Other reliefs

344.     In addition to trading losses, some other reliefs may be surrendered by one company to another. The other reliefs are listed in clause 99(1).

Equity holders

345.     In some cases a simple test of shareholding does not accurately reflect the economic reality of the relationship between companies. So there are rules in Chapter 6 of this Part to establish the true economic relationship.

Chapter 1: Introduction

Overview

346.     This Chapter introduces the Part.

Clause 97: Introduction to Part

347.     This clause sets out the structure of the Part and introduces the expression “group relief”. It is based on section 402(1) of ICTA.

Chapter 2: Surrender of company’s losses etc for an accounting period

Overview

348.     This Chapter sets out what relief is available and the main restrictions on relief.

Clause 98: Overview of Chapter

349.     This clause sets out the structure of the Chapter. It is new.

Clause 99: Surrendering of losses and other amounts

350.     This clause lists the losses and other amounts that may be surrendered as group relief. It is based on sections 402, 403, 403ZC and 403ZD of ICTA.

351.     In ICTA the amounts are referred to as “trading losses and other amounts eligible for relief”. The trading losses are explained in section 403ZA of ICTA. The “other amounts” are explained in sections 403ZB (excess capital allowances), 403ZC (non-trading deficit on loan relationships) and 403ZD (charges, Schedule A losses, management expenses and non-trading loss on intangible fixed assets).

352.     This clause adopts a similar approach by specifying the losses and other amounts that may be subject to a group relief claim. There is a more detailed explanation of each of those losses and other amounts in clauses 100 to 104.

353.     Subsection (2) uses a test of whether the losses and other amounts are “eligible for corporation tax relief”.

354.     Subsections (3) and (4) contrast the treatments of:

• amounts within paragraphs (a) to (c) of subsection (1), which may be surrendered whatever the profits of the surrendering company; and

• amounts within paragraphs (d) to (g) of subsection (1), which may be surrendered only to the extent that they exceed the surrendering company’s total profits (see clause 105(3)).

355.     Subsection (5) refers to the other restrictions on amounts that may be surrendered in clauses 106 to 110. It also refers to the restrictions (mentioned in section 403(4) of ICTA) that operate by making amounts not available for set off.

356.     Subsection (6) cross-refers the requirement (in Schedule 18 to FA 1998) that the surrendering company must consent to the surrender. Clause 130(2) requires that there is also a claim.

357.     Subsection (7) introduces the label “surrenderable amounts” to refer to the losses and other amounts that may be surrendered.

Clause 100: Meaning of “trading loss”

358.     This clause explains which trading losses are available for relief. It is based on section 403ZA of ICTA.

359.     Subsection (1) is the link to the basic rule in clause 99(1)(a).

360.     Subsection (2) excludes from the available losses:

• losses made in a trade carried on wholly outside the United Kingdom (the profits of which were historically charged to tax under Schedule D Case V); and

• non-commercial losses for which relief would not be available to the surrendering company under the loss relief rules (see Part 4).

361.     This clause does not rewrite the requirement in section 403ZA(1) of ICTA that a trading loss is calculated in the same way as a loss within section 393A of ICTA. This is because the requirement is already rewritten in section 47 of CTA 2009.

Clause 101: Meaning of “capital allowance excess”

362.     This clause explains which capital allowances are available for relief. It is based on section 403ZB of ICTA.

363.     Subsection (1) is the link to the basic rule in clause 99(1)(b). It identifies the capital allowances as those to be given in a qualifying activity of “special leasing”.

364.     A company may surrender the allowances which would otherwise be available for relief against its total profits under section 260 of CAA.

365.     Subsections (3) and (4) set out how to deal with “special leasing” allowances that are brought forward:

• the amount to be surrendered is limited to the allowances for the current period, without regard to any allowances brought forward; and

• in calculating the excess of allowances over the leasing income of the current period, the amount of the income is not reduced by allowances brought forward.

Clause 102: Meaning of “UK property business loss”

366.     This clause explains which property income losses are available for relief. It is based on section 403ZD(3) of ICTA.

367.     Subsection (1) is the link to the basic rule in clause 99(1)(e).

368.     Subsection (2) makes clear that a loss brought forward under the loss relief rules (see Part 4) is not available even though those rules treat the loss as made in the surrender period.

369.     A non-commercial property loss is not eligible for relief under the loss relief rules (see Part 4). So it is not “eligible for corporation tax relief (apart from this Part)” - see clause 99(2). It follows that such a loss may not be surrendered as group relief and there is no need to rewrite section 403ZD(3)(b) of ICTA.

Clause 103: Meaning of “management expenses”

370.     This clause explains which management expenses are available for relief. It is based on section 403ZD(4) of ICTA.

371.     Subsection (1) is the link to the basic rule in clause 99(1)(f).

372.     Subsection (2) excludes from the available management expenses amounts brought forward from an earlier period under:

• section 1223 of CTA 2009 (management expenses carried forward); or

• the property loss rules (see Chapter 4 of Part 4 of this Bill).

Clause 104: Meaning of “non-trading loss on intangible fixed assets”

373.     This clause explains that a non-trading loss that is available for relief is one calculated under Part 8 of CTA 2009. It is based on section 403ZD(6) of ICTA.

374.     Subsection (1) is the link to the basic rule in clause 99(1)(g).

375.     Subsection (2) excludes from the available loss amounts brought forward from an earlier period.

Clause 105: Restriction on surrender of losses etc within section 99(1)(d) to (g)

376.     This clause sets out a special rule which applies only to “relevant amounts”. They are:

• qualifying charitable donations;

• a UK property business loss;

• management expenses; and

• a non-trading loss on intangible assets.

377.     The clause is based on section 403 of ICTA.

378.     Subsection (1) introduces the “relevant amounts” to which the clause applies. The “relevant amounts” do not include the main reliefs (trading losses, excess capital allowances and non-trading loan relationships deficits), which may be surrendered even if the surrendering company has profits against which the main reliefs may be set.

379.     Subsections (2) and (3) are the main rule: the relevant amounts are available only to the extent that they cannot be deducted from the surrendering company’s own profits.

380.     In section 403ZE of ICTA there is a definition of “gross profits” that is applied for the purposes of section 403 of ICTA. The expression is used only in subsection (3) of section 403 of ICTA.

381.     Section 403(3) of ICTA restricts the amount of relief that can be given for some amounts. Relief may be given only for any excess of those amounts over “the surrendering company’s gross profits”. The rule in this clause compares the amounts within clause 99(1)(d) to (g) with the “surrendering company’s total profits”. It is clear from clause 4(2) that those total profits are calculated without any of the deductions set out in section 403ZE of ICTA. So section 403ZE of ICTA is not rewritten.

382.     Subsection (4) deals with the case where the reliefs are restricted. In that case, the subsection determines the make-up of the relief that is surrendered.

383.     Subsection (5) refers to one of the restrictions mentioned in section 403(4) of ICTA. The other restrictions are in clauses 99(5) and 137(3)(e).

Clause 106: Restriction on losses etc surrenderable by UK resident

384.     This clause eliminates from group relief some amounts that are attributable to a foreign permanent establishment. It is based on section 403E of ICTA.

385.     In most cases the profits of a foreign permanent establishment are taxed in the country where the permanent establishment is. The profits remain chargeable to United Kingdom tax but credit is given for foreign tax on the profits. If the permanent establishment is not profitable relief may be available for the loss etc in the foreign country. This clause prevents relief being given for the same loss etc both in the foreign country and in the United Kingdom.

386.     Subsection (1) restricts the operation of the clause to companies resident in the United Kingdom.

387.     Subsection (2) sets out the basic rule: a loss or other amount attributable to a foreign permanent establishment is not available for group relief if it qualifies for relief from non-UK tax.

388.     Subsections (3) and (4) set out how to calculate the loss etc of a foreign permanent establishment. The calculation is done on the same basis as that for the calculation of the losses etc of a United Kingdom permanent establishment.

389.     Subsection (5) explains the sort of relief from non-UK tax with which the clause is concerned: it is relief from tax in the country where the permanent establishment is; and the relief is against the non-UK profits (defined in clause 108) of any person other than the surrendering company. In other words, the clause is concerned with foreign group relief.

390.     Subsections (6) and (7) resolve a potential circularity in the rules. Foreign tax rules may deny relief for an amount if it qualifies for relief from United Kingdom tax. In that case, it would not be clear how the rule in subsection (5) operates.

391.     The circularity is resolved by giving relief where the company is resident (that is, in the United Kingdom). But there is an exception to this rule if the company is also resident in the country where the permanent establishment is. In that case, United Kingdom relief is denied.

Clause 107: Restriction on losses etc surrenderable by non-UK resident

392.     This clause eliminates from group relief amounts that arise from activities that are not within the United Kingdom tax net, or are relieved abroad. It is based on section 403D of ICTA.

393.     Subsection (1) restricts the operation of the clause to companies not resident in the United Kingdom that carry on a trade through a permanent establishment in the United Kingdom.

394.     Subsection (2) introduces the three conditions (A, B and C) that have to be met if the non-UK resident company is to be able to surrender group relief.

395.     Subsection (3) sets out condition A. The activities of the company must bring it within the charge to corporation tax. So its business must be a trade carried on through a permanent establishment in the United Kingdom (see section 19 of CTA 2009).

396.     Subsection (4) sets out condition B. A company may be within the charge to corporation tax because it carries on its business through a permanent establishment in the United Kingdom but those activities (for instance, those of an airline) may be exempt from United Kingdom tax as a result of a DTA. In that case, any losses arising from the exempt activities may not be surrendered as group relief.

397.     Subsections (5) and (6) set out condition C. A loss or other amount attributable to a United Kingdom permanent establishment is not available for group relief if it qualifies for relief from non-UK tax.

398.     Subsection (7) explains how Condition C works if a foreign tax system (such as those of France and Australia) operates by exempting foreign (in this case, United Kingdom) profits from tax in the foreign country. Such a system may need to calculate the United Kingdom profits in order to exempt them. But that calculation does not mean that the profits in question are the subject of foreign tax relief.

399.     Subsections (8) and (9) resolve a potential circularity in the rules. Foreign tax rules may deny relief for an amount if it qualifies for relief from United Kingdom tax. In that case, it would not be clear how condition C operates.

400.     The clause changes the approach of section 403D(6) of ICTA. Instead of ignoring the condition in foreign tax law the clause sets out the result. That is that the loss etc is treated as allowable for foreign tax.

401.     Section 403D(11) of ICTA serves only to clarify the interface between relief under that section and relief under the EEA rules in sections 403F and 403G of ICTA. In this Bill it is clear that relief under Chapter 2 of this Part is separate from, and (potentially) in addition to, relief under Chapter 3 of this Part. So section 403D(11) is not rewritten.

Clause 108: Meaning of “non-UK profits”

402.     This clause defines “non-UK profits” for clauses 106 and 107. It is based on sections 403D and 403E of ICTA.

403.     Subsections (1) and (2) set out the basic rule. The profits are those that are charged to “non-UK tax” (see clause 187). The definition includes amounts that are taken into account in calculating those profits. But it does not include any profits that are taken into account in calculating the profits of any person for United Kingdom tax purposes.

404.     Subsection (3) deals with profits that are exempted from United Kingdom tax by a DTA. Such profits may be non-UK profits. Subsection (2) refers to the “total profits” of any person. Clause 4(3) defines that expression to include only amounts charged to corporation tax. So there is no need to exclude non-chargeable profits and section 403D(2)(a) of ICTA is not rewritten in this clause.

Clause 109: Restriction on losses etc surrenderable by dual resident

405.     This clause restricts the relief available to dual resident investing companies. It is based on section 404 of ICTA.

406.     Subsections (1) and (2) are the basic rule. A company that is resident both in the United Kingdom and in another country may not surrender losses etc as group relief. But the rule applies only to investing companies, a concept that is defined in the following subsections.

407.     Subsection (3) defines the first sort of company to which the clause applies. It is a company that does not carry on a trade.

408.     Subsection (4) defines the second sort of company to which the clause applies. It is a trading company whose activities are of a sort more usually associated with an investment business.

409.     Subsection (5) defines the third sort of company to which the clause applies. The rule prevents an investing company being “dressed up” as a trading company.

Clause 110: Restriction on surrender of losses etc from alternative finance arrangements

410.     This clause denies group relief if a deduction is disallowed by section 520 of CTA 2009. It is based on section 411ZA of ICTA.

Chapter 3: Surrenders made by non-UK resident company resident or trading in the EEA

Overview

411.     This Chapter makes the United Kingdom group relief rules compatible with European Community law following the judgment in Marks and Spencer plc v Halsey, C446/03 ¹. That case decided that in some circumstances it is contrary to the provisions of the EC Treaty on freedom of establishment to deny group relief to a UK resident parent for the losses of a non-UK resident subsidiary.

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1  See also [2008] STC 526.

412.     So this Chapter allows relief for foreign losses. But there are two main restrictions:

• the surrendering company must be resident in (or otherwise “related” to) an EEA territory; and

• the losses must not qualify for relief in the EEA territory.

Clause 111: Overview of Chapter

413.     This clause sets out the structure of the Chapter. It is new.

Clause 112: EEA related definitions

414.     This clause defines the expressions that are used in the Chapter to describe the connection of companies and their profits to the EEA. It is based on section 402 of, and Schedule 18A to, ICTA. The EEA comprises:

Clause 113: Steps to determine extent to which loss etc can be surrendered

415.     This clause sets out how to calculate how much of an “EEA amount” may be surrendered. It is based on section 403F of, and paragraph 11 of Schedule 18A to, ICTA.

416.     Subsection (2) is a method statement.

417.     Step 1 eliminates any amount that is within the United Kingdom tax net and available for surrender under the rules in Chapter 2.

418.     Step 2 sets out the conditions that the EEA amount has to meet. The detail of the conditions is set out in clauses 114 to 121. To the extent that the EEA amount meets these conditions it is the “qualifying part of the EEA amount”.

419.     Step 3 requires the EEA amount to be recalculated using United Kingdom tax rules and the assumptions set out in clauses 123 to 126.

420.     In paragraph 11(4) of Schedule 18A to ICTA the assumptions are made in relation to “the provision of this Chapter” (that is, Chapter 4 of Part 10 of ICTA). In fact the assumptions are used only for the purpose of recalculating the EEA amount. So in this Bill they apply only for that restricted purpose.

421.     Step 4 compares the qualifying part of the EEA amount with the same proportion of the EEA amount recalculated in Step 3. The lower amount is the amount that may be surrendered.

422.     Step 5 requires a restriction for any amount excluded from relief by clause 127 (arrangements).

423.     Subsection (3) deals with the possibility that the accounting periods assumed by clause 125 does not coincide with the accounting period of the surrendering company. The subsection makes clear that the total of the recalculated amounts is compared with the qualifying part of the EEA amount. See Change 23 in Annex 1.

424.     Subsection (4) cross-refers to the need for consent to the surrender. This rule corresponds to the rule in clause 99(6) for UK related companies.

Clause 114: The equivalence condition

425.     This clause requires the EEA amount to correspond to an amount that would qualify for United Kingdom group relief. It is based on paragraph 2 of Schedule 18A to ICTA.

Clause 115: The EEA tax loss condition: companies resident in EEA territory

426.     This clause identifies the EEA amount as one calculated in accordance with the relevant foreign tax law. It is based on paragraph 3 of Schedule 18A to ICTA.

427.     Subsection (1) applies the clause to companies resident in the EEA. The other sort of EEA related companies (those with an EEA permanent establishment) are dealt with in clause 116.

428.     Subsection (2) sets out the main condition: it establishes that the Chapter is concerned with an amount that has arisen for tax purposes in an EEA territory.

429.     Subsection (3) excludes an amount that is attributable to a permanent establishment in the United Kingdom. Such an amount may qualify for relief under the rules in Chapter 2.

Clause 116: The EEA tax loss condition: companies not resident in EEA territory

430.     This clause identifies the EEA amount in the case of a company with a permanent establishment in the EEA. It is based on paragraph 4 of Schedule 18A to ICTA.

431.     Subsection (1) applies the clause to companies not resident in the EEA. The other sort of EEA related companies (those resident in the EEA) are dealt with in clause 115.

432.     Subsection (2) sets out the main condition: it establishes that the Chapter is concerned with an amount that has arisen for tax purposes in an EEA territory.

433.     Subsection (3) excludes an amount that arises from activities the profits of which would be exempt under a DTA.

434.     Subsection (4) introduces subsections (5) and (6), which explain the sort of arrangements with which subsection (3) is concerned.

435.     Subsection (5) sets out the relevant arrangements. They are arrangements between the EEA territory where the permanent establishment is and:

• the United Kingdom (paragraph (b)); or

• any other territory (paragraph (a)).

436.     Subsection (6) identifies the effect of the DTA: it is that any profits from the activities in question would be exempt from tax in the EEA territory.

Clause 117: The qualifying loss condition: general

437.     This clause introduces the rules which exclude from the EEA amount any amount that qualifies for relief abroad. It is based on paragraphs 5 to 7 of Schedule 18A to ICTA.

438.     Subsection (1) makes clear that the EEA amount must meet the conditions in all of clauses 118 to 120. Those conditions are expressed in the negative. So the conditions are met if foreign relief is not available.

439.     Subsection (3) identifies the “relevant non-UK tax” as any foreign tax charged in the relevant EEA territory or in any territory where the surrendering company is resident.

440.     Subsection (4) identifies the “resident territory” as any territory in which the surrendering company is resident, apart from the EEA territory to which the EEA company is related.