Corporation Tax Bill

House of Commons

Session 2009 - 10
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Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 12 — Real Estate Investment Trusts
Chapter 3 — Tax treatment of profits and gains of UK REITs
268

(a)
make further provision relating to the content of a financial statement
under section 532,
(b)
prescribe the form of a financial statement, and
(c)
specify a time before which a financial statement must be submitted to
an officer of Revenue and Customs.
5
(6)
Regulations under subsection (5)(a) may in particular—
(a)
permit or require apportionment or otherwise prescribe or refer to
accounting practice;
(b)
provide for the inclusion or exclusion of specified profits, expenses,
gains, losses, assets and liabilities;
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(c)
make provision about the treatment of an interest in a business held by
a member.
Chapter 3
Tax treatment of profits and gains of UK REITs
534
Profits
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(1)
Profits of property rental business of a UK company which is, or is a member
of, a UK REIT are not charged to corporation tax.
(2)
Profits of UK property rental business of a non-UK member of a group UK
REIT are not charged to corporation tax.
(3)
Profits which—
20
(a)
arise from residual business of a UK company which is, or is a member
of, a UK REIT, and
(b)
are charged to corporation tax,

are to be so charged at a rate determined without reference to sections 18 to 23
(small profits rate and marginal relief).
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(4)
If a percentage of the profits of property rental business of a member of a group
UK REIT is excluded from a financial statement in accordance with section
533(3), that percentage of those profits is to be treated for corporation tax
purposes as profits of residual business of the member.
(5)
For the purposes of subsections (1) and (2) profits are to be calculated in
30
accordance with section 599.
535
Gains
(1)
A gain on the disposal of an asset is not a chargeable gain if—
(a)
the gain accrues to a company which is, or is a member of, a UK REIT,
and
35
(b)
condition A or B is met in relation to the asset.
(2)
Condition A is that the asset was used wholly and exclusively for the purposes
of property rental business of the company.
(3)
Condition B is that the asset was used during one or more periods of (in total)
less than a year—
40
(a)
partly for the purposes of property rental business of the company, and
(b)
partly for the purposes of residual business of the company,

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Part 12 — Real Estate Investment Trusts
Chapter 4 — Entering the UK REIT regime
269


but was otherwise used as mentioned in subsection (2).
(4)
Subsection (5) applies if a gain accrues to a company which is, or is a member
of, a UK REIT on the disposal of an asset which for one or more periods of (in
total) at least a year has been used—
(a)
partly for the purposes of property rental business of the company, and
5
(b)
partly for the purposes of residual business of the company.
(5)
Such part of the gain as may reasonably be attributed to property rental
business of the company, having regard to—
(a)
the extent to which the asset was used for the different purposes, and
(b)
the length of the periods during which it was used for those purposes,
10

is not a chargeable gain.
(6)
Gains which—
(a)
accrue to residual business of a company which is, or is a member of, a
UK REIT, and
(b)
are charged to corporation tax,
15

are to be so charged at a rate determined without reference to sections 18 to 23
(small profits rate and marginal relief).
(7)
If a percentage of the gains of property rental business of a member of a group
UK REIT is excluded from a financial statement in accordance with section
533(3), that percentage of those gains is to be treated for corporation tax
20
purposes as gains of the member’s residual business.
(8)
This section has effect in relation to a non-UK member of a group UK REIT as
if references to property rental business of the member were to its UK property
rental business.
(9)
This section is to be read as if it were contained in TCGA 1992.
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Chapter 4
Entering the UK REIT regime
536
Effects of entry: corporation tax
(1)
Property rental business carried on before entry by a company which becomes,
or becomes a member of, a UK REIT (an “incoming company”) is to be treated
30
for corporation tax purposes as ceasing at entry.
(2)
Assets which immediately before entry are involved in property rental
business of an incoming company are to be treated for corporation tax
purposes as being—
(a)
sold by the pre-entry company immediately before entry, and
35
(b)
reacquired immediately after entry by the company so far as it carries
on property rental business.
(3)
The sale and reacquisition deemed under subsection (2) is to be treated as being
for a consideration equal to the market value of the assets.
(4)
A gain accruing as a result of subsection (2) is not a chargeable gain.
40
(5)
For corporation tax purposes, one accounting period of an incoming company
ends on entry and a new one begins.

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Part 12 — Real Estate Investment Trusts
Chapter 4 — Entering the UK REIT regime
270

(6)
In the case of a group UK REIT—
(a)
if a percentage of the assets of a member of the group is excluded from
a financial statement in accordance with section 533(3), that percentage
of those assets is to be ignored in the application of subsection (2) to the
member, and
5
(b)
this section has effect in relation to a non-UK member of the group as if
references to property rental business were references to UK property
rental business of the member.
(7)
This section does not apply if—
(a)
a company which was a member of one group UK REIT becomes a
10
member of a different group UK REIT, or
(b)
a company which was a company UK REIT becomes a member of a
group UK REIT.
(8)
This section and section 537 are subject to section 559 (demergers: company
leaving group UK REIT).
15
(9)
For the meaning of “entry”, see section 607(1).
537
Effects of entry: CAA 2001
(1)
Subsections (2) to (4) apply for the purposes of CAA 2001.
(2)
The sale and reacquisition deemed under section 536(2)—
(a)
does not give rise to allowances or charges, and
20
(b)
does not enable an election to be made under section 198 or 199 of CAA
2001 (apportionment).
(3)
Section 536(3) (deemed consideration for sale and reacquisition) does not
apply.
(4)
Anything done by or to a company which becomes, or becomes a member of,
25
a UK REIT in relation to an asset which is deemed under section 536(2) to be
sold and reacquired is to be treated after entry as having been done by or to the
company so far as it carries on property rental business.
538
Entry charge
(1)
An amount of notional income calculated in accordance with section 539 (“the
30
notional amount”) is treated as arising to a company at entry.
(2)
The notional amount is treated as arising to the company’s residual business.
(3)
If the company is a UK company, it is chargeable to corporation tax under the
charge to corporation tax on income on the notional amount (which is
accordingly charged at the rate mentioned in section 534(3)).
35
(4)
If the company is a non-UK company, it is chargeable to income tax on the
notional amount (which is accordingly charged at the basic rate in accordance
with section 11 of ITA 2007).
(5)
No loss, deficit, expense or allowance may be set off against the notional
amount or against tax arising under this section.
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(6)
This section does not apply if a company—

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Part 12 — Real Estate Investment Trusts
Chapter 4 — Entering the UK REIT regime
271

(a)
which was a member of one group UK REIT becomes a member of
another group UK REIT, or
(b)
which was a company UK REIT becomes a member of a group UK
REIT.
(7)
This section is subject to section 559 (demergers: company leaving group UK
5
REIT).
539
Calculation of the notional amount
(1)
This section provides for the calculation of the amount of notional income
mentioned in section 538(1).
(2)
The calculation is—
10
(3)
“MV” means the total market value of assets which immediately before entry
are involved in—
(a)
property rental business of the company (in the case of a UK company),
or
(b)
UK property rental business of the company (in the case of a non-UK
15
member of a group UK REIT),

ignoring any asset of negative market value.
(4)
If a percentage of the assets of a member of a group UK REIT is excluded from
a financial statement in accordance with section 533(3), that percentage of those
assets is to be ignored for the purposes of subsection (3).
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(5)
“TR” means—
(a)
in the case of a UK company, the rate of corporation tax mentioned in
section 534(3), and
(b)
in the case of a non-UK company, the rate of income tax mentioned in
section 538(4).
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540
Election to treat notional income as arising in instalments
(1)
A company may elect to have the amount of notional income mentioned in
section 538(1) treated as arising in 4 instalments, the first on the date of entry
and the other 3 on the first three anniversaries of that date.
(2)
For this purpose section 539(2) has effect as if the percentage referred to were—
30
(a)
0.50% for the first instalment,
(b)
0.53% for the second instalment,
(c)
0.56% for the third instalment, and
(d)
0.60% for the fourth instalment.
(3)
If a company makes an election under subsection (1)—
35
(a)
notice of the election must be given to an officer of Revenue and
Customs with the notice under section 523 or 524 (as the case may be),
and

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Part 12 — Real Estate Investment Trusts
Chapter 5 — Assets etc
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(b)
the election cannot be revoked.
(4)
Subsection (5) applies if—
(a)
a company makes an election under subsection (1), and
(b)
before the third anniversary of entry, the company ceases to be, or to be
a member of, a UK REIT.
5
(5)
Any remaining instalments become chargeable immediately.
(6)
The Treasury may by regulations amend a percentage specified in subsection
(2) in order to reflect a change in interest rates; but any such regulations are not
to have effect in relation to elections made before the regulations come into
force.
10
Chapter 5
Assets etc
Ring-fencing of property rental business
541
Ring-fencing of property rental business
(1)
This section applies—
15
(a)
in the case of a group UK REIT, to the group and to each company
which is a member of the group, and
(b)
to a company UK REIT.
(2)
For corporation tax purposes property rental business of the group or
company is treated as a separate business, distinct from—
20
(a)
business of the pre-entry group or pre-entry company,
(b)
residual business of the group or company, and
(c)
business of the post-cessation group or post-cessation company.
(3)
For corporation tax purposes the group or company is treated as a separate
group or company so far as it carries on property rental business, distinct
25
from—
(a)
the pre-entry group or pre-entry company,
(b)
the group or company so far as it carries on residual business, and
(c)
the post-cessation group or post-cessation company.
(4)
In particular—
30
(a)
a loss made in property rental business may not be set off against
profits of residual business,
(b)
a loss made in residual business may not be set off against profits of
property rental business,
(c)
a loss made in business carried on before entry may not be set off
35
against profits of property rental business,
(d)
a loss made in property rental business may not be set off against
profits of business carried on after cessation (in respect of business of
any kind), and
(e)
receipts accruing after entry but relating to business carried on before
40
entry are not treated as receipts of property rental business.

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Chapter 5 — Assets etc
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(5)
Nothing in this section prevents a loss made in business carried on before entry
from being set off against profits of residual business.
(6)
In subsections (4) and (5) references to a loss include references to a deficit,
expense, charge or allowance.
(7)
If a percentage of the profits of property rental business of a member of a group
5
UK REIT is excluded from a financial statement in accordance with section
533(3), that percentage of those profits is to be treated for the purposes of this
section as profits of the member’s residual business.
(8)
This section has effect in relation to a non-UK member of a group, as if
references to property rental business were references to UK property rental
10
business.
(9)
For the meaning of “cessation”, see section 607(2).
542
Disapplication of certain provisions
(1)
Section 66 (ring-fencing of losses from overseas property business) does not
apply to property rental business of a UK company which is, or is a member of,
15
a UK REIT.
(2)
Sections 166 to 171 of TIOPA 2010 (transfer pricing: exemption for small and
medium enterprises) do not apply to a UK company which is, or is a member
of, a UK REIT (whether to property rental business or residual business of the
company).
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Profits: financing-cost ratio
543
Profit: financing-cost ratio
(1)
This section applies to a UK REIT if the result of the calculation in subsection
(2) is less than 1.25 for an accounting period.
(2)
The calculation is—

25

where—
PP is the UK REIT’s property profits for the accounting period (see section
544(1)), and
PFC is the UK REIT’s property financing costs for the accounting period
(see section 544(3)).
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(3)
The amount (“the excess”) given by subtracting—
(a)
the property financing costs which would cause the calculation in
subsection (2) to equal 1.25 for the accounting period, from
(b)
the UK REIT’s actual property financing costs for the period,

is charged to corporation tax in relation to the period under the charge to
35
corporation tax on income.
(4)
The excess is treated as profits of residual business—

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Part 12 — Real Estate Investment Trusts
Chapter 5 — Assets etc
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(a)
in the case of a group UK REIT, of the principal company of the group,
and
(b)
in the case of a company UK REIT, of the company.
(5)
Accordingly it is charged to corporation tax at the rate mentioned in section
534(3) (rate at which profits of residual business are charged).
5
(6)
No loss, deficit, expense or allowance may be set off against the excess.
(7)
The Commissioners for Her Majesty’s Revenue and Customs may waive a
charge to corporation tax under this section in respect of an accounting period
if they think that—
(a)
the company was in severe financial difficulties at a time in the
10
accounting period,
(b)
the result of the calculation in subsection (2) is less than 1.25 in respect
of the accounting period because of circumstances that arose
unexpectedly, and
(c)
in those circumstances the company could not reasonably have taken
15
action to avoid the result being less than 1.25.
(8)
The Treasury may make regulations which specify criteria to be applied by the
Commissioners in determining whether to waive a charge under subsection
(7).
544
Meaning of “property profits” and “property financing costs”
20
(1)
For the purposes of section 543 “property profits” for an accounting period
means—
(a)
in the case of a group UK REIT, the sum of the profits of property rental
business of members of the group that arise in the period, as shown in
the financial statement under section 532(2)(b), and
25
(b)
in the case of a company UK REIT, the amount of the profits of the
company’s property rental business (calculated in accordance with
section 599) that arise in the period.
(2)
References in subsection (1) to a company’s profits are to its profits before the
offset of—
30
(a)
capital allowances,
(b)
losses from a previous accounting period, and
(c)
amounts taken into account as a result of section 599(3).
(3)
For the purposes of section 543 “property financing costs” for an accounting
period means—
35
(a)
in the case of a group UK REIT, the amount of the financing costs
incurred in respect of property rental business of members of the
group, excluding financing costs owed by one member of the group to
another, as shown in the financial statement under section 532(2)(a),
and
40
(b)
in the case of a company UK REIT, the amount of the financing costs
incurred in the period in respect of the company’s property rental
business.
(4)
In subsection (3) “financing costs” means the cost of debt finance.
(5)
In calculating the costs of debt finance in relation to an accounting period the
45
matters to be taken into account include—