule 29 to FA 2002.

2217.     The rules in paragraph 115 of Schedule 29 to FA 2002 correspond to general rules that apply outside this Part; that is, the rules in sections 88D and 94 of ICTA rewritten in Part 3 (trading income).

Clause 870: Assumptions for calculating chargeable profits

2218.     This clause gives special rules when this Part applies to a “controlled foreign company”. It is based on paragraph 116 of Schedule 29 to FA 2002.

Chapter 15: Adjustments on change of accounting policy

Overview

2219.     This Chapter rewrites the rules in Part 13A of Schedule 29 to FA 2002. Part 13A gives rules dealing with a company’s change of accounting policy where it affects assets within the intangible fixed assets regime.

2220.     Part 13A of Schedule 29 to FA 2002 applies, in particular, when a company changes between UK generally accepted accounting practice and International Accounting Standards. It ensures that any change in accounting value of the assets resulting from the change of accounting policy will be brought into account for tax purposes.

Clause 871: Introduction to Chapter

2221.     This clause explains when the rules in this Chapter apply. It is based on paragraph 116A of Schedule 29 to FA 2002.

Clause 872: Adjustments in respect of change

2222.     This clause provides for an adjustment when the value of an intangible fixed asset changes as a result of a change of accounting policy. It is based on paragraph 116B of Schedule 29 to FA 2002.

2223.     This clause provides for the change in value to translate into a corresponding credit or debit.

Clause 873: Effect of application of section 872 in later period and subsequently

2224.     This clause sets out the effects of an adjustment under the previous clause. It is based on paragraph 116B of Schedule 29 to FA 2002.

Clause 874: Original asset not subject to fixed-rate writing down

2225.     This clause provides for an adjustment when a change of accounting policy results in one intangible fixed asset being treated as two or more assets and gives the calculation rules. It is based on paragraph 116C of Schedule 29 to FA 2002.

Clause 875: Effect of application of section 874 in later period and subsequently

2226.     This clause sets out the effects of an adjustment under the previous clause. It is based on paragraph 116C of Schedule 29 to FA 2002.

Clause 876: Original asset subject to fixed-rate writing down

2227.     This clause ensures the calculation rules work properly when a change of accounting policy results in an intangible fixed asset that was subject to a fixed-rate writing down election under clause 730 being treated as two or more assets. It is based on paragraph 116D of Schedule 29 to FA 2002.

2228.     It gives rules:

• to apportion the former tax written-down value of the original intangible fixed asset to each disaggregated asset on the basis of the ratio of their new accounting values; and

• to determine how written-down value and cost recognised for tax purposes will be identified subsequently.

2229.     The election under clause 730 in respect of the original intangible fixed asset applies to that asset for the period prior to the change and to each of the disaggregated assets subsequently.

Clause 877: Election for fixed-rate writing down in relation to resulting asset

2230.     This clause allows a fixed rate writing down election under clause 730 to be made in respect of disaggregated assets and gives calculation rules to deal with the effects. It is based on paragraph 116E of Schedule 29 to FA 2002.

Clause 878: Exclusion of credits or debits brought into account under other provisions

2231.     This clause prevents double counting and gives priority to other rules in this Part where double counting might otherwise arise. It is based on paragraph 116G of Schedule 29 to FA 2002.

Clause 879: Subsequent events affecting asset subject to adjustment under this Chapter

2232.     This clause gives rules on subsequent accounting adjustments in respect of intangible fixed assets which have already been subject to the provisions of this Chapter on a change of accounting policy. It is based on paragraph 116H of Schedule 29 to FA 2002.

Chapter 16: Pre-FA 2002 assets etc

Overview

2233.     The clauses in this Chapter are based on the provisions in Part 14 of Schedule 29 to FA 2002 “Commencement and transitional provisions” and some of the key terms used in the source legislation have been revised.

2234.     There are two tests which together determine whether an asset can come within this Part of the Bill. The first is that the asset must be goodwill or an intangible fixed asset for accountancy purposes and not fall within certain statutory exceptions.

2235.     The second brings within the scope of this Part only those intangible fixed assets which:

• came into existence on or after 1 April 2002; or

• were acquired directly or indirectly from independent parties on or after that date.

2236.     Assets in existence before 1 April 2002 remain outside this Part and subject to general corporation tax rules for as long as they remain within the same economic family as they did before that date. This basic rule is subject to a number of exceptions.

2237.     The source legislation identifies intangible fixed assets that do not fall within the regime as “existing assets” and the law which governs their tax treatment as the “existing law”. This Part replaces these terms with new, more appropriate terms.

Clause 880: Overview of Chapter

2238.     This clause gives a “route map” of the Chapter and introduces a revised approach to some key terms. It is new.

Clause 881: Meaning of “pre-FA 2002 assets”

2239.     This clause defines a key term. It is new.

2240.     This and clause 880 together replace paragraph 117 of Schedule 29 to FA 2002 as a general introduction to the intangible fixed assets regime. The focus of paragraph 117 of Schedule 29 is the “commencement date”, that is the date at which the intangible fixed assets regime came into force: 1 April 2002. And it refers to the law which applied up to that date as “the existing law”. This Part revises the approach to both these concepts.

2241.      This Part drops “the commencement date” as a defined term, throughout the rules and refers instead directly to 1 April 2002 on each occasion that such reference is necessary.

2242.     This Part also drops the expression “the existing law” and refers to “the pre-FA 2002 law”. Similarly dropped is the related expression “existing assets” (defined in paragraph 118(3) of Schedule 29 to FA 2002) in favour of “pre-FA 2002 assets” (defined in this clause).

Clause 882: Application of this Part to assets created or acquired on or after 1 April 2002

2243.     This clause gives the general timing rule to identify which assets come within this Part. It is based on paragraph 118 of Schedule 29 to FA 2002.

Clause 883: Assets treated as created or acquired when expenditure incurred

2244.     This clause defines when an asset is created or acquired for the purposes of clause 882: when the expenditure is incurred. It is based on paragraph 120 of Schedule 29 to FA 2002.

Clause 884: Internally-generated goodwill: time of creation

2245.     This clause gives a special rule defining when internally-generated goodwill is created for the purposes of clause 882. It is based on paragraph 121 of Schedule 29 to FA 2002.