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Clause 1277: Income charged on withdrawal of relief after source ceases
3270. This clause sets out how relief given under this Part is withdrawn when income ceases to be unremittable after the source of the income has ceased. It is based on section 584(4) of ICTA. The corresponding rule for income tax is in section 844 of ITTOIA.
3271. If relief cannot be withdrawn in accordance with clause 1276, because the trade or property business in question has permanently ceased, the amount in respect of which relief is withdrawn is dealt with as a post-cessation receipt under Chapter 15 of Part 3 (trading income) or Chapter 9 of Part 4 (property income) of this Bill. In both cases, the provision in the relevant Chapter limiting its application is disapplied as unnecessary.
3272. For any other case where relief is withdrawn after the source has ceased, subsection (4) provides that the income should be taxed as if the source had not ceased. See Change 19 in Annex 1.
3273. Income charged by virtue of this clause is, in the source legislation, charged under Schedule D Case VI (rather than Schedule D Case V or another charge). The potential relevance of such income to relief under section 396 of ICTA (losses from miscellaneous transactions) is preserved by consequential amendments in Schedule 1 to this Bill, which amend that section and insert section 834A of ICTA. See the commentary on Schedule 1 for the insertion of section 834A of ICTA.
Clause 1278: Valuing unremittable income
3274. This clause sets out how unremittable income is valued if relief under this Part is not claimed. It is based on section 584(8) of ICTA. The corresponding rule for income tax is in section 845 of ITTOIA.
3275. The clause applies if no claim is made under clause 1275 for relief under this Part. In such a case, the charge to tax is not deferred. So the income is charged to corporation tax in the accounting period to which it refers. This clause determines the sterling value of the amount to be charged.
Part 19: General exemptions
Overview
3276. This Part groups all of the clauses which provide exemption for income otherwise charged to corporation tax by this Bill. The exemptions, where relevant, apply to both United Kingdom and foreign income unless one of these kinds of income is expressly excluded in the clause.
Clause 1279: Exemption of profits from securities free of tax to residents abroad (“FOTRA securities”)
3277. This clause exempts FOTRA securities specified in clause 1280(1) from corporation tax and sets out the two conditions that must be met if that exemption is to apply. It is based on section 154 of FA 1996. The corresponding rule for income tax is in section 714 of ITTOIA.
Clause 1280: Section 1279: supplementary provision
3278. This clause sets out the three different classes of United Kingdom Government securities exempt in the hands of non-UK residents (FOTRA securities) and defines the term “the exemption condition” and “gilt-edged security” used in this clause. It is based on section 154(8) of FA 1996 and section 161 of FA 1998. The corresponding rule for income tax is in section 713 of ITTOIA.
Clause 1281: Income from savings certificates
3279. This clause provides an exemption for income from savings certificates where the holding is within specified limits. It is based on section 46(1), (3), (4) and (6) of ICTA. The corresponding rule for income tax is in section 692 of ITTOIA.
3280. The source legislation refers to the limits in terms of purchase by, or on behalf of, a person. Subsection (2) rewrites this as “acquisition” to avoid confusion for situations such as joint ownership where special regulations apply. It also refers to the regulations as limiting a person’s holding in line with the way the regulations are written.
3281. Subsection (2) introduces the words “so far as”. This allows exemption to be conferred in part in respect of multiple savings certificates. See Change 92 in Annex 1.
Clause 1282: Income from Ulster Savings Certificates
3282. This clause provides an exemption for income from Ulster Savings Certificates for holdings within specified limits. It is based on section 46 of ICTA, which also deals with savings certificates generally (see clause 1281). The corresponding rule for income tax is in section 693 of ITTOIA.
3283. Although Ulster Savings Certificates have not been issued since March 1997, there are still holdings which have not been redeemed. Consequently it is necessary to rewrite this provision to ensure that interest continuing to be paid in respect of these holdings is exempt from corporation tax.
3284. Subsection (4) introduces the words “so far as”. This allows exemption to be conferred in part in respect of multiple savings certificates. See Change 92 in Annex 1.
3285. Subsection (4) uses “acquisition” rather than purchase and refers to a person’s holding in line with the way the regulations are written.
3286. Subsection (5) does not specify that the claim for exemption is to be made to the Board. Where a notice to deliver a corporation tax return has been issued, paragraphs 57 and 58 of Schedule 18 to FA 1998 require the claim to be made in the return or by amendment of the return if possible. See Change 1 in Annex 1.
Clause 1283: Interest from tax reserve certificates
3287. This clause exempts interest on tax reserve certificates from corporation tax. It is based on section 46(2) of ICTA.
Clause 1284: Housing grants
3288. This clause exempts from corporation tax grants paid under legislation intended to assist in providing, maintaining or improving housing. It is based on section 578 of ICTA. The corresponding rule for income tax is in section 769 of ITTOIA.
3289. Subsection (1) reflects the effect of the devolution settlements. See Change 15 in Annex 1.
Clause 1285: UK company distributions
3290. This clause sets out the exemption from the charge to corporation tax on dividends and other distributions made by a UK resident company. It is based on section 208 of ICTA.
3291. The judgement in the case of Strand Options and Futures Ltd v Vojak, 76 TC 220 CA 2, provides judicial interpretation of section 208 of ICTA. The Court of Appeal held that the exemption referred specifically to leaving dividends and other distributions out of account in computing income, which does not mean that the amount of a distribution should be left out of account in computing a chargeable gain.
3292. Subsection (2) encapsulates the court’s interpretation of the legislation in respect of distributions and their inclusion in a chargeable gains computation.
3293. Section 337A(1)(a) of ICTA, rewritten as clause 1305, denies a deduction in computing profits for corporation tax purposes in respect of dividends and other distributions. The wording of section 208 of ICTA makes no distinction between receipts and deductions in computing income, and it therefore potentially overlaps with section 337A(1)(a) of ICTA. The words “as receipts” have therefore been added to this clause to clarify its role.
3294. The clause also provides signposts to certain exceptions to the general rule.
Clause 1286: VAT repayment supplements
3295. This clause exempts VAT repayment supplement from corporation tax. It is based on section 827 of ICTA. The corresponding rule for income tax is in section 777 of ITTOIA.
Clause 1287: Incentives to use electronic communications
3296. This clause exempts from corporation tax incentives provided under regulations for the use of electronic communications. It is based on section 143 of FA 2000. The corresponding rule for income tax is in section 778 of ITTOIA.
Part 20: General calculation rules
Overview
3297. This Part contains a number of generally applicable rules. They apply to all income charged to corporation tax.
3298. The rules are included here to save repetition at numerous points in the Bill. Some of the rules apply mainly to trading and property income within Parts 3 and 4 of this Bill. The approach for income tax in ITTOIA is to put one version of the rule in the trading income Part, with another version of the rule in the general provisions Part. But for corporation tax the rules apply also to expenses of management (see Part 16 of this Bill) and expenses of insurance companies (see section 76 of ICTA).
Chapter 1: Restriction of deductions
Clause 1288: Unpaid remuneration
3299. This clause defers a deduction for employees’ (or an office-holder’s) remuneration in a period of account if that remuneration remains unpaid nine months after the period has ended. It is based on section 43 of FA 1989. The corresponding rule for income tax is in section 36 of ITTOIA.
3300. Section 43 of FA 1989 was introduced when the assessment of employment income was put on a receipts basis. A deduction for employees’ pay may be linked to the time when the pay is received by the employees.
3301. This clause uses “income from any source” rather than “profits or gains”, to define the scope of the rule. See the commentary on the omission of “gains” in the overview of Part 3 of this Bill. There is a separate rule for expenses of management in clause 1249.
3302. Schedule 2 to this Bill preserves the commencement rule for the amendment of the source legislation by Schedule 24 to FA 2003.
Clause 1289: Unpaid remuneration: supplementary
3303. This clause provides definitions and further explanation of the main rule in clause 1288. It is based on section 43 of FA 1989. The corresponding rule for income tax is in section 37 of ITTOIA.
3304. Subsection (1) applies clause 1288 to provisions made in the accounts for amounts that may become employees’ remuneration.
3305. Subsection (3) deals with the case in which the company submits its tax return before the end of the nine month limit in clause 1288(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. See Change 68 in Annex 1.
Employee benefit contributions
Overview
3306. The next eight clauses deal with the deduction allowed in respect of an employer’s contribution to an employee benefit scheme. They are based on Schedule 24 to FA 2003. The corresponding rules for income tax are in sections 38 to 44 of ITTOIA.
3307. The clauses give a comprehensive set of rules for determining when deductions can be made for payments made by an employer to a third party to hold or use to provide benefits for the employer’s employees.
Clause 1290: Employee benefit contributions
3308. This clause sets out the conditions under which a deduction may be allowed. It is based on paragraphs 1 and 8 of Schedule 24 to FA 2003. The corresponding rules for income tax are in section 38 of ITTOIA.
3309. The legislation rewritten in this clause does not apply to deductions that would otherwise be allowed for periods ending before 27 November 2002, or in respect of employee benefit contributions made before that date. This limitation is preserved in Schedule 2 (transitionals and savings).
Clause 1291: Making of “employee benefit contributions”
3310. This clause defines the transactional characteristics which must be present if a payment is to qualify for relief as an “employee benefit contribution”. It is based on paragraphs 1 and 9 of Schedule 24 to FA 2003. The corresponding rule for income tax is in section 39 of ITTOIA.
Clause 1292: Provision of qualifying benefits
3311. This clause sets out what is meant by the provision of qualifying benefits. It is based on paragraph 2 of Schedule 24 to FA 2003. The corresponding rules for income tax are in section 40 of ITTOIA.
Clause 1293: Timing and amount of certain qualifying benefits
3312. This clause sets out:
- when benefits in the form of money are treated as provided; and
- how to calculate the value of benefits provided by the transfer of an asset.
3313. It is based on paragraphs 2 and 5 of Schedule 24 to FA 2003. The corresponding rules for income tax are in section 41 of ITTOIA.
Clause 1294: Provision or payment out of employee benefit contributions
3314. This clause sets out the rules for allocating the provision of qualifying benefits, or payment of qualifying expenses, by the third party against the employee benefit contributions received. It is based on paragraph 4 of Schedule 24 to FA 2003. The corresponding rules for income tax are in section 42 of ITTOIA.
Clause 1295: Profits calculated before end of 9 month period
3315. This clause applies if the company makes its corporation tax return before the end of the nine month period. It is based on paragraph 6 of Schedule 24 to FA 2003. The corresponding rule for income tax is in section 43 of ITTOIA.
Clause 1296: Interpretation of sections 1290 to 1296
3316. This clause interprets and defines terms. It is based on paragraphs 3 and 9 of Schedule 24 to FA 2003. The corresponding rules for income tax are in section 44 of ITTOIA.
Clause 1297: Life assurance business
3317. This clause modifies the operation of clause 1290 where the company in question is charged on the I minus E basis in respect of life assurance business and claims a deduction for expenses under section 76 of ICTA. It is based on paragraph 7 of Schedule 24 to FA 2003.
Clause 1298: Business entertainment and gifts
3318. This clause and the following two clauses deal with expenditure on business entertainment or gifts. It is based on section 577 of ICTA. The corresponding rule for income tax is in sections 45 and 867 of ITTOIA.
3319. Section 577 of ICTA denies a deduction for certain expenses “in computing profits chargeable to corporation tax under Schedule D”. Profits chargeable to corporation tax under Schedule D include profits of a business which is neither a trade nor a property business. And section 577(7)(b) of ICTA indicates that references to a trade, for the purposes of the section, include references to a business.
3320. The exceptions to the general rules are not limited to trades. See Change 93 in Annex 1.
Clause 1299: Business entertainment: exceptions
3321. This clause provides exceptions to the prohibition in clause 1298 relating to business entertainment in certain circumstances. It is based on section 577 of ICTA. The corresponding rules for income tax are in section 46 of ITTOIA.
Clause 1300: Business gifts: exceptions
3322. This clause provides exceptions to the prohibition in clause 1298 relating to business gifts in certain circumstances. It is based on section 577 of ICTA. The corresponding rules for income tax are in section 47 of ITTOIA.
3323. Subsection (3) allows the Treasury to increase the monetary limit in paragraph (b). See Change 94 in Annex 1.
3324. Subsection (5) makes an exception for gifts to charities and named bodies. Section 577(9) of ICTA limits this exception to the computation of profits under Schedule D Cases I and II, that is, to income calculated under rules rewritten in Part 3 of this Bill. It was not intended that the exception should be applied narrowly to the disadvantage of a business other than a trade or property business. This section extends the exception to such businesses. See Change 93 in Annex 1.
Clause 1301: Restriction of deductions for annual payments
3325. This clause prevents annual payments for which the consideration is either a dividend or not taxable from being deducted in calculating a company’s income from any source. It is based on section 125 of ICTA. The corresponding income tax rule is in sections 843 and 904 of ITA.
3326. Subsections (4) to (6) together set out the conditions that must be met by an annual payment in order for the rule in subsection (1) to apply to the payment.
3327. The source legislation specifies that the payment must not be interest (section 125(2)(a) of ICTA). Annual payments within subsection (2) do not include interest, so this does not need to be stated explicitly. In addition, no specific reference is made to annuities (also mentioned in the source legislation) as these are simply one type of annual payment.
3328. This clause does not rewrite the exclusion in section 125(3)(a) of ICTA for payments which in the hands of the recipient are income falling within section 627(2)(a) of ITTOIA. Such payments cannot be relevant for corporation tax purposes since such payments can only be made by an individual. Nor does this clause rewrite the commencement provision in section 125(5) of ICTA, which is spent.
Clause 1302: Social security contributions
3329. This clause prevents a deduction for most social security contributions for any corporation tax purpose. It is based on section 617 of ICTA. The corresponding rule for income tax is in section 868 of ITTOIA.
Clause 1303: Penalties, interest and VAT surcharges
3330. This clause contains the general rule that tax penalties and interest are not to be deducted. It is based on section 827 of ICTA. The corresponding rule for income tax is in section 869 of ITTOIA.
3331. This clause refers to “profits” because the rule covers both the calculation of income and deductions (such as expenses of management within Part 16) from total profits.
3332. Section 90(1)(b) of TMA prohibits a deduction for interest payable “under this Part” of TMA. Section 90(2) cancels the prohibition for interest under sections 87 and 87A of TMA. This is because interest under those sections may be taken into account as a loan relationship debit (see Parts 5 and 6 of this Bill). But the prohibition does apply to interest under section 86 of TMA, which applies for corporation tax purposes only for accounting periods ending before 1 October 1993. So that rule is “saved” by Schedule 2 to this Bill and not rewritten in this clause.
3333. The table in subsection (2) sets out the specific statutory references because a general description of the penalties etc would not be precise enough. But the second column of the table is a description of the tax to indicate what is involved.
Clause 1304: Crime-related payments
3334. This clause prohibits any deduction for expenses incurred in making a payment:
- the making of which is a criminal offence, or which would be a criminal offence if the payment were made in the United Kingdom; or
- which is made in response to a demand, the making of which is a criminal offence.
3335. The clause is based on section 577A of ICTA. The corresponding rule for income tax is in section 870 of ITTOIA.
3336. The source legislation denies a deduction for certain crime-related payments “in computing profits chargeable to corporation tax under Schedule D”. Profits chargeable to tax under Schedule D include profits of a business which is neither a trade nor a property business.
3337. The clause applies to income charged to corporation tax. Some kinds of income are not charged under Schedule D in the source legislation. But the prohibition of a deduction is not thought to have any practical effect on income that is not charged under Schedule D. So the scope of the prohibition is unchanged.
3338. The clause overrides any provision which otherwise allows a deduction to be made in calculating the profits of a trade. See clause 51(1)(b) of this Bill.
Clause 1305: Dividends and other distributions
3339. This clause sets out the prohibition on deducting dividends or other distributions made by a company in computing that company’s profits chargeable to corporation tax. It is based on section 337A(1)(a) of ICTA.
Chapter 2: Other general rules
Clause 1306: Losses calculated on same basis as miscellaneous income
3340. This clause is based on numerous provisions, including section 827 of ICTA. The corresponding rule for income tax is in section 872 of ITTOIA.
3341. The application of the clause is limited to “miscellaneous income”, defined in subsection (3) by reference to section 834A of ICTA (inserted by Schedule 1 to this Bill). The source legislation does not generally limit the scope of the rule. For example, section 827(1) of ICTA says “the payment shall not be allowed as a deduction in computing any income, profits or losses for any corporation tax purposes”. But in practice this clause affects only the calculation for corporation tax purposes of amounts, other than profits within Part 3 or 4 of this Bill, chargeable under a provision listed in the table in section 834A of ICTA.
3342. Subsection (2) ensures that this rule does not overturn any rules about the calculation of losses. For example, see section 398 of ICTA (which deals with the calculation of losses for the purposes of a claim under section 396 of ICTA).
3343. See the related commentary on clause 47 of this Bill.
Clause 1307: Apportionment etc of miscellaneous profits and losses to accounting period
3344. This clause provides for apportionment of profits and losses when a company’s period of account does not coincide with an accounting period. It is based on section 72 of ICTA. The corresponding rule for income tax is in sections 203 and 871 of ITTOIA.
3345. Section 72 of ICTA applies “in the case of any profits or gains chargeable.. under Case I, II or VI of Schedule D”. Apportionment is therefore not limited to the case of profits or losses of a trade. See the related commentary for section 52.
3346. The clause applies where income is chargeable under a provision to which section 834A of ICTA applies. That section is inserted by Schedule 1 to this Bill. Section 834A of ICTA does not apply to income to which Chapter 8 of Part 10 (income not otherwise charged) applies which arises from a source outside the United Kingdom (see subsection (3) of that section). Subsection (2) of this clause qualifies the reference to that section so that the benefit of the apportionment rules extends to such income (that is, to income charged in the source legislation under Schedule D Case V). See Change 95 in Annex 1.
3347. The only circumstance in which aggregation within subsection (3)(b) will occur is when a company is in liquidation and has fixed accounting periods of 12 months in accordance with clause 12 of this Bill.
3348. This clause does not carry over the rewrite change in section 871(5) of ITTOIA whereby apportionment is permitted by a measure of time other than the number of days in the respective periods, as required by section 72(2) of ICTA. HMRC consider that a day cannot fall into more than one accounting period.
3349. See also the paragraph headed “miscellaneous profits and losses: apportionment to accounting periods ending before 1 April 2009” in Part 21 of Schedule 2 to the Bill which provides for a period of account that straddles the end of the financial year 2008 and the beginning of the financial year 2009.
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