Clause 67: Overseas property business to be commercial or carried on for statutory functions

254.     This clause provides that clause 66 only applies when an overseas property business is carried on on a commercial basis or in the exercise of functions conferred by or under an Act. It is based on sections 392A(5) to (7) and 392B(2) of ICTA.

255.     The reference to an Act in subsection (1) includes an Act of the Scottish Parliament. See Change 6 in Annex 1.

256.     Subsection (1) also refers to functions conferred by the law of a territory outside the United Kingdom. See Change 10 in Annex 1.

257.     The reference to “profit” in subsection (2) is to profit in its ordinary commercial sense.

258.

Chapter 5: Losses on disposal of shares

Overview

259.     This Chapter provides that, if an investment company incurs an allowable loss for the purposes of corporation tax on chargeable gains on the disposal of ordinary shares in a qualifying trading company for which it has subscribed, it may claim to set off the loss against its income for corporation tax purposes. It is based on Chapter 5A of Part 13 of ICTA.

Clause 68: Share loss relief

260.     This clause introduces share loss relief. It is based on sections 573(1) and 575(1) and (3) of ICTA.

261.     Subsection (1) outlines the basic structure of the relief, namely that a company (“the investor company”) is eligible for share loss relief if the following conditions are met:

• the investor company has “subscribed for” shares in another company (“the investee company”) (see the commentary on clause 73),

• the investee company is a “qualifying trading company” (see the commentary on clause 78),

• the investor company incurs an allowable loss for the purposes of corporation tax on chargeable gains on the disposal, and

• the investor company meets the eligibility conditions (see the commentary on clause 69).

262.     Subsection (2) provides that relief is only available if the disposal is of one of the kinds specified in paragraphs (a) to (d).

263.     Subsection (2)(a) is based on section 575(1)(a) of ICTA which specifies as one of the kinds of disposal:

a disposal by way of a bargain made at arm’s length for full consideration.

264.     The words “for full consideration” have been omitted from subsection (2)(a) on the basis that they add nothing. See Change 11 in Annex 1.

Clause 69: Eligibility conditions

265.     This clause sets out the conditions in relation to the investor company which must be met in order for the investor company to be eligible for share loss relief. It is based on section 573(1) and (5) of ICTA.

266.     This clause provides that the investor company must be an investment company (as defined in clause 90) on the date of the disposal and for a continuous period ending on that date and must not be associated with the investee company or any member of its group.

Clause 70: Entitlement to claim

267.     This clause deals with the making of a claim for share loss relief. It is based on section 573(2) and (3) of ICTA.

268.     Share loss relief is obtained by way of a deduction in calculating the investor company’s income for corporation tax purposes.

269.     Subsection (3) makes clear that the words “if the company was then an investment company” in section 573(2)(b) of ICTA require that the company is an investment company throughout the relevant accounting period.

Clause 71: How relief works

270.     This clause explains how the loss is to be deducted from income. It is based on section 573(2), (3) and (4A) of ICTA.

271.     Section 573(4) of ICTA provides that share loss relief must be claimed before any deduction for “charges on income, expenses of management or other amounts which can be deducted from or set against or treated as reducing profits of any description”. It has not been rewritten in this Chapter, but instead the order of priority is achieved in CTA 2009 and this Bill in the following way.

272.     Because share loss relief operates against the company’s income (see subsection (1)), it falls to be deducted at Step 1 in clause 4(3), i.e. on the way to finding the amount of the company’s total profits. Charges on income, rewritten as charitable donations relief in Part 6, and expenses of management are to be deducted from the company’s total profits at Step 2 in clause 4(2). See clause 189(1) of this Bill and section 1219(1) of CTA 2009 (as amended by Schedule 1 to this Bill). For another example of a deduction from total profits, see clause 37(3) (relief for trade losses against total profits).

273.     This clause provides that the amount not deducted from income of the accounting period in which the loss is incurred may be deducted from the income of earlier accounting periods ending within the immediately preceding period of 12 months (see Step 2 in subsection (1)). The extent to which a deduction may be made at Step 2 from an accounting period which falls only partly within that period of 12 months is limited in accordance with clause 72.

274.     Subsection (6) is new. It has been included to make explicit that the balance of any allowable loss for which share loss relief is not obtained continues to be capable of being claimed as a deduction under TCGA.

Clause 72: Limit on deduction if accounting period falls partly within 12 month period

275.     This clause applies where an accounting period ends within 12 months before the accounting period in which the loss is incurred but begins before the beginning of that 12 month period. It is based on section 573(3) of ICTA.

276.     This clause ensures that a deduction can only be made at Step 2 in clause 71(1) from that part of the income of the accounting period that is proportionate to the part of the accounting period falling within the 12 month period.

Clause 73: Subscription for shares

277.     This clause sets out the requirements relating to the subscription for shares in a qualifying trading company. It is based on sections 573(6) and 576K(3) of ICTA and includes a new provision relating to bonus shares.

278.     Subsection (2) provides that shares are subscribed for by the investor company if they have been issued to the investor company in consideration of money or money’s worth.

279.     The shares must form part of the ordinary share capital of the investee company. See the definition of “shares” in clause 90 and the commentary on that clause.

280.     Subsection (3) is new and treats “corresponding bonus shares” issued in respect of shares which have been subscribed for as themselves having been subscribed for. See Change 12 in Annex 1.

281.     Subsection (4) is new and provides that corresponding bonus shares are treated as subscribed for at the same time as the original shares were subscribed for. See Change 12 in Annex 1.

Clause 74: Disposals of new shares

282.     This clause denies or restricts share loss relief on the disposal of shares which are identified by virtue of section 127 of TCGA with other shares previously held by the investor company, unless certain conditions are met. It is based on section 575(2) and (4) of ICTA.

283.     The reference to section 87(3) at the end of subsection (2) makes clear that this clause does not apply to an exchange of shares to which clause 87(1) applies. See the commentary on clause 87 and Change 19 in Annex 1.

Clause 75: Limits on relief

284.     This clause deals with the calculation of the amount of share loss relief. It is based on section 576(1) of ICTA.

285.     Section 576(1) of ICTA provides that, if the investor company disposes of shares for which it has subscribed and which form part of a holding, the share loss relief in relation to those shares is not to exceed the sums which would have been allowable as deductions in computing the allowable loss for the purposes of corporation tax on chargeable gains if the shares had not formed part of the holding.

286.     Clause 75 refines the circumstances in which the provision applies in connection with the changes in clause 76 described in Change 16 in Annex 1. See Change 13 in Annex 1.

287.     Subsection (8) explains what is meant by shares “that are not capable of being qualifying shares” for the purposes not only of this clause but also of clause 76. Change 14 in Annex 1 contains a detailed explanation of why a mixed holding is defined for the purposes of clause 76 in terms of a holding which includes such shares.

288.     Subsection (9) extends this meaning for the purposes only of subsection (5) to cover reorganisations involving the issue of shares of a different class.

Clause 76: Disposal of shares forming part of mixed holding

289.     This clause deals with the identification of shares disposed of where those shares form part of a “mixed holding”. It is based on section 576 of ICTA, with a number of changes.

290.     Section 576 of ICTA is concerned with a holding which comprises shares for which a person has subscribed and shares which the person has acquired otherwise than by subscription.

291.     Subsection (1) provides that this clause applies to a holding in which some only of the shares are shares “that are not capable of being qualifying shares” (as defined in clause 75(8)). See Change 14 in Annex 1 which contains a detailed explanation of why a mixed holding has been defined in terms of a holding which includes such shares.

292.     Subsection (2) provides that the clause applies for the purpose of determining the questions:

• whether the shares disposed of are qualifying shares (as defined in clause 75); and

• which of any qualifying shares acquired at different times are disposed of.

293.     This is a change from section 576(1) of ICTA, which is not expressed to apply for the purpose of determining which of any qualifying shares are disposed of. See Change 15 in Annex 1.

294.     Subsection (3) introduces the rules for determining the questions in subsection (2), including in subsection (4) the application of the identification rules in sections 105 and 107 of TCGA. See Change 16 in Annex 1.

295.     Subsection (7) is new and puts on a statutory basis the practice under which questions which cannot be determined by the specific provisions of this clause are to be determined on a just and reasonable basis. This subsection will principally be required in cases where qualifying shares and shares which are not qualifying shares were acquired, or are treated as having been acquired, on the same day. See Change 16 in Annex 1.

296.     Subsection (8) (defining “holding”) omits section 576(1D)(b) of ICTA, which applies subsection (4) of section 104 of TCGA. That subsection can apply only to employees and is, therefore, otiose in relation to an investment company.

Clause 77: Section 76: supplementary

297.     This clause supplements clause 76. It is new.

298.     Subsection (1) determines the time of acquisition for the purposes of clause 76 of shares issued in a reorganisation within the meaning of section 126 of TCGA to which section 127 of that Act applies. See Change 17 in Annex 1.

299.     Subsection (2) clarifies that shares held or disposed of by a nominee or bare trustee for a company are part of the company’s holding for the purposes of clause 76. See Change 18 in Annex 1.

Clause 78: Qualifying trading companies

300.     This clause defines what is a qualifying trading company and introduces clauses 79 to 85, which set out six specific requirements to be met by a company if it is to be a qualifying trading company. It is based on section 576A of ICTA.

301.     Four of the requirements are to be met on the date of the disposal or, subject to certain conditions, at a time which is not more than three years before that date (see subsection (2)) and for a continuous period ending on that date or, subject to those conditions, at that time (see subsection (3)).

302.     Two of the requirements are to be met only at or around the time of issue of the shares in respect of which the share loss relief is claimed (see subsection (4)).

Clause 79: The trading requirement

303.     This clause sets out the first of the four requirements to be met throughout the period mentioned in clause 78(3). It is based on section 576B of ICTA.

Clause 80: Ceasing to meet trading requirement because of administration etc

304.     This clause supplements clause 79 and deals with the consequences for the trading requirement of administration, receivership or winding up. It is based on section 576C of ICTA.

Clause 81: The control and independence requirement

305.     This clause sets out the second of the four requirements to be met throughout the period mentioned in clause 78(3). It is based on section 576D of ICTA.

306.     Section 576D(3A) of ICTA, which applies section 839 of ICTA (connected persons) for the purposes of that section, has not been rewritten. Section 839 of ICTA is rewritten in clause 1122 for the purposes of the Corporation Tax Acts and clause 1176(1) applies that definition generally for the purposes of this Bill.

Clause 82: The qualifying subsidiaries requirement

307.     This clause sets out the third of the four requirements to be met throughout the period mentioned in clause 78(3). It is based on section 576E of ICTA.

Clause 83: The property managing subsidiaries requirement

308.     This clause sets out the last of the four requirements to be met throughout the period mentioned in clause 78(3). It is based on section 576F of ICTA.

Clause 84: The gross assets requirement

309.     This clause sets out the requirement to be met only at the times mentioned in clause 78(4)(a). It is based on section 576G of ICTA.

Clause 85: The unquoted status requirement

310.     This clause sets out the requirement to be met only at the time mentioned in clause 78(4)(b). It is based on section 576H of ICTA.

Clause 86: Power to amend requirements by Treasury order

311.     This clause enables the requirements in clauses 79 to 85 to be amended by secondary legislation. It is based on section 576I of ICTA.

Clause 87: Relief after an exchange of shares for shares in another company

312.     This clause and clause 88 provide for continuity of the application of the requirements in clauses 79 to 85 in the case of certain reconstructions which result in the issue of shares in a new company in exchange for shares in another company but do not involve any change in ownership of the underlying business. This clause is based on section 576J of ICTA.

313.     Subsection (3)(a) is new and resolves the apparent conflict between clause 74 and this clause. See Change 19 in Annex 1.

Clause 88: Substitution of new shares for old shares

314.     This clause sets out the consequences for the application of the requirements in clauses 79 to 85 of an exchange to which clause 87 applies. It is based on section 576K of ICTA.

315.     The words “in relation to any subsequent disposal or other event” in section 304A(4) of ICTA on which section 576K(2) of ICTA is based were inadvertently omitted from section 576K(2) by ITA. They have been included in subsection (2) in conformity with section 146(2) of ITA, also based on section 304A(4) of ICTA.

Clause 89: Deemed time of issue for certain shares

316.     This clause determines the time of issue of corresponding bonus shares for the purposes of the provisions listed in subsection (1). It is new.

317.     Subsection (2) mirrors clause 73(4). See Change 20 in Annex 1.

Clause 90: Interpretation of Chapter

318.     This clause explains the meaning of expressions used in this Chapter. It is based on sections 130 and 576L of ICTA.

319.     Subsection (1) includes the definition of “corresponding bonus shares”. Subsection (2) amplifies that definition. See Change 12 in Annex 1.

320.     The definition of “investment company” is set out in full in subsection (1) rather than by cross-referring to and modifying the definition in section 130 of ICTA. References to savings banks and banks for savings have been omitted. See Change 21 in Annex 1.

321.     Subsection (7) is new and clarifies that the date of disposal is the time when the disposal is made or treated as made for the purposes of corporation tax on chargeable gains. See Change 22 in Annex 1.

Chapter 6: Losses from miscellaneous transactions

Overview

322.     This Chapter deals with loss relief in respect of miscellaneous transactions.

Clause 91: Relief for losses from miscellaneous transactions

323.     This clause provides relief for losses arising from transactions that, had they resulted in gains, would have been treated as miscellaneous income. It is based on section 396 of ICTA.

324.     Subsections (4), (5) and (6) ensure that such losses may only be relieved against miscellaneous income.

325.

Chapter 7: Write-off of government investment

Overview

326.     This Chapter restricts losses where there has been a write-off of an amount of government investment in a company.

Clause 92: Loss relief to be reduced if government investment is written off

327.     This clause provides that if an amount of government investment in a company is written off that company’s carry-forward losses are restricted by the amount written off. It is based on section 400(1) and (10) of ICTA.

Clause 93: Groups of companies

328.     This clause sets out the further rules that apply if clause 92 applies and the company is a member of a group of companies. It is based on section 400(5) and (10) of ICTA.

329.     In these circumstances subsection (2) provides that the restriction may be to the carry-forward losses of any of the group companies provided that the restriction is on a just and reasonable basis. For example, if the government investment had been in a holding company and that company had lent the money to a subsidiary then it would be appropriate to restrict the carry-forward losses of the subsidiary.

Clause 94: Cases in which government investment is written off

330.     This clause sets out the three circumstances which constitute a write-off of government investment. It is based on section 400(7), (8), (9) and (10) of ICTA.

Clause 95: Meaning of “carry-forward losses”

331.     This clause defines the five types of “carry-forward losses”. It is based on section 400(2) to (4) of ICTA.

332.     Subsection (2) provides that certain amounts are not to be included in the calculation of “carry-forward losses”. The effect of this is to limit the reduction of loss relief provided for by clause 92.

333.     Subsection (4) sets out the order in which losses are to be set off against the various “carry-forward losses” set out at subsection (1).

Clause 96: Interaction with other tax provisions

334.     This clause ensures that a company is not prevented from deducting an amount in calculating its profits of a trade simply because an amount of government investment in the company has been written off. It is based on section 400(6) and (9A) of ICTA.

Part 5: Group relief

Overview

335.     This Part sets out the rules for group relief.

336.     In the diagrams to the right of the text of this commentary, surrendering companies are shown in black; claimant companies are shown in white; and other companies are shown in grey.

338.     If one company is to surrender its losses to another, the two companies must be in the same group. In the case of a simple parent/subsidiary relationship, the definition in clause 152 specifies that one company must be a “75% subsidiary” of the other.

Consortiums

International

342.     In the simplest case, all the companies involved are resident in the United Kingdom and carry on their businesses wholly in the United Kingdom. But the relief is extended to include the losses of:

• some companies not resident in the United Kingdom that carry on a trade through a permanent establishment in the United Kingdom; and

• some companies resident in the EEA (or carrying on a trade through a permanent establishment there).

343.     And the relief is restricted in some cases if a UK resident company’s business is not carried on wholly in the United Kingdom.