Corporation Tax Bill

House of Commons

Session 2008 - 09
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Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 8 — Intangible fixed assets
Chapter 12 — Related parties
402

840
Partnerships
(1)
The rights and powers of a person as a member of a firm are ignored unless the
person has control of or a major interest in the firm.
(2)
Whether a person has control of or a major interest in a firm is determined in
accordance with sections 836 to 839 as in relation to a company.
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(3)
For the purposes of subsection (2), references in those sections to any other
company must be read as including any other firm.
Meaning of “participator” and “associate”
841
“Participator” and “associate”
(1)
In this Chapter “participator”, in relation to a close company, has the meaning
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it has for the purposes of Part 11 of ICTA (close companies) (see section 417(1)
of that Act), except as provided in subsection (2).
(2)
“Participator” does not include a person just because the person is a loan
creditor of the company within the meaning of that Part (see section 417(7) to
(9) of ICTA).
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(3)
In this Chapter “associate”, in relation to a participator in a close company, has
the meaning given by section 417(3) of ICTA.
Connected persons
842
Introduction
(1)
Section 843 explains what is meant in this Chapter when a person is referred to
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as being connected with another person.
(2)
If that section provides that one person (“A”) is connected with another person
(“B”), B is connected with A too.
(3)
In that section—
“relative” means brother, sister, ancestor or lineal descendant, and
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“settlement” and “settlor” have the same meaning as in Chapter 5 of Part
5 of ITTOIA (see section 620 of that Act).
843
Who are connected persons
(1)
An individual (“A”) is connected with another individual (“B”) if—
(a)
A is B’s spouse or civil partner,
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(b)
A is a relative of B,
(c)
A is the spouse or civil partner of a relative of B,
(d)
A is a relative of B’s spouse or civil partner, or
(e)
A is the spouse or civil partner of a relative of B’s spouse or civil
partner.
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(2)
A person in the capacity of a trustee of a settlement is connected with—
(a)
any individual who is a settlor in relation to the settlement,
(b)
any person connected with such an individual, and
(c)
any body corporate that is connected with the settlement.

Corporation Tax Bill
Part 8 — Intangible fixed assets
Chapter 13 — Transactions between related parties
403

(3)
For the purposes of subsection (2) a body corporate is connected with a
settlement if—
(a)
it is a close company (or not a close company only because it is not UK
resident) and the participators include the trustees of the settlement, or
(b)
it is controlled by a company within paragraph (a).
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(4)
A person is connected with a company if they are related parties because of
section 835(2) or (3).
(5)
For the purposes of subsection (4) and for the purposes of section 835 as it
applies for the purposes of subsection (4)—
(a)
“company” includes any body corporate or unincorporated
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association, but does not include a firm, and
(b)
a unit trust scheme is treated as if it were a company and as if the rights
of the unit holders were shares in the company.
Chapter 13
Transactions between related parties
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Introductory
844
Overview of Chapter
(1)
This Chapter sets out special rules relating to transactions between related
parties.
(2)
Sections 845 to 849 are about the rule that transfers between a company and a
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related party are treated as being at market value.
(3)
Sections 850 and 851 set out other rules for transactions involving related
parties.
(4)
See Chapter 12 for the meaning of “related parties”.
Transfers treated as being at market value
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845
Transfer between company and related party treated as at market value
(1)
The basic rule is that a transfer of an intangible asset—
(a)
from a company to a related party, or
(b)
to a company from a related party,

is treated for all purposes of the Taxes Acts as being at market value (as
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respects both the company and the related party) if condition A or B is met.
(2)
Condition A is that the asset is a chargeable intangible asset in relation to the
transferor immediately before the transfer.
(3)
Condition B is that the asset is a chargeable intangible asset in relation to the
transferee immediately after the transfer.
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(4)
That rule is subject to—
(a)
section 846 (transfers not at arm’s length),
(b)
section 847 (transfers involving other taxes),

Corporation Tax Bill
Part 8 — Intangible fixed assets
Chapter 13 — Transactions between related parties
404

(c)
section 848 (tax-neutral transfers), and
(d)
section 849 (transfers involving gifts of business assets).
(5)
In subsection (1)—
“market value” means the price the asset might reasonably be expected to
fetch on a sale in the open market, and
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“the Taxes Acts” means the enactments relating to income tax, corporation
tax or chargeable gains.
846
Transfers not at arm’s length
(1)
Section 845 does not apply if the consideration for the transfer—
(a)
falls to be adjusted for tax purposes under Schedule 28AA to ICTA
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(provision not at arm’s length), or
(b)
falls within that Schedule without falling to be so adjusted.
(2)
For the purposes of subsection (1)(b) the consideration for a transfer falls
within that Schedule without falling to be adjusted under it if—
(a)
the conditions in paragraph 1(1) of that Schedule are met, but
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(b)
the actual provision does not differ from the arm’s length provision.
(3)
In subsection (2) “the actual provision” and “the arm’s length provision” have
the same meaning as in that Schedule (see paragraph 1(1) and paragraph 1(2)
and (3) of that Schedule respectively).
847
Transfers involving other taxes
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(1)
This section applies if—
(a)
in a case where section 845(1) applies and the asset is transferred from
the company to a related party, the transfer is at less than its market
value,
(b)
in a case where that section applies and the asset is transferred to the
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company from the related party, the transfer is at more than its market
value, and
(c)
conditions A and B apply.
(2)
Condition A is that the related party—
(a)
is not a company, or
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(b)
is a company in relation to which the asset is not a chargeable intangible
asset immediately after the transfer to it or, as the case may be,
immediately before the transfer from it.
(3)
Condition B is that the transfer—
(a)
gives rise to an amount to be taken into account in calculating any
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person’s income, profits or losses for tax purposes because of a relevant
provision, or
(b)
would do so apart from section 845(1).
(4)
If this section applies, section 845(1) does not apply in relation to the
calculation referred to in subsection (3) for the purposes of any relevant
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provision.
(5)
In this section “relevant provision” means—
(a)
section 209 of ICTA (meaning of “distribution”), and

Corporation Tax Bill
Part 8 — Intangible fixed assets
Chapter 13 — Transactions between related parties
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(b)
Part 3 of ITEPA 2003 (employment income: earnings and benefits etc
treated as earnings).
848
Tax-neutral transfers
(1)
Section 845 does not apply if the transfer is tax-neutral for the purposes of this
Part as a result of any provision in this Part.
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(2)
For such provisions, see, in particular—
(a)
section 775 (transfers within a group), and
(b)
sections 818 to 826 (transfer of business or trade).
849
Transfers involving gifts of business assets
(1)
This section applies if—
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(a)
the asset is transferred to the company mentioned in section 845(1), and
(b)
on a claim for relief under section 165 of TCGA 1992 (relief for gifts of
business assets) in respect of the transfer, a reduction is made under
section 165(4)(a).
(2)
The transfer is treated for the purposes of this Part as being at market value,
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less the amount of the reduction.
(3)
Any necessary adjustments may be made, by way of assessment, amendment
of returns or otherwise, regardless of any relevant time limits.
Other rules
850
Part realisation involving related party acquisition: exclusion of roll-over
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relief
(1)
Chapter 7 (roll-over relief in case of realisation and reinvestment) does not
apply in relation to the part realisation by a company of an intangible fixed
asset if there is a related party acquisition as a result of, or in connection with,
the part realisation.
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(2)
For this purpose there is a related party acquisition if a person who is a related
party in relation to the company acquires an interest of any description—
(a)
in the intangible fixed asset, or
(b)
in an asset whose value is derived in whole or in part from that asset.
851
Delayed payment of royalty by company to related party
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(1)
This section applies if—
(a)
a royalty is payable by a company to or for the benefit of a related party,
(b)
the royalty is not paid in full within the period of 12 months after the
end of the period of account in which a debit in respect of it is
recognised by the company for accounting purposes, and
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(c)
credits representing the full amount of the royalty are not brought into
account under this Part in any accounting period by the person to
whom it is payable.
(2)
The royalty is brought into account for the purposes of this Part only when it
is paid.
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Corporation Tax Bill
Part 8 — Intangible fixed assets
Chapter 14 — Miscellaneous provisions
406

Chapter 14
Miscellaneous provisions
Grants and other contributions to expenditure
852
Treatment of grants and other contributions to expenditure
(1)
This section applies if a grant or other payment is intended by the payer to
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meet, directly or indirectly, expenditure of a company on an intangible fixed
asset.
(2)
A gain recognised in the company’s profit and loss account in respect of the
grant or other payment is treated for the purposes of section 721 (receipts
recognised as they accrue) as a gain representing a receipt in respect of the
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intangible fixed asset.
(3)
This section does not apply to a grant within section 853.
853
Grants to be left out of account for tax purposes
(1)
This section applies to the following grants (“exempt grants”)—
(a)
grants under Part 2 of the Industrial Development Act 1982 (c. 52)
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(regional development grants), and
(b)
grants made under Northern Ireland legislation and declared by the
Treasury by order to correspond to a grant under that Part.
(2)
A gain in respect of an exempt grant to a company is ignored for the purposes
of this Part, even though it is recognised in determining the company’s profit
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or loss.
(3)
This subsection applies if, as a result of an exempt grant being brought into
account by the company to which it is made, there is a reduction—
(a)
in the amount of a loss recognised in determining the company’s profit
or loss, or
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(b)
in the amount of expenditure on an intangible fixed asset that is
capitalised for accounting purposes.
(4)
If subsection (3) applies, the amount of the reduction is added back for the
purposes of this Part.
Finance leasing
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854
Finance leasing etc
(1)
The Treasury may make provision by regulations as to the application of this
Part in relation to a company that is the finance lessor of an intangible asset that
is the subject of a finance lease.
(2)
Section 855 is about the provision that the regulations may make.
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(3)
References in this section and that section to a finance lease—
(a)
have the meaning they have for accounting purposes, and
(b)
include hire-purchase, conditional sale or other arrangements if they
are of a similar character to a finance lease.

Corporation Tax Bill
Part 8 — Intangible fixed assets
Chapter 14 — Miscellaneous provisions
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(4)
References to the finance lessor or finance lessee have a corresponding
meaning.
(5)
Regulations under this section may be made so as to have effect from 1 April
2002.
855
Further provision about regulations under section 854
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(1)
Regulations under section 854 may provide that this Part applies as if the asset
were an intangible fixed asset of the finance lessor and not a financial asset,
even though the asset is accounted for by the finance lessor as a financial asset.
(2)
The regulations may provide that this Part applies as if the amount at which
the asset is recognised in the finance lessor’s balance sheet were capitalised
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expenditure on an intangible fixed asset, but that—
(a)
no election may be made under section 730 (writing down at fixed rate:
election for fixed-rate basis) in respect of that amount, and
(b)
that amount is not to be treated as capitalised expenditure for the
purposes of section 756(2) (roll-over relief in case of realisation and
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reinvestment: conditions to be met in relation to expenditure on other
assets).
(3)
The regulations may provide that if an asset formerly recognised by the finance
lessor for accounting purposes as an intangible fixed asset becomes subject to
a finance lease (and so comes to be accounted for as a financial asset), the value
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of the asset so created is recognised as realisation proceeds of the intangible
fixed asset on the change of accounting treatment.
(4)
The regulations may provide that assets partially excluded from this Part by
sections 810 to 813 or section 902 (assets excluded except as respects royalties)
are entirely excluded from this Part as respects the finance lessor if they—
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(a)
are subject to a finance lease, and
(b)
are accounted for by the finance lessor as financial assets.
(5)
The regulations may provide for excluding from the regulations assets used by
the finance lessee for the purposes of a trade or business in respect of which the
finance lessee is liable to income tax.
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(6)
The regulations may provide that an intangible asset counts as a pre-FA 2002
asset in the hands of the finance lessor if the finance lessee is—
(a)
a company for which the asset was the whole or part of a pre-FA 2002
asset, or
(b)
a person who is a related party in relation to such a company.
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(7)
The regulations may make incidental, supplemental, consequential and
transitional provision and savings.
(8)
That provision may include modifications of the operation of other provisions
of the Corporation Tax Acts.