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Clause 11: Sterling equivalents: basic rule
62. This clause sets out the method for translating an amount from a non-sterling currency into sterling where required by clauses 7, 8 or 9. It is based on sections 92D and 92E of FA 1993.
63. This clause is subject to special rules dealing with losses carried forwards or backwards.
Clause 12: Sterling equivalents: carried-back amounts
64. This clause sets out how a loss is to be converted into sterling from another currency in order to establish the sterling amount of a carried-back loss. It is based on section 92DA of FA 1993.
Clause 13: Sterling equivalents: carried-forward amounts
65. This clause sets out how a loss is to be converted into sterling from another currency in order to establish the sterling value of a loss carried forward to a later period. It is based on section 92DB of FA 1993.
Clause 14: Carried-back amounts
66. This clause applies where a company accounts in sterling or identifies sterling as its functional currency, but carries back a loss to an accounting period where it computed its profits and losses for tax purposes in a currency other than sterling. It is based on section 92DC of FA 1993.
Clause 15: Carried-forward amounts
67. This clause applies where a company accounts in sterling or identifies sterling as its functional currency, but carries forward a loss to an accounting period where it computes its profits and losses for tax purposes in a currency other than sterling. It is based on section 92DD of FA 1993.
Clause 16: Sections 13(2) and 15(5): profit against which carried-forward amount to be set
68. This clause provides interpretation of what is meant by the profit in a later period against which a loss is to be set off. It is based on section 92DE(3) and (4) of FA 1993.
Clause 17: Interpretation of Chapter
69. This clause provides interpretation of a number of terms used in the Chapter. It is based on sections 92DE and 92E of FA 1993.
Part 3: Companies with small profits
Overview
70. The profits of a company are charged to tax at a lower rate than the main corporation tax rate if the profits of the company are within certain limits.
71. A lower rate is used if the company’s profits (for a full year) are no more than the “lower limit”. In making this comparison, there may be two adjustments.
72. First, some franked investment income is added to the profits of the company.
73. Second, the amount of the “lower limit” is split between companies that are under common control.
Clause 18: Profits charged at the small profits rate
74. This clause sets out the three conditions for the small profits rate to apply. It is based on section 13 of ICTA.
75. The first condition is that the company is resident in the United Kingdom in the accounting period. If a company becomes, or ceases to be, resident in the United Kingdom an accounting period ends (see the rules about accounting periods in section 10 of CTA 2009). So the effect of this condition is that the company must be resident in the United Kingdom throughout the accounting period.
76. Some non-resident companies trading in the United Kingdom through a permanent establishment may be entitled to the small profits rate as a result of a provision of a DTA.
77. The second condition is that the company is not a “close investment-holding company”. That expression is defined in clause 34.
78. The third condition is that the “augmented profits” (defined in clause 32) of the company do not exceed the lower limit. If the profits fall between that limit and the upper limit, marginal relief may be due in accordance with clause 19.
79. This clause does not include a requirement that the company should make a claim for the relief. See Change 1 in Annex 1.
Clause 19: Marginal relief
80. This clause is the first of five that set out the rules for marginal relief. It is based on section 13 of ICTA.
81. Two conditions for the relief are the same as the first two conditions for entitlement to the small profits rate (see the commentary on clause 18). But for the purposes of this relief there are two further conditions. The “augmented profits” (defined in clause 32) of the company need to fall between:
- the “lower limit” (in ICTA, the “lower relevant maximum amount”); and
- the “upper limit” (in ICTA, the “upper relevant maximum amount”).
82. The limits are set out in clause 24.
83. Finally, if this clause is to apply, the company must have no ring fence profits.
84. This clause does not include a requirement that the company should make a claim for the relief. See Change 1 in Annex 1.
Clause 20: Company with only ring fence profits
85. This clause is the second of five that set out the rules for marginal relief. It is based on section 13 of ICTA, section 3 of FA 2007 and section 7 of FA 2008.
86. Three conditions for the relief are the same as those for entitlement to marginal relief (see the commentary on clause 19). But for the purposes of this clause the augmented profits must include only ring fence profits.
87. Subsection (2) applies the “ring fence fraction” instead of the standard fraction (see clause 19(2)).
Clause 21: Company with ring fence profits and other profits
88. This clause is the third of five that set out the rules for marginal relief. It is based on section 3 of FA 2007 and section 7 of FA 2008.
89. Three conditions for the relief are the same as those for entitlement to marginal relief (see the commentary on clause 19). But for the purposes of this clause the augmented profits include both ring fence and other profits.
90. Subsection (2) gives a deduction in two parts: one relating to the ring fence amount (see clause 22); the other relating to the remaining amount (see clause 23).
Clause 22: The ring fence amount
91. This clause is the fourth of five that set out the rules for marginal relief. It is based on section 3 of FA 2007 and section 7 of FA 2008.
92. The clause calculates the marginal relief available on the ring fence amount. It uses the appropriate part (“UR”) of the upper limit.
Clause 23: The remaining amount
93. This clause is the fifth of five that set out the rules for marginal relief. It is based on section 3 of FA 2007 and section 7 of FA 2008.
94. The clause calculates the marginal relief available on the remaining (non-ring fence) amount. It uses the appropriate part (“UZ”) of the upper limit.
Clause 24: The lower limit and the upper limit
95. This clause sets the limits for small profits rate and marginal relief. It is based on section 13 of ICTA.
96. Subsection (2) deals with the straightforward case where there are no associated companies.
97. Subsection (3) deals with the case where there are associated companies. The limits are divided equally between the companies.
98. Subsection (4) reduces the limits if the company’s accounting period is less than 12 months long.
Clause 25: Associated companies
99. This clause defines “associated company” for the purpose of clause 24. It is based on section 13 of ICTA.
100. Subsection (1) sets out the position if a company is an associated company for any part of an accounting period. It counts as an associated company for the whole of the accounting period.
101. Subsection (2) clarifies the position if more than one company is an associated company for different parts of an accounting period.
Example
Company A claims small profits rate for its accounting period from 1 January 2009 to 31 December 2009.
A is associated with B in the period 1 January 2009 to 31 March 2009.
A is associated with C in the period 1 October 2009 to 31 December 2009.
A has two associated companies in its accounting period ending on 31 December 2009, even though it never has more than one at any time.
102. Subsection (3) is the rule that associated companies that carry on no business are ignored. The rule is modified by subsection (6).
103. Subsection (4) is the main rule for determining whether or not companies are “associated”, based on “control”. The rule is modified by subsection (6).
104. Subsection (5) defines “control” for the purpose of subsection (4). The definition is based on clause 450 but is modified by subsection (6).
105. Subsection (6) introduces the special rules for associated companies in the next five clauses.
Clause 26: Section 25(3): treatment of certain non-trading companies
106. This clause is the rule that passive non-trading companies are ignored as associated companies. It is new. See Change 2 in Annex 1.
107. Subsection (1) sets out the three conditions for the treatment in the clause. The first two conditions reproduce the main words of SP5/94. The third condition introduces the concept of a “passive company”, defined in subsection (3).
108. Subsection (2) is the result if the conditions are met: the company is treated as being within clause 25(3) and is ignored for the purposes of claims for small profits rate by any company with which it is associated.
109. Subsection (3) reproduces the conditions in SP5/94 for a company to qualify as a passive company. See Change 2 in Annex 1 for a fuller discussion of the conditions.
110. Subsection (4) sets out the condition that any dividends received from subsidiaries are distributed in full by the holding company.
111. Subsection (5) makes clear that a company that receives, or is due to receive, a dividend is not treated on that ground alone as having assets.
Clause 27: Attribution to persons of rights and powers of their partners
112. This section modifies the rule in clause 25(4) and (5) about “control”. It is based on section 13(4), (4A), (4B) and (4C) of ICTA.
113. Clause 451 attributes to a person rights that belong to any associate of that person. In accordance with clause 448, “associate” includes a (business) partner.
114. This clause relaxes the rule about attributing a partner’s rights unless tax planning arrangements are in place.
Clause 28: Associated companies: fixed-rate preference shares
115. This clause is the rule that some fixed-rate preference shares are ignored in determining whether one company controls another. It is new. See Change 3 in Annex 1.
116. Subsection (1) sets out the three conditions for the special treatment. The second condition includes a reference to the company which holds the shares taking part in the management or conduct of the issuing company’s business. It is unlikely that a company (rather than an individual) would do this but the clause retains this part of the condition for the relaxation to apply.
117. Subsection (2) sets out a definition of “fixed-rate preference shares”. ESC C9 refers to the definition in Schedule 28B to ICTA, which deals with venture capital trusts. The definition here reproduces the rewritten version in section 313(7) of ITA.
Clause 29: Association through a loan creditor
118. This clause is the rule that some loan creditors are ignored in determining whether one company controls another. It is new. See Change 3 in Annex 1.
119. Subsection (1) deals with the simple case of a loan creditor which would otherwise be associated with the company to which it has lent money. The subsection sets out the three conditions that have to be met if the loan creditor is to be ignored. The second condition (“no connection”) is amplified in subsection (5).
120. Subsections (2) and (3) deal with the more complex case of two companies which would otherwise be associated with each other because they are controlled by the same loan creditor. The condition in subsection (2)(b) is amplified in subsection (5).
121. Subsection (4) defines “control” for the purpose of subsection (2)(a). The definition is based on clause 450 but is modified by subsection (1) of this clause (to eliminate some loan creditors) and clauses 27 (to prevent attribution of some partners’ rights), 28 (to eliminate some fixed-rate preference shares) and 30 (to eliminate some trustee companies).
122. Subsection (5) sets out the condition in ESC C9 that there is “no past or present connection” between the company and the loan creditor. It reflects the strict interpretation that is used in practice in applying the concession.
123. Subsection (6) imports the definition of “loan creditor” from clause 453. Clause 453(4) prevents a bank from being treated as a loan creditor just because of an ordinary bank loan.
Clause 30: Association through a trustee
124. This clause is the rule that some holdings of trustee companies are ignored in determining whether one company controls another. It is new. See Change 3 in Annex 1.
125. Subsections (1) and (2) deal with the simple case of a trustee company which would otherwise be associated with the company in which it has rights (or over which it has powers). The rights or powers are to be ignored. But this treatment applies only if there is no other connection between the companies (see subsection (6)).
126. Subsections (3) and (4) deal with the more complex case of two companies which would otherwise be associated with each other because they are controlled by the same trustee company. As in subsections (1) and (2), the rights or powers of the trustee company are to be ignored. This treatment applies only if there is no other connection between the companies (see subsection (6)).
127. Subsection (6) sets out the condition in ESC C9 that there is “no past or present connection” between the company and the trustee company. It reflects the strict interpretation that is used in practice in applying the concession.
Clause 31: Power to obtain information
128. This clause allows an officer of HMRC to require information for the purposes of this Part. It is based on Schedule 12 to FA 1989.
129. Subsection (1) is an information power about shareholders.
130. Subsections (3) and (4) are information powers about bearer securities.
Clause 32: Meaning of “augmented profits”
131. This clause defines the augmented profits which are compared with the limits in clauses 19 and 24 to determine whether or not small profits rate is due. It is based on section 13 of ICTA.
132. In section 13 of ICTA the word “profits” is used in a special sense to mean the total of what are usually referred to as profits and some franked investment income. This may lead to confusion. So this clause uses “taxable total profits” (see clause 4(2)) to mean the amount on which corporation tax is charged and introduces a new term “augmented profits” which is used only in this Part.
133. Subsection (1) is the basic definition of “augmented profits”. In determining whether a company’s profits are “small” for the purposes of this Part, dividends received are taken into account, even though those dividends are not charged to corporation tax.
134. Subsection (2) excludes what is usually known as “group income”. This comprises:
- distributions from companies in the same group as the receiving company; and
- distributions from trading companies (“quasi-subsidiaries” - defined in subsection (3)) which are owned by a consortium of which the receiving company is a member.
135. The meanings of “trading company” and “relevant holding company” in subsection (2)(b) are set out in clause 33(4).
Clause 33: Interpretation of section 32(2) and (3)
136. This clause expands the meaning of “51% subsidiary”. It is based on section 13ZA of ICTA.
137. Subsection (1) is similar to the group relief rule (see clause 151). It ensures that the tax relationship between companies is not based simply on share-holding if the share-holding does not represent the true economic relationship. So the subsection looks also at the equity holders’ entitlement to profits and assets. “Equity holders” are defined in subsection (7) by reference to the group relief rules (see Chapter 6 of Part 5 of this Bill).
138. Subsection (2) makes clear that the basic test for being a 51% subsidiary in clause 1154(2) of this Bill still applies.
139. Subsection (3) is similar to the group relief rule (see clause 151). Shares held by a share dealer are ignored.
140. Subsection (4) provides the meaning of “trading company” for the quasi-subsidiaries in clause 32(2)(b).
141. Subsections (5) and (6) are similar to the group relief rule (see clause 153). But subsection (5)(b) and (c) includes an economic test for the 5% ownership requirement in a consortium.
Clause 34: Close investment-holding companies
142. This clause defines the close investment-holding companies which are excluded from small profits rate by clauses 18(b) and 19(1)(b). It is based on sections 13A and 839(8) of ICTA.
143. The rule about close investment-holding companies is an anti-avoidance rule. Without it, a wealthy individual could transfer investments to a company where undistributed income would bear tax at a rate lower than the individual’s marginal rate.
144. The clause uses the expression “candidate company” to describe the company which is being considered to determine whether or not it is a close investment-holding company.
145. Subsection (1) defines close investment-holding companies by exclusion. All close companies are close investment-holding companies unless they exist for “permitted purposes”.
146. Subsection (2) sets out the permitted purposes. The first two purposes (paragraphs (a) and (b)) are concerned with the activities (broadly, trades and property businesses) of the candidate company itself. The last four purposes (paragraphs (c) to (f)) allow a candidate company to qualify as having a permitted purpose by reference to “qualifying companies” (and some others) with which it is closely connected.
147. Subsection (3) excludes from the property businesses in subsection (2)(b) letting to individuals who have a close connection with the candidate company.
148. Subsection (4) extends the purpose in subsection (2)(c) so that it covers not only investment in a qualifying company but also investment in another company which itself invests in a qualifying company.
149. Subsection (5) ensures that a company which exists for a permitted purpose does not become a close investment-holding company simply because it is wound up. But this special treatment lasts for only one accounting period.
150. Subsection (6) defines “qualifying company” by reference to the same purposes of trades and property businesses as apply to the candidate company in subsection (2)(a) and (b).
151. Subsection (7) provides two definitions for the clause. In this clause some permitted purposes depend on control of the candidate company. ESC C9 would operate against taxpayer companies in this context and so does not apply. It follows that the relaxations in clauses 28 to 30 do not apply here and the meaning of “control” is different from that in clause 25(4).
Part 4: Loss relief
Overview
152. This Part contains rules relating to various reliefs available for losses.
153. The reliefs are set out in separate Chapters.
154. The source legislation dealt with the carry forward of trade losses (section 393 of ICTA) before set off against total profits of the same accounting period or carry back (section 393A of ICTA). In practice companies tend to prefer to set losses off against total profits or carry them back rather than carry them forward. The rewritten legislation reflects this practice by dealing first with the set-off against total profits and carry back, from clause 37 onwards, and then turning to the carry forward of losses in clause 45.
Chapter 1: Introduction
Clause 35: Overview of Part
155. This clause provides an overview of the Part. It is new.
156. Subsection (3) refers to section 47 of CTA 2009 which is reproduced here in order to avoid the need to cross-refer to that Act:
(1) The same rules apply for corporation tax purposes in calculating losses of a trade as apply in calculating profits.
(2) This is subject to any express provision to the contrary.
Chapter 2: Trade losses
Overview
157. This Chapter deals with relief for trading losses.
Clause 36: Introduction to Chapter
158. This clause provides an overview of the Chapter and also includes provision about the meaning of references to “trade” and “carrying on a trade”. In particular it carries forward the effect of sections 6(4)(b) and 834(2) of ICTA in providing that a “trade” includes an office. It is based on sections 6(4), 393(10), 393A(9) and 834(2) of ICTA.
Clause 37: Relief for trade losses against total profits
159. This clause explains how a loss in a trade may be relieved against total profits of the same or earlier periods. It is based on sections 6(4), 393A(1), (2), (3), (10) and 834(2) of ICTA.
160. Subsection (3)(b) establishes that a loss in trade may be carried back to the twelve month period prior to the accounting period in which the loss arose. The exceptions to this rule, where the carry-back period is extended, are set out in clauses 39 to 42. These exceptions will either affect companies rarely or not at all.
161. Subsection (4) deals with the order of set-off of losses claimed under subsection (3). Such losses must first be set against total profits of the loss making period before, if the claim so requires, being carried back to earlier periods. Where it is possible to carry a loss back for more than one period (see clauses 39 to 42) then the loss must be set against total profits of the most recent period before the balance of the loss can be carried back to the period preceding that period and so on.
162. Subsections (5) and (6) prohibit the carry back of losses from what used to be Case V trades but what are now referred to as trades “carried on wholly outside the United Kingdom”. The courts established that a Case V trade was one that was carried on wholly outside the United Kingdom.
163. Ogilvie v Kitton (Surveyor of Taxes) (1908), 5 TC 338, Court of Exchequer (Scotland) determined that where a trade is “carried on” depends not only on the location of the day-to-day transactions of the trade but also on where the management and control of the company takes place. In the case of a company where the directors are responsible for management and control and that management and control function is exercised in the United Kingdom it is very unlikely that the company will have a trade “carried on wholly outside the United Kingdom”.
164. There is, however, one situation where a company managed and controlled in the United Kingdom may have a trade carried on wholly outside the United Kingdom. That is where the company is a partner in a partnership and the business of the partnership is managed and controlled abroad. By using the words “carried on” in the clause the link with existing case law has been maintained.
165. Subsection (7) sets out the time limits for making a claim. The time limit may be extended by an officer of Revenue and Customs. See Change 5 in Annex 1.
166. Subsection (9) provides that relief is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts. Examples of such restrictions or modifications are to be found in:
- Chapter 3 of this Part (relief for losses in cases involving limited partnerships and limited liability partnerships);
- Clause 304 (relief for losses in relation to oil activities);
- Clause 944 (modified application of Chapter 2 of Part 4 in relation to transfers of trade without a change in ownership); and
- Chapter 3 of Part 22 (relief for losses if company is a member of a partnership and certain arrangements for transferring relief are in place).
167. Subsection (2D) of section 393A has not been rewritten. The subsection was a signpost to section 393B where certain provisions relating to losses arising in a ring fence trade applied. The structure of the rewritten clause makes such a signpost unnecessary.
168. Subsections (7), (7A) and (8) of section 393A have not been rewritten. These subsections dealt with excess trade charges. It is no longer possible for trade charges to arise and these subsections were therefore redundant.
169. The definition of charges in section 338A of ICTA was limited to qualifying donations to charity. To be added to trade losses (section 393(9) of ICTA) the charges must have been payments made wholly and exclusively for the purposes of the trade. Section 338A(3) stipulated that no payment that was deductible in computing profits should be treated as a charge. If a payment was made wholly and exclusively for the purposes of the trade it would be allowable as a deduction in computing profits. Hence, it could not be a charge.
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