Corporation Tax Bill - continued          House of Commons

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This change will not alter the amount charged to tax. The most it will do is affect the timing of that tax liability. In a small minority of cases this could mean a different rate of tax being applied, according to individual circumstances. Any overall tax effect is likely to be negligible.

Change 26: Trading income: gifts of trading stock: drop the need for the gift to be plant and machinery in the hands of the educational establishment: clause 105

This change removes the requirement that a gift to an educational establishment should qualify as plant and machinery in the hands of the educational establishment.

It brings the income tax and corporation tax codes back into line.

Section 84(1) of ICTA (gifts to educational establishments) gives relief for the gift of an article that “qualifies as plant or machinery”. Subsection (2) sets out what those words mean. The similar relief in section 83A of ICTA for gifts of trading stock to charities does not have the same condition. The change brings the relief for gifts to educational establishments into line with the relief for gifts to charities. There is no longer the need for a gift to qualify as plant and machinery before relief can be given.

This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.

Change 27: Trading income: gifts of trading stock: gifts “for the purpose of” a charity etc: clause 105

This change brings the wording of the relief for a gift to a charity, a registered club or one of the special bodies listed in clause 105(4) of this Bill into line with that for a gift to an educational establishment.

It brings the income tax and corporation tax codes back into line.

Section 84 of ICTA allows relief for a gift of an article “for the purposes of a designated educational establishment”. Those words ensure that the relief is available even if the gift is made to a person (such as a local education authority) who becomes the legal owner of the article so that it can be used in a school. In many cases the gift is not “to” the school.

Section 83A of ICTA allows similar relief but in this case the gift must be “to” a charity. The clause, instead, follows the section 84 model and allows relief for a gift “for the purposes of” a charity, a registered club or one of the listed bodies. This widens the circumstances in which relief is available.

This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.

Change 28: Trading income: gifts of trading stock: drop the need for a claim: clause 105 and Schedule 1

This change removes the requirement that a company should make a claim for relief on a gift to an educational establishment.

It brings the income tax and corporation tax codes back into line.

Section 84(3) of ICTA provides that the relief does not apply unless “the donor makes a claim”. The general approach of this Bill is not to require a claim for a trading deduction. In this case, the relief takes the form of removing the obligation to include a trade receipt. But the same principle applies here.

Section 42(7) of TMA sets out the rules for making claims. Schedule 1 to this Bill removes the reference to section 84 of ICTA in paragraph (a) of that subsection and does not replace it.

The similar relief for gifts to charities in section 83A of ICTA does not require a claim. So this change makes the two reliefs consistent.

The provisions that govern claims are not the same as the provisions that govern returns. But in practice dropping the need for a claim has only the following two consequences, both of which relate to the time available for “claiming” the relief.

First, the absolute time limit for making a claim is replaced by a time limit that may vary according to the particular circumstances. That may be because the return is issued late or because the taxpayer makes a late return. Accordingly, HMRC are no longer able to refuse a claim because it is late by reference to an absolute time limit: returns time limits and sanctions apply and they depend on the date the return was issued and submitted.

Second, mistake relief claims under paragraph 51 of Schedule 18 to FA 1998 are possible if too much tax is paid as a result of omitting the relief from the tax return. Claims under paragraph 51 of Schedule 18 to FA 1998 must be made within six years of the end of the accounting period to which the return relates.

This change is in taxpayers’ favour in principle and may benefit some taxpayers in practice. But the numbers affected and the practical effects are likely to be small.

Change 29: Trading income: gifts of medical supplies and equipment: clause 107

This change makes clear that the reliefs for gifts out of trading stock of medical supplies apply only for corporation tax purposes.

In FA 2002:

  • section 55 applies only to companies;

  • the deduction for expenses in subsection (3) applies only for corporation tax purposes;

  • subsections (3) and (4) refer to an “accounting period” of the company (which is a defined term only for corporation tax purposes); and

  • the charge to tax under subsection (4) on any benefit attributable to the making of the gift is a charge to corporation tax.

This leaves open the theoretical possibility that the relief for the gift in subsection (2) (but not for the associated costs) is available to a non-UK resident company liable to income tax (because it carries on a trade in the United Kingdom other than through a permanent establishment in the United Kingdom). Any charge (under Schedule D Case VI) on a benefit received by such a company would be charged to corporation tax, even though the company is not otherwise within the charge to that tax.

It would be surprising if Parliament’s intention was that subsection (2), but not subsection (3), should apply for income tax purposes; or that the charge on a benefit should be to a tax to which a company is not already chargeable.

In practice, it is very unlikely that trading stock could belong to a trade that is carried on in the United Kingdom, but not through a permanent establishment.

So clause 107 of this Bill rewrites section 55 of FA 2002 as providing only corporation tax relief and Schedule 1 to the Bill repeals that section.

The change removes the possibility of income tax relief. But there is a minor theoretical benefit to taxpayers because the change also removes the possibility of a corporation tax charge on a company otherwise liable only to income tax.

This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 30: Trading income: herd basis rules: meaning of “substantial part of herd”: clause 111 and clause 118

This change gives statutory effect to the practice of treating 20% of the herd as substantial.

It brings the income tax and corporation tax codes back into line.

A number of clauses in the herd basis rules refer to “a substantial part of the herd”.

  • clause 116(1) (sale of animals from herd);

  • clause 117(1) (sale of whole or substantial part of herd);

  • clause 118(4) and (5) (acquisition of new herd begun within five years of sale);

  • clause 120(1) (replacement of part sold within five years of sale); and

  • clause 124(1) (slaughter under disease control order).

What constitutes a substantial part of the herd or a substantial difference is primarily a question of fact. But this change gives statutory effect to a long-standing practice set out in paragraph 55525 of the HMRC Business Income Manual. This provides that 20% of the herd will be regarded as substantial. This does not, however, prevent a smaller percentage from being regarded as substantial.

This change assists taxpayers because it provides for certainty and uniformity. It grants relief in circumstances where the test in the source legislation (evaluation of all the facts) might have been denied.

This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 31: Trading income: herd basis rules: sale of whole or substantial part of herd: clauses 117 and 118

This change merges the rules in paragraph 3(7) to (9) of Schedule 5 to ICTA.

It brings the income tax and corporation tax codes back into line.

Paragraphs 3(7) to (9) of Schedule 5 to ICTA set out the rules relating to the sale of all or most of a herd within 12 months.

Paragraph 3(7) of Schedule 5 to ICTA applies when a herd is sold as a whole and then replaced. Paragraph 3(8) of Schedule 5 to ICTA deals with cases where the whole of a herd is sold “in circumstances in which sub-paragraph (7) above does not apply”. Or when a substantial part of a herd is sold. Paragraph 3(9) of Schedule 5 to ICTA sets out rules for the circumstances where paragraph 3(8) but not 3(7) of Schedule 5 to ICTA is relevant, provided that replacement begins to take place within five years.

ICTA does not make clear how quickly a herd must be replaced in order for paragraph 3(7) - rather than paragraph 3(8) of Schedule 5 to ICTA - to apply. This change merges these rules.

There are three practical differences between the application of the rules in paragraph 3(7) and those in paragraph 3(8) and 3(9) of Schedule 5 to ICTA.

First, paragraph 3(8) of Schedule 5 to ICTA directs that neither the profit nor the loss on the sale is to be taken into account. So, in effect, the farmer may obtain a tax-free gain on any profit from the sale. By contrast paragraph 3(7) of Schedule 5 to ICTA does not say how to deal with the proceeds of sale before it is known how many of the old herd will be replaced.

Second, if the farmer subsequently acquires a new production herd (which must be treated as a replacement herd) or animals to replace the part of the herd sold, paragraph 3(9) of Schedule 5 to ICTA recovers any tax-free gain made on the sale of the old animals. To achieve this the proceeds of the sale of each animal are brought into account at the time the replacement animal is acquired. By contrast paragraph 3(7) of Schedule 5 to ICTA contains no timing rule.

Third, in providing for the sale proceeds to be brought into account, paragraph 3(9) of Schedule 5 to ICTA allows the trading receipt to be reduced if the replacement animal is of worse quality than the old animal (on an enforced sale). Paragraph 3(7) of Schedule 5 to ICTA, however, does not permit such a reduction to be made.

Merging these rules removes these differences. It gives a common set of rules where a whole herd is sold, whether at once or over a period of up to a year. These are the rules set out in paragraphs 3(8) and (9) of Schedule 5 to ICTA.

Clause 117 begins the process of merger by providing that in all cases where a herd or a substantial part of a herd is sold within a year the profit or loss which arises from that sale is not to be taken into account. That rule is then made subject to the rules which follow in clause 118 and clause 120 which concern the acquisition of a new herd or replacement of a substantial part of a herd respectively.

It is possible that merging the rules may disadvantage the farmer who sells a herd over a period of 12 months and replaces it with a new, smaller herd. In this case clause 118(4) taxes the profit on the difference if the difference is not substantial. That subsection is based on paragraph 3(11) of Schedule 5 to ICTA and is consistent with herd rules viewed as a whole.

But it is arguable that paragraph 3(11) of Schedule 5 to ICTA does not apply to all disposals within paragraph 3(8) of Schedule 5 to ICTA. This is because paragraph 3(11) applies “Where the herd is sold as a whole” while paragraph 3(8) applies both if the herd is sold “either all at once or over a period not exceeding twelve months”. But unless the rule in paragraph 3(11) of Schedule 5 to ICTA is applied to all cases where a herd is sold within a year it would be difficult, if not impossible, to merge the rules in paragraphs 3(7) to 3(9) of Schedule 5 to ICTA. This is because it would be necessary to distinguish between the two circumstances in paragraph 3(8) in which a herd may be sold and apply different results to the two situations. This is likely to involve a more significant change in the law than the approach adopted in clause 118(4).

This change assists taxpayers because it provides a single coherent set of rules.

This change may be adverse to some taxpayers because it removes the possible argument that paragraph 3(11) did not apply to circumstances to which paragraph 3(8) applied. In other words, it removes the possible argument that, where a farmer sells a herd over a period of 12 months and replaces it with a new herd which is not substantially smaller than the old one, the notional profit on the difference is not taxable.

This change may be favourable to some taxpayers because by applying the rule in paragraph 3(8) (that disposal proceeds are taxed only when acquisition costs are allowed) to circumstances to which paragraph 3(7) would have applied, the possibility that disposal proceeds are taxable immediately is removed.

This change is adverse to some taxpayers and favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.

Change 32: Trading income: herd basis elections: five year gap in which no production herd kept: clause 123

This change gives statutory effect to the practice in paragraph 55630 of the HMRC Business Income Manual (BIM 55630).

It brings the income tax and corporation tax codes back into line.

Paragraph 4 of Schedule 5 to ICTA provides a special rule for herd basis elections where there is a gap of at least five years when the farmer does not keep a production herd of a particular class. The farmer is treated as never having kept such a production herd at all.

This approach sits oddly with the rule in paragraph 2(4) of Schedule 5 to ICTA that a herd basis election is irrevocable. It is not clear which rule has priority.

HMRC practice is to allow the farmer to decide whether or not the herd basis rules continue to apply. This is achieved by ignoring the previous election for the purposes of allowing the farmer to make a fresh election: farmers can either make a fresh election or do nothing. Clause 123 gives this practice statutory effect.

This change allows the taxpayer to select the basis of taxation.

This change is in the taxpayer’s favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 33: Trading income: securities held as circulating capital: clause 129

This change dispenses with the requirement that securities within section 473 of ICTA must be securities to which the company is beneficially entitled.

It brings the income tax and corporation tax codes back into line.

Section 473 of ICTA contains special rules for the tax treatment of certain securities held as circulating capital, the profit on the sale of which would form part of the trading profits of a company. The effect is that neither a profit nor a loss is crystallised on a conversion of the securities.

It is not clear why section 473 of ICTA applies only to securities to which a company is beneficially entitled.

There is no reason to calculate a company’s profits from dealing in securities in a fiduciary or representative capacity in a different way from a company’s profits from dealing in securities beneficially held by the company.

So clause 129 dispenses with the requirement that the company must be beneficially entitled to the shares in question. This means that clause 129 applies to transactions by companies acting in a fiduciary or representative capacity as well as to companies dealing on their own behalf.

It also means that clause 129 applies to securities in stock lending or sale and repurchase arrangements where beneficial ownership has passed to the company’s counterparty but where the company continues to account for profits and losses as if those securities had not been disposed of.

A profit or loss on the conversion of securities to which this change applies is not recognised for tax purposes until the replacement securities are disposed of.

This change affects the timing of the tax liability. It is adverse to some taxpayers and favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.

Change 34: Trading income: traders receiving distributions etc: clause 130 and Schedule 1

This change alters the test for bringing a distribution received from a UK resident company (“a UK distribution”), or a payment representative of such a distribution, into account in calculating the profits of a trade for corporation tax purposes from one based on the underlying shares to one based on the character of the receipt or payment.

It brings the income tax and corporation tax codes back into line.

Section 95 of ICTA sets out the circumstances in which a UK distribution or a payment “representative of” a UK distribution, is brought into account in calculating the corporation tax profits of the company by which the distribution is received or to which the payment is made.

Section 95 of ICTA operates by determining whether the company by which the distribution is received or to which the payment made is a dealer in relation to that distribution. Section 95(2) of ICTA tests whether the company is a dealer by reference to whether the proceeds of a notional sale by the company of the shares in respect of which the distribution is received or the payment made would be taken into account in calculating the profits of the company’s trade.

This approach is a legacy of the origin of section 95 of ICTA. Section 95 of ICTA is derived from section 54 of FA 1982. Section 54 of FA 1982 was concerned with the tax treatment of a dealer from whom a company purchased its own shares. In that context it was logical to focus on the shares rather than on the distribution. But this has the problem not only that the sale is theoretical but also that the shares may not be held by the dealer when the distribution is received. It is no longer the logical approach now that section 95 of ICTA applies to all distributions received by share dealers.

So clause 130 provides that:

  • a UK distribution is brought into account in calculating the profits of a trade if it is a trade receipt; and

  • a payment representative of such a distribution is brought into account in calculating the profits of a trade if a deduction for the payment would be disallowed only by clause 1305.

Section 208 of ICTA provides that “except as otherwise provided by the Corporation Tax Acts” corporation tax is not chargeable on dividends and other distributions. Section 95(1A) of ICTA disapplies section 208 of ICTA in the case of a UK distribution, or a payment representative of such a distribution, received by a dealer.

Paragraph 2(2)(b) of Schedule 23A to ICTA provides that an amount representative of a dividend on UK shares (a “manufactured dividend”) is treated in relation to the company by which it is paid as if it were a dividend on its own shares.

Section 337A(1)(a) of ICTA provides that “subject to any provision of the Corporation Tax Acts expressly authorising a deduction”, a company’s profits are to be computed “without any deduction in respect of dividends or other distributions”. Section 95 of ICTA expressly provides for a payment representative of a UK distribution made by a company which is a dealer to be taken into account in computing the profits of that company.

Clause 130 does not refer to a “dealer” (defined in section 95(2) of ICTA). So Schedule 1 to this Bill replaces references to that definition. See the entries for section 26(7) of F(No 2)A 2005 and section 121(3) of FA 2006, where the replacement definitions reproduce the exclusion for insurance companies in section 95(2A) of ICTA.

HMRC believe it is highly unlikely that a UK distribution could be a receipt of a trade, or that the payment of an amount representative of a UK distribution could be allowed as a trade deduction, unless the proceeds of any sale of the shares giving rise to the distribution or payment would also be treated as a receipt or allowable expense of that trade. But if this is not the case, the change may in principle be unfavourable to some taxpayers by bringing into account a UK distribution which would otherwise be exempt under section 208 of ICTA and favourable to others by allowing a deduction for a payment representative of a UK distribution which would otherwise be disallowed under section 337A(1) of ICTA.

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 35: Trading income etc: combine pools payments rules: clauses 138 and 978

This change combines sections 126 of FA 1990 and 121 of FA 1991.

It brings the income tax and corporation tax codes back into line.

Clause 138 of this Bill does not specify that payments in consequence of the 1990 reduction in pool betting duty must be made for the safety and comfort of football spectators, and that payments in consequence of the 1991 reduction in pool betting duty must be made to the Foundation for Sport and the Arts. Instead payments in consequence of any reduction in pool betting duty for either purpose will qualify.

Lord Justice Taylor’s report into the Hillsborough disaster, published on 18 January 1990, recommended that significant capital expenditure should be incurred to improve safety and comfort at football grounds. To facilitate this the rate of pool betting duty was reduced from 42.5% to 40% in FA 1990, in exchange for an agreement that the money saved by pools promoters would be given to the Football Trust 1990, which would use it to implement the Taylor recommendations.

The following year the government agreed to a further reduction of 2.5% in pool betting duty on condition that the money saved was paid to a charitable trust to be set up by the three main pools companies. The trust is called the Foundation for Sport and the Arts. For legal reasons connected with pool betting duty, the Foundation’s main purpose is the support of athletic sports and games, but up to one third of its funds may be used to promote the arts.

The objectives of sections 126 of FA 1990 and 121 of FA 1991 are to ensure that the money saved in pool betting duty can flow through to its intended purpose in full, without tax liabilities.

Because the source sections have very similar objectives and consequences, this Bill combines them.

In principle a company could divert payments from one destination to the other and still obtain a deduction, but in practice (because the payments are made under agreements with the bodies concerned) this is not possible. Even if it were possible the payments would still be supporting the defined good causes.

Clause 978 of this Bill adopts the same approach to rewriting section 126(3) of FA 1990 and section 121(3) of FA 1991. The payments made are not treated as annual payments.

The payments covered by this change are allowed as trading deductions. And the payer does not have to deduct income tax from them.

This change is in taxpayers’ favour in principle. But is expected to have no practical effect as it is in line with generally accepted practice.

Change 36: Trading income etc: extend pools payments treatment to the 1995 reduction: clauses 138 and 978

This change extends the treatment of payments in consequence of reductions in pool betting duty so that it applies to the reduction in pool betting duty made in any year.

It brings the income tax and corporation tax codes back into line.

Pool betting duty was reduced in 1990 and 1991 in exchange for agreements that the money saved would be paid to particular good causes (the Football Trust 1990 and the Foundation for Sport and the Arts, respectively).

Sections 126 of FA 1990 and 121 of FA 1991 were enacted to ensure that the money could flow through to the beneficiaries without tax consequences.

In 1995 pool betting duty was reduced again, with half of the money saved to be paid to the Football Trust and the other half to the Foundation for Sport and the Arts. But no equivalent tax legislation was enacted. In practice the payments are treated in the same way as those made from the 1990 and 1991 reductions.

Clause 138 of this Bill allows a trading deduction for payments made because of any reduction in pool betting duty. So the 1995 reduction and any further reductions which result in payments being made to the two “good causes” lead to the payments being allowed as a trading deduction.

Clause 978 of this Bill adopts the same approach to rewriting section 126(3) of FA 1990 and section 121(3) of FA 1991. The payments made are not treated as annual payments.

The payments covered by this change are allowed as trading deductions. And the payer does not have to deduct income tax from them.

This change is in taxpayers’ favour in principle. But is expected to have no practical effect as it is in line with generally accepted practice.

Change 37: Trading income: use period of account instead of tax year as the basis for certain restrictions on relief in connection with a deemed employment payment: clause 140

This change clarifies the calculation of the restriction of a deduction for a deemed employment payment and of the cap on expenses for partnerships that are treated as making a deemed employment payment.

Paragraph 18 of Schedule 12 to FA 2000 limits the deduction allowed by paragraph 17 of the Schedule in the case of a business carried on “by a partnership”. The limit is the amount that reduces the profits of the partnership for the tax year to nil. Until 2005, when section 164 of ITTOIA rewrote the income tax rule, the rule was the same for both income tax and corporation tax.

The consequential amendments made by ITTOIA do not affect the wording of the limit, which continues to use “tax year”, an expression which is defined only for income tax purposes (see paragraph 17(4) of Schedule 12 to FA 2000 and section 989 of ITA).

The profits of a trade carried on by a company in partnership are calculated as if the trade were carried on by a single company (see section 114(1) of ICTA, rewritten in this Bill as clause 1259). It is not sensible that a rule for calculating the profits of a company should apply to the profits of a tax year. Consistent with the rule in clause 139, this partnership rule refers to the profits of a period of account.

Clause 140(3) of this Bill caps the allowable expenses by reference to the steps of the calculation of the deemed employment payment. That calculation is for a tax year (see section 54 of ITEPA). But the expenses are compared with the expenses of the trade carried on by a company in partnership. As with subsection (2), it is unreasonable to require a company to calculate its profits of a tax year. So the comparison is with the expenses for a period of account.

Changes in the period over which profits are calculated could in principle increase or decrease them by small amounts and so affect the amount of tax payable.

This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.

 
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Prepared: 5 December 2008