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This change has no implications for the amount of tax paid, who pays it or when. It affects only administrative matters.
Change 62: Relationships treated as loan relationships etc: Industrial and provident society payments treated as interest under loan relationship: clause 499
This change provides that share interest and loan interest of a registered industrial and provident society and share interest of an agricultural co-operative society are treated as trading income where the company is a party to the respective shares or loan for the purposes of a trade.
In the source legislation income from loan relationships is charged under Schedule D Case I if the relationship is used for the purposes of a trade (see section 80(2) of FA 1996) and otherwise under Schedule D Case III (see section 80(3) of that Act).
Section 486(1) of ICTA provides that, notwithstanding anything in the Tax Acts, share or loan interest payable by a registered industrial and provident society is to be treated as interest under a loan relationship of the society. Section 486(4) of ICTA requires any share or loan interest paid by such a society to be chargeable under Schedule D Case III.
“Share interest” is defined in section 486(12) of ICTA to include dividends or other sums payable to a shareholder by reference to shareholding in the society. “Loan interest”, which is also defined in that section, would fall within the loan relationships provisions (Chapter 2 of Part 4 of FA 1996) regardless of section 486 of ICTA. However, section 486(4) of ICTA arguably has the effect of charging such interest under Case III only, but the matter is unclear as the words “Notwithstanding anything in the Tax Acts” only occur in section 486(1) of ICTA and the point arises as to whether section 486(4) is overridden by section 80 of FA 1996, which would give Chapter 2 of Part 4 of FA 1996 precedence.
Section 81(4) of FA 1996 excludes share capital from being treated as a debt and hence from being a loan relationship. It seems that the wording of section 486(1) of ICTA does not require the shareholding itself to be treated as a loan relationship. For that to be the case the definition of “share” in section 103 of FA 1996 would need amendment in the same way that it is amended to exclude building society shares which, as a result, are treated as loan relationships. (Section 477A(3) of ICTA, which is not unlike section 486(1), merely requires building society dividends to be treated as liabilities arising under a loan relationship but does not extend the deeming provision to the shareholding.)
Section 486(9) of ICTA requires section 486(1) (but not subsection (4)) to have effect as if references to an industrial and provident society include a reference to an agricultural co-operative society, which complicates the matter still further.
The resulting situation appears to be as follows.
IPSs other than agricultural cooperative societies
All interest which, regardless of section 486 of ICTA, would fall to be brought into account under Chapter 2 of Part 4 of FA 1996 (“natural interest”), other than interest in respect of loan relationships of a co-operative society is chargeable under that Chapter but (arguably) solely as Schedule D Case III income.
All dividends etc which are only treated as income under a loan relationship by virtue of section 486(1) of ICTA are chargeable under Chapter 2 of Part 4 of FA 1996 but solely as Schedule D Case III income. Regardless of whether section 486(4) of ICTA applies to such income or not, there is no underlying loan relationship to fall within section 80(2) of FA 1996 and the income is chargeable under Case III by virtue of section 80(3) of FA 1996. Crown Option cannot apply in this case since the charge can only be to Schedule D Case III. (Crown Option is the right given by paragraph 84 of Schedule 18 to FA 1998 to an officer of Revenue and Customs to choose between different cases of Schedule D.)
Agricultural co-operative societies
All natural interest paid by an agricultural co-operative society is chargeable under Chapter 2 of Part 4 of FA 1996 as a payment under a loan relationship. The interest is chargeable under Schedule D Case III by virtue of section 80(3) of FA 1996 unless the underlying loan relationship is held for the purposes of a trade, in which case the income is chargeable under Case I of that Schedule by virtue of sections 80(2) and 82(2) of FA 1996. The interest does not fall within section 486(4) so there is no obligatory Case III charge under that section.
All dividends paid by an agricultural co-operative society are chargeable under Chapter 2 of Part 4 of FA 1996 as payments under a loan relationship. The dividends do not fall within section 486(4) of ICTA so there is no obligatory Case III charge under that section. But, since there is no underlying loan relationship to fall within section 80(2) of FA 1996, the income is chargeable under Case III by virtue of section 80(3) FA 1996.
The effect of clause 499 is that the Schedule D Case III charge in section 486(4) of ICTA is ignored and the existence of an underlying loan relationship that may be held for the purposes of a trade is assumed.
Whether a company pays more or less tax as a result of this change will depend on a number of factors, for example whether it has trading losses brought forward to reduce what will, as a result of this change, be a trading credit. In most cases the change is not expected to result in any tax difference.
This change is in principle adverse to some taxpayers and favourable to others but is expected to be favourable in most cases.
Change 63: Derivative contracts: amendment of references to a “relevant holding” in a collective investment scheme in relation to certain relevant contracts treated as derivative contracts: clauses 587 and 601
This change clarifies the meaning of references to a “relevant holding” in unit trust schemes, open-ended investment companies and offshore funds in determining whether a relevant contract is a derivative contract.
Paragraph 36 of Schedule 26 to FA 2002 treats as a derivative contract a relevant contract to which a company is a party in an accounting period, that is not otherwise a derivative contract for the purposes of that Schedule, if its “underlying subject matter consists wholly or partly of a holding which is, in that period, a relevant holding”. The paragraph does not directly define “relevant holding” for the purposes of this rule. Instead, paragraph 36(3) of that Schedule provides that “for the purposes of this paragraph a person holds a relevant holding in an accounting period if, at any time in that period, he holds..” and there follows a list of what such a holding may comprise. The reference here to a “person” is at odds with the reference in paragraph 36(1)(b) of that Schedule to a holding of which the underlying subject matter of a relevant contract consists.
The source legislation was modelled on a similar provision for loan relationships (see paragraph 4(1) of Schedule 10 to FA 1996). The reference there is to a holding held by a company. In adopting the model in paragraph 4 of Schedule 10 to FA 1996, the reference to a holding of a legal person was retained in error.
Clause 587(3), which rewrites paragraph 36(3) of Schedule 26 to FA 2002, gives a meaning of “relevant holding”, for the purposes of subsection (1) of that clause, that brings matters back into alignment. It defines the case where “the underlying subject matter of a contract consists wholly or partly of a relevant holding in an accounting period”. That wording matches the phrase “its underlying subject matter consists wholly or partly of a relevant holding in that period” in subsection (1).
This change also applies to clause 601, which determines the accounting basis to be used in determining the credits and debits to be brought into account in relation to a relevant holding mentioned in clause 587.
This change provides a clarification of the law which 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.
Change 64: Derivative contracts: amendment of a condition to be satisfied to determine whether the underlying subject matter of a relevant contract is “excluded property” for the purposes of Part 7: clause 591
This change adds acquiring a plain vanilla contract to the circumstances that are relevant to the contract satisfying condition A in clause 591. The circumstances in question are those in which a company carrying on life assurance business becomes a party to such a contract.
Paragraph 3 of Schedule 26 to FA 2002 sets out conditions to be satisfied if a relevant contract is to be a derivative contract for the purposes of that Schedule. (“Relevant contract” is defined in paragraph 2(2) of that Schedule as an option, a future or a contract for differences.) But paragraph 4 of Schedule 26 to FA 2002 excludes a relevant contract from contracts that are derivative contracts for the purposes of that Schedule if, although the relevant contract meets the conditions in paragraph 3 of that Schedule, its underlying subject matter consists wholly of property within specified excluded types of property. One such type is certain shares in a company or rights of a unit holder under a unit trust scheme, if the relevant contract satisfies a condition in paragraph 4(2A), (2B), (2C), (2CA) or (2D) of Schedule 26 to FA 2002.
The condition in paragraph 4(2A) of Schedule 26 to FA 2002 includes that the relevant contract is a plain vanilla contract “entered into” by a company carrying on life assurance business. (A “plain vanilla contract” is defined in paragraph 2(2B) of Schedule 26 to FA 2002 as a relevant contract other than one to which the company is treated as being a party by virtue of a provision mentioned in paragraph 2(2A) of that Schedule.) But the conditions in paragraph 4(2B), (2C) and (2CA) of Schedule 26 to FA 2002 refer to the circumstance in which the relevant contract is “entered into or acquired”. That is, the condition can be met in circumstances where the company in question was not a party to the contract when it was made but became a party to the contract at a later point, say by the assignment to it of the assignor’s rights and liabilities under the contract.
There is no reason in relation to the condition in paragraph 4(2A) of Schedule 26 to FA 2002 to distinguish between a case in which a company enters into a contract and one in which it acquires the contract. It is not HMRC’s practice to make any such distinction. Clause 591(2), which rewrites paragraph 4(2A) of Schedule 26 to FA 2002, therefore refers to a plain vanilla contract “entered into or acquired” by a company carrying on life assurance business. This brings it into line with the conditions in paragraph 4(2B), (2C) and (2CA) of Schedule 26 to FA 2002 that are also rewritten in clause 591.
Because of this change some relevant contracts may cease to be derivative contracts for the purposes of this Part, in which case profits and losses from the contract are not charged by virtue of this Part and may be subject to a more favourable regime (say, the charge on chargeable gains).
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 65: Derivative contracts: credits and debits in respect of capital expenditure: debits not to be brought into account: clause 604
This change clarifies the rule that prevents certain debits in respect of a derivative contract taken to profit and loss being brought into account under Part 7 of this Bill. The rule applies if a related debit has already been brought into account under that Part notwithstanding that it was treated as capital expenditure under generally accepted accounting practice.
Paragraph 17A of Schedule 26 to FA 2002 sets out the general rule that the amounts to be brought into account by a company for the purposes of that Schedule are those that, in accordance with generally accepted accounting practice, are recognised in determining the company’s profit or loss for the accounting period in question. Paragraph 17B of that Schedule provides that amounts so “recognised” are those recognised for accounting purposes in certain accounts or statements of the company.
Paragraph 25 of Schedule 26 to FA 2002 varies the general rule for a credit or debit that is treated in the company’s accounts as an amount brought into account in determining the value of a fixed capital asset or project. A credit or debit so treated falls outside the meaning of amounts recognised in determining the company’s profit or loss for the period. Paragraph 25 of Schedule 26 to FA 2002 provides that, notwithstanding the accounting treatment, the credit or debit is brought into account in the same way as a credit or debit to which paragraph 17A of Schedule 26 to FA 2002 refers. (There is an exception for certain debits taken into account under Schedule 29 to FA 2002 (intangible fixed assets)).
If a company decides to write down the value of the asset to which a debit within this paragraph has been added, or to create a reserve for the amortisation or depreciation of that asset, a debit will be taken to profit and loss. Such a debit would, but for the prohibition in paragraph 25(4) of Schedule 26 to FA 2002, be brought into account in the same way as credits and debits to which paragraph 17A of Schedule 26 to FA 2002 refers.
Paragraph 25 of Schedule 26 to FA 2002 matches paragraph 14 of Schedule 9 to FA 1996. Paragraph 25(4) and paragraph 14(4) were inserted in identical terms by Schedule 10 to FA 2004 (see paragraphs 56 and 33 respectively of that Schedule). A debit in respect of the writing down of the asset, or the creation of an amortisation or depreciation reserve, is not brought into account under Schedule 26 to FA 2002 (or Chapter 2 of Part 4 of FA 1996 in the case of a loan relationship) if attributable to the debit that is brought into account by the main rule in paragraph 25 of Schedule 26 to FA 2002 (paragraph 14 of Schedule 9 to FA 1996 in the case of a loan relationship). But the wording of paragraph 25(4)(b), in so far as it refers to “the interest component of the asset”, has no application to the regime for derivative contracts. Such interest is only taken into account under the regime for loan relationships in Chapter 2 of Part 4 of FA 1996. The change dispenses with the redundant words to leave the rule in terms appropriate to derivative contracts.
This change amends the scope of a rule prohibiting a deduction. Whether that amendment results in further disallowance or an easing of disallowance (or any difference) depends largely on how the company in question interpreted the provision in assessing its liabilities. In practice, it is likely to have no tax effect.
This change is in principle and in practice adverse to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.
Change 66: Derivative contracts: priority of provisions when a company ceases to be UK resident and ceases to be a member of a group: clauses 609 and 610
This change deals with the deemed assignment and reacquisition of rights and liabilities under a derivative contract on a company ceasing to be UK resident, or the rights and liabilities in question ceasing to be held for the purposes of a permanent establishment in the United Kingdom of a non-UK resident company. The deeming does not apply if such a deemed assignment and reacquisition would otherwise occur at the same time as the company leaves a group after replacing another group member as a party to the contract. It corrects a mismatch between the rules for derivative contracts and those for loan relationships as they deal with the same circumstances.
Paragraph 22A of Schedule 26 to FA 2002 applies if a company ceases to be resident in the United Kingdom or rights and liabilities under a derivative contract of a non-UK resident company cease to be held or owed for the purposes of a United Kingdom permanent establishment. In either case, the company is deemed to have assigned the rights and liabilities under its derivative contracts (or those no longer so held or owed) for a consideration equal to the fair value of the rights and liabilities, and to have reacquired them for the same amount. Paragraph 22A of Schedule 26 to FA 2002 is rewritten in clauses 609 and 610 of this Bill.
Paragraph 30A of Schedule 26 to FA 2002 deems the same assignment and reacquisition to occur, in respect of a derivative contract, if either of two circumstances applies after one member of a group has replaced another as a party to that contract, as a result of a transaction or series of transactions within paragraph 28(2)(a) or (b) of Schedule 26 to FA 2002, so as to trigger paragraph 28(3) of that Schedule. The circumstances are that the transferee company ceases to be a member of that group of companies either, firstly, solely because of an “exempt distribution”, that is, a distribution that is exempt by virtue of section 213(2) of ICTA (demergers), or, second, for any other reason. In the first case, the deemed assignment and reacquisition is triggered by and at the time of a “chargeable payment” within the meaning of section 214(2) of ICTA within five years of the company leaving the group. In the second case, the deemed assignment and reacquisition occur when the company leaves the group. Paragraph 30A of Schedule 26 to FA 2002 is rewritten in clauses 630 to 632 of this Bill.
Paragraph 10A of Schedule 9 to FA 1996, rewritten in clauses 333 and 334 of this Bill, is the equivalent for loan relationships of paragraph 22A of Schedule 26 to FA 2002. Paragraph 12A of Schedule 9 to FA 1996, rewritten in clauses 344 to 346 of this Bill, is the equivalent for loan relationships of paragraph 30A of Schedule 26 to FA 2002.
Both paragraph 22A and paragraph 30A of Schedule 26 to FA 2002 may apply at the same time (for example, a company may cease to be UK resident at the time it ceases to be a member of the group because it moves its residence abroad on being bought by a new parent who is non-UK resident). Paragraph 10A(1A) of Schedule 9 to FA 1996 avoids the same duplication in respect of loan relationships by disapplying that paragraph if paragraph 12A of that Schedule applies and the cessation mentioned in one paragraph occurs at the same time as the cessation mentioned in the other.
There is no reason for the two regimes to apply different rules in these circumstances. Clauses 609 and 610 therefore include the equivalent of paragraph 10A(1A) of Schedule 9 to FA 1996, mirroring the rewrite of that provision in clauses 333 and 334. This change brings the two regimes into line.
This change clarifies the order of priority of the operation of the provisions in question. It may, in cases where clause 631 or 632 applies instead of clause 609 or 610, defer the point at which the deemed assignment and reacquisition, and therefore the resulting incidence of a tax charge, occurs.
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 67: Derivative contracts: meaning of “impairment loss” for the purposes of the meaning of “carrying value”: clause 702
This change provides a meaning for the term “impairment loss” which is used in providing the meaning of “carrying value” in clause 702 of this Bill.
Paragraph 54(1) of Schedule 26 to FA 2002 provides that “carrying value”, where that term is used in that Schedule, is to be construed in accordance with paragraph 50A(3A) and (3B) of that Schedule. Paragraph 50A of Schedule 26 to FA 2002 brings into account under that Schedule an adjustment on a company changing to international accounting standards. Sub-paragraph (3A) provides that, for the purposes of that paragraph, the “carrying value” of a contract includes amounts recognised for accounting purposes in relation to a derivative contract in respect of a number of items, including “impairment losses (including provisions for bad or doubtful debts)”.
The term “impairment loss” is not defined in Schedule 26 to FA 2002. It is arguable that the reference in subparagraph (3A) to “amounts recognised for accounting purposes” brings with it the meaning of that term provided by generally accepted accounting practice. For example, paragraph 6 of International Accounting Standard 36 says: “impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.” And there are similar but not identical references to impairment losses in other standards. The term could therefore be included in clause 710 of this Bill (other definitions) beside a number of other terms taken from generally accepted accounting practice which have the meaning they have for accounting purposes.
However, section 103(1) of FA 1996 provides a definition of “impairment loss” for the purposes of Chapter 2 of Part 4 of that Act (loan relationships). That Chapter includes Schedule 9 to FA 1996 which has a number of paragraphs dealing specifically with impairment losses (for example, paragraphs 5ZA to 6C). Paragraph 19A of that Schedule deals with the adjustment to be made for the purposes of that Chapter on a change of accounting policy. That paragraph is drafted in very similar terms to paragraph 50A of Schedule 26 to FA 2002. It also includes the equivalent of paragraph 50A(3A) of Schedule 26 to FA 2002, with a mention of impairment losses, so that the definition in section 103(1) of FA 1996 applies.
As the provisions for derivative contracts deal with this matter in an equivalent manner to the provisions for loan relationships, it adds consistency in the construction of such equivalent provisions to adopt the definition of “impairment loss” in section 103(1) of FA 1996 for the purposes of paragraph 50A(3A) of Schedule 26 to FA 2002. That definition (together with the subsidiary definition of “impairment” in section 103(1) of FA 1996) has therefore been rewritten in clause 702(4).
This change provides a clarification of the law which 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.
Change 68: Unpaid remuneration of employees: payment made after return submitted but within 9 months of the end of the period of account: clauses 867, 1250 and 1289 and Schedule 1
This change drops the requirement to make a claim for a deduction for remuneration paid after the return is submitted but within nine months of the end of the period of account in which it is charged.
This change brings the income tax and corporation tax codes back into line in rewriting section 43 of FA 1989. And it is adopted for consistency in rewriting parallel rules in section 44 of FA 1989 and paragraph 113 of Schedule 29 to FA 2002.
Sections 43(5) and 44(5) of FA 1989 deal with profit calculations made within nine months of the end of the period of account. Paragraph (a) of each subsection requires the assumption that any remuneration unpaid at the time of the calculation will not be paid by the end of that nine month period. That means the proposed remuneration cannot be deducted in making the calculation. Paragraph (b) of each subsection provides an adjustment procedure that applies when the remuneration is paid after the calculation is made but before the end of the nine month period. If a claim is made within two years of the end of the period of account the calculation may be adjusted.
There is a parallel rule in paragraph 113(5) of Schedule 29 to FA 2002 which applies to the intangible fixed assets regime.
This change brings the adjustment procedure into line with the normal Self Assessment rules and deals with the adjustment as an amendment to a return. Section 42(7) of TMA sets out the rules for making claims. Schedule 1 to this Bill removes the reference to section 43(5) of FA 1989 in paragraph (b) of that subsection and does not replace it.
The change alters the time available for making the adjustment from two years after the end of the period of account in every case to a date that depends on the length of the period of account.
Paragraph 15(4)(a) of Schedule 18 to FA 1998 gives the time limit for making amendments to corporation tax returns. It is 12 months from the filing date for the relevant return.
Corporation tax returns are required for accounting periods. The end of a period of account will always end an accounting period. In the normal case where the company has a 12 month period of account the change makes no difference to the time limit for “claiming” the relief. The filing date is 12 months after the accounting date and the date for amending the return is 12 months after that. This is the same time limit as those in sections 43(5) and 44(5) of FA 1989.
In fact, the time limit for “claiming” the relief is unaffected if the period of account is no longer than 18 months.
Example One
A notice to file for the 12 months ended 31 December 2005 is issued in January 2006. This accounting period is included in a period of account that runs from 1 January 2005 to 30 June 2006. The filing date for the accounting period is 30 June 2007 and the amendment date 30 June 2008. This is two years after the end of the period of account.
The time limit for “claiming” the relief will be reduced only if the period of account is longer than 18 months. The filing date for the first accounting period in such a period of account is 12 months after the 18-month point. The time limit for amending the return is 12 months after that filing date. This will be less than two years after the end of the period of account.
Example Two
A notice to file for the 12 months ended 31 December 2005 is issued in January 2006. This accounting period is included in a period of account that runs from 1 January 2005 to 31 December 2006. The filing date for the accounting period is 30 June 2007 and the amendment date 30 June 2008. This is less than two years after the end of the period of account (31 December 2008).
A company is unlikely to be disadvantaged by the change. In Example Two the company would have to submit its return before 30 June 2007 (the filing date) at a time when the remuneration was unpaid. The remuneration would then have to be paid on or before 30 September 2007. Under the change the company would still have nine months to “claim” the relief (compared with 15 months under section 43(5)(b) or 44(5)(b) of FA 1989).
In practice periods of account longer than 18 months are unusual and nearly all companies affected by the provision claim the deduction in their original return.
This change puts the method of allowing relief on the same basis as that in paragraph 6 of Schedule 24 to FA 2003, rewritten in clause 1295.
Schedule 24 to FA 2003 is a similar provision to section 43 of FA 1989. It denies a deduction for amounts charged in respect of employee benefit contributions unless the benefits are provided within nine months of the end of the period in respect of which they are charged.
Paragraph 6 of Schedule 24 to FA 2003 deals with the case in which the return is made before the end of the nine month period. Unlike section 43(5) of FA 1989 it does not require a claim. It provides merely that the calculation can be adjusted. This is the most appropriate way of dealing with the point under Self Assessment.
This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.
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