Clause 118: The qualifying loss condition: relief for current and previous periods

441.     This clause sets out the condition that relief is not available for the current period or for a previous period. It is based on paragraph 6 of Schedule 18A to ICTA.

442.     Subsection (1) introduces the clause.

443.     Subsection (2) deals with any part of the EEA amount that is deductible in calculating profits. The profits are those of any person (not just the surrendering company). And, for the purpose of this clause, one looks at the current period and any previous period.

444.     Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.

445.     Subsection (4) makes clear that the clause is concerned with whether the relief is available, not with whether it is actually given: the condition cannot be met simply by failing to make any necessary claim for relief.

Clause 119: The qualifying loss condition: relief for future periods

446.     This clause sets out the condition that relief is not available for subsequent periods. It is based on paragraph 7 of Schedule 18A to ICTA.

447.     Subsection (1) introduces the clause.

448.     Subsection (2) deals with any part of the EEA amount that may be deductible in calculating profits in any future period. The profits are those of any person (not just the surrendering company).

449.     Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.

450.     Subsection (4) determines that the possibility of foreign tax relief is to be considered as at the end of the period in which the EEA amount arises.

Clause 120: The qualifying loss condition: non-UK tax relief in another territory

451.     This clause sets out the condition that relief is not available in any territory. It is based on paragraph 8 of Schedule 18A to ICTA.

452.     Subsection (1) introduces the clause.

453.     Subsection (2) deals with any part of the EEA amount that may be deductible in calculating profits. The profits are those of any person (not just the surrendering company). Unlike clauses 118 and 119, this clause deals with tax relief in a territory which is neither the EEA territory where the EEA amount arises nor the territory where the surrendering company is resident. And it is concerned only with relief that has been given, not with relief that may be given.

454.     Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.

Clause 121: The precedence condition

455.     This clause deals with the possibility that relief is available in more than one territory. It is based on paragraph 9 of Schedule 18A to ICTA.

456.     Suppose there is a chain of companies with a “top” holding company, a “bottom” trading company and a series of other companies each of which is both a subsidiary and a holding company. If the companies are resident in a variety of territories, where there are rules equivalent to those in this Chapter of the Bill, it is possible for the losses of the “bottom” trading company to be relievable in several territories.

457.     The clause resolves the problem by providing that relief is assumed to be given at the lowest possible level in the chain. If the company at that level is UK resident, group relief is available.

458.     Subsection (1) introduces the idea that relief may be available in a territory that is neither the United Kingdom nor the territory where the EEA amount arises.

459.     Subsection (2) describes the chain of companies. Paragraph (a) establishes that the company in question is in the chain. Paragraph (b) establishes that higher in the chain there is a UK resident company. Paragraph (c) establishes that the surrendering company is a 75% subsidiary of that UK resident company. Paragraph (d) establishes that there is no other UK resident company in the chain between the surrendering company and the company in question.

460.     If relief is available to the company in question it is excluded from the EEA amount.

461.     Subsection (3) sets out the sorts of relief with which the clause is concerned: they are the same as those in clause 118(2) (a direct deduction) and (3) (other relief).

Example

So Germany is a territory within subsection (2). If relief for F’s loss is available in Germany no United Kingdom group relief is available. G’s potential claim takes precedence over U1’s claim because G is lower in the chain.

But, in relation to N:

(a)     it is resident in the Netherlands (not the relevant EEA territory, which is France);

(b)     the only UK resident company that owns share capital in N is U1;

(c)     F is a 75% subsidiary of U1; but

(d)     F is a subsidiary of U1 only as a result of its being a 75% subsidiary of another UK resident company (U2).

So the Netherlands is not a territory within subsection (2). Even if relief for F’s loss is available in the Netherlands, United Kingdom group relief may be available to U2. U2’s potential claim takes precedence over N’s because U2 is lower in the chain.

Clause 122: Assumptions to be made in recalculating EEA amount

462.     This clause introduces clauses 123 to 126. It is new.

Clause 123: Assumptions as to UK residence

463.     This clause is the first of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules. It is based on paragraph 12 of Schedule 18A to ICTA.

464.     Subsection (1) requires the assumption that the surrendering company is resident in the United Kingdom.

465.     Subsection (2) makes clear that the assumption in subsection (1) does not:

• affect where the company’s activities are carried on (but clause 124 may make an assumption about that); or

• treat the company as ceasing to be UK resident at the end of the EEA accounting period (but clause 125 treats the company’s accounting period as ending then).

466.     Subsection (3) requires the assumption that the surrendering company becomes UK resident at the beginning of the EEA accounting period.

Clause 124: Assumptions as to places in which activities carried on

467.     This clause is the second of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules. It is based on paragraph 13 of Schedule 18A to ICTA.

468.     Subsection (1) requires the assumption that the company’s activities are carried on in the United Kingdom instead of in the EEA territory. So any special rules about foreign income do not apply.

469.     Subsection (2) makes clear that the assumption in subsection (1) includes the assumption that any land held by the surrendering company is in the United Kingdom.

470.     Subsection (3) explains how the United Kingdom concepts of law in subsection (2) (“estate”, “interest” and “rights”) are to be applied to land that is outside the United Kingdom.

Clause 125: Assumptions as to accounting periods

471.     This clause is the third of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules. It is based on paragraph 14 of Schedule 18A to ICTA.

472.     Subsection (1) determines the start of the accounting period for recalculating the surrendering company’s EEA amount.

473.     Subsections (2) to (4) determine when the accounting period ends. As in section 10 of CTA 2009, the accounting period ends at the end of the EEA accounting period or, if earlier, after 12 months.

474.     The clause clarifies the position if, exceptionally, the EEA accounting period is longer than two years. Paragraph 14 of Schedule 18A to ICTA does not explicitly cater for this possibility but the only logical interpretation involves treating the process in sub-paragraphs (2) to (4) as iterative. So this clause does not change the law.

Clause 126: Assumptions in relation to capital allowances

475.     This clause is the last of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules. It is based in paragraph 15 of Schedule 18A to ICTA.

476.     Subsection (1) sets out when the clause applies.

477.     Subsection (2) invokes section 13 of CAA. So the surrendering company is treated as having incurred expenditure on the plant or machinery on the first day of the EEA accounting period. The amount of the expenditure is the market value of the plant or machinery.

478.     Subsection (3) ensures that all the relevant rules in the plant and machinery Part of CAA apply in the recalculation of the EEA amount.

Clause 127: Amounts excluded because of certain arrangements

479.     This clause is a rule to deal with contrived situations. It is based on section 403G of ICTA.

480.     Subsection (1) excludes from the EEA amount any amount that arises from an “arrangement”. The exclusion is mentioned in Step 5 of clause 113(2). Subsection (1)(a) of the clause ensures that the rule does not apply to any part of the EEA amount that is attributable to a United Kingdom permanent establishment. That part is dealt with under clause 107.

481.     Subsection (2) identifies the excluded amount by reference to “arrangements”.

482.     Subsection (3) tests the purpose of the arrangements. They are within this clause if their main purpose is to secure group relief.

Clause 128: Rules for recalculating EEA amount

483.     This clause requires the EEA amount to be recalculated using United Kingdom tax rules. It is based on paragraph 16 of Schedule 18A to ICTA.

484.     If the recalculation results in a lower amount, the recalculated amount (or the relevant proportion of it) is the amount that may be surrendered as group relief (see Step 4 in clause 113(2)).

485.     Subsection (1) is the basic rule. The EEA amount is recalculated. Furthermore, any rule that would disallow the amount for United Kingdom tax purposes (such as the rule about non-commercial losses) is applied.

486.     Subsections (2) to (4) allow the Treasury to make regulations about the recalculation of the EEA amount.

Chapter 4: Claims for group relief

Overview

487.     This Chapter sets out the conditions for relief involving UK related companies (under Chapter 2) and EEA related companies (under Chapter 3). It also sets out restrictions on relief that may be given on claims.

Clause 129: Overview of Chapter

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

Clause 130: Group relief claims on amounts surrenderable under Chapter 2

489.     This clause sets out the basic rules for claims for group relief surrendered by UK related companies. It is based on section 402 of ICTA and paragraph 70 of Schedule 18 to FA 1998.

490.     The corresponding rules for EEA related companies are in clause 135.

491.     Subsection (2) requires a claim by the claimant company. The surrender is required by clause 99(6). The subsection goes on to set out three conditions for a claim.

• There must be a consent (see clause 99(6)).

• There must be an overlapping period (see clause 142).

• The relief must be available as a result of the existence of:

• —     a group (see clause 131);

• —     a consortium, not involving a “link” company (see clause 132); or

• —     a consortium involving a “link” company (see clause 133).

492.     The detail of each part of the third condition includes a requirement that the companies concerned are “UK related” (defined in clause 134). That requirement in the case of a group is based on section 402(2) of ICTA.

493.     In the case of a consortium it is explicit in section 402(3A) and (3B) of ICTA that the claimant and surrendering companies must be UK related.

496.     So each of the conditions in clauses 131 to 133 is explicit in requiring that all of the surrendering, claimant and link companies are UK related.

497.     Subsection (3) makes clear that more than one company may claim the relief available in the surrendering company. But the total claimed cannot exceed the relief available (see clause 137(7)).

Clause 131: The group condition

498.     This clause deals with straightforward claims for group relief (that is, claims not involving consortiums) surrendered by a UK related company. It is based on section 402 of ICTA.

499.     The corresponding rule for EEA related companies is in clause 136.

Clause 132: Consortium condition 1

500.     This clause allows claims involving companies owned by a consortium. It is based on section 402 of ICTA.

503.     Subsections (4) and (5) deny relief if the consortium relationship depends on shares that are held by a share-dealing company as part of its circulating capital.

Clause 133: Consortium conditions 2 and 3

504.     This clause extends the relief that is available to consortiums. It is based on sections 402 and 406 of ICTA.

505.     The extension involves a company (“the link company”) that is a consortium member and is also a member of a group. There are special rules for companies in the same group as the company owned by a consortium in clauses 148 and 149.

508.     Subsections (3) and (4) deny relief if the consortium relationship depends on shares that are held by a share-dealing company as circulating capital.

509.     The rule in subsections (3) and (4) is not explicit in the source legislation. If shares in C are held by L as circulating capital, section 402(4) of ICTA prevents a consortium claim by L. Similarly, C may not claim L’s losses etc. It follows that when P steps into the shoes of L in accordance with section 406(2) or (5) of ICTA P may not claim C’s losses etc and C may not claim P’s losses etc.

Clause 134: Meaning of “UK related” company

510.     This clause defines “UK related”. It is based on section 402 of ICTA.

Clause 135: Group relief claims on amounts surrenderable under Chapter 3

511.     This clause gives the rules for claims for group relief surrendered by EEA related companies. It is based on section 402 of ICTA and paragraph 70 of Schedule 18 to FA 1998.

512.     The corresponding rules for UK related companies are in clause 130.

513.     Subsection (2) requires a claim by the claimant company. The surrender is required by clause 99(6). The subsection goes on to set out three conditions for a claim.

• There must be a consent (see clause 99(6)).

• There must be an overlapping period (see clause 142).

• The relief must be available as a result of the existence of a group (see clause 136).

514.     Subsection (3) makes clear that more than one company may claim the relief available in the surrendering company. But the total claimed cannot exceed the relief available (see clause 137(7)).

Clause 136: The EEA group condition

515.     This clause sets out the condition for group relief to be surrendered by an EEA related company. It is based on section 402 of ICTA.

516.     Subsections (2) and (3) set out the condition, that either the claimant company or the company that owns both it and the surrendering company is UK resident.

Clause 137: Deduction from total profits

517.     This clause explains how group relief is given to the claimant company. It is based on sections 403, 407 and 411 of ICTA.

518.     Subsection (1) is the link to clause 4.

519.     Subsection (2) makes clear that the claimant company may claim all or part of the surrendering company’s surrenderable amounts.

520.     Subsection (3) subjects subsection (2) to the restrictions later in the Chapter. Paragraph (e) refers to one of the restrictions mentioned in section 403(4) of ICTA. The other restrictions in that subsection are referred to in clauses 99(5) and 105(5) or are rewritten in clause 109.

521.     Subsection (4) is the rule that group relief is the final deduction to be given in arriving at a company’s taxable profits, subject only to the exceptions set out in subsection (5).

522.     Subsection (5) sets out the reliefs that are to be given after group relief. So, for instance, group relief may reduce a company’s profits for an accounting period to an extent that there is a restriction to relief for losses carried back to that accounting period.

523.     Subsection (6) makes clear that each relief in subsection (4) that depends on the making of a claim is to be taken account of on the assumption that the relevant claim is made. But there is an exception in the case of relief for non-trading loan relationship deficits: that relief is taken account of only if the relevant claim is actually made.

524.     Subsection (7) ensures that an amount of relief is not given twice.

Clause 138: Limitation on amount of group relief applying to all claims

525.     This clause restricts the amount of group relief to the profits available to absorb it. It is based on section 403A of ICTA.

526.     It compares the “unused part of the surrenderable amounts” (defined in clause 139) with the “unrelieved part of the claimant company’s total profits” (defined in clause 140). The amount of group relief is restricted to the lower of the two compared amounts.

Clause 139: Unused part of the surrenderable amounts

527.     This clause defines “unused part of the surrenderable amounts” for the purpose of clause 138. It is based on sections 403A and 403B of ICTA.

528.     Subsection (1) introduces the rules for calculating the “unused part of the surrenderable amounts”. In particular, the rules cater for the cases where:

• the surrendering company and the claimant company have different accounting periods; or

• there are multiple claims for the surrendering company’s losses etc.

529.     Subsection (2) sets out the restriction to be made if the surrendering company and claimant company have different accounting periods. In that case the “surrender period” (see clause 99(7)) and “claim period” (see clause 130(2)) are not the same. The loss etc is apportioned on a time basis to the “overlapping period” (see clause 142).

530.     Subsection (3) introduces the calculation that has to be made if there are multiple claims for the surrendering company’s loss etc. It considers what “prior claims” have been made and what “prior surrenders” have been made as a result.

531.     Subsection (4) defines a “prior claim”.

532.     Subsection (5) is a method statement for calculating the total amount of any “prior claims”. The overlapping period for any prior claim is given by clause 142.

533.     If no part of that overlapping period falls within the claim period of the current claim, that prior claim is ignored. But if part of the overlapping period does fall within the claim period of the current claim a time-apportioned amount of the prior claim is taken into account.

534.     The total of the amounts to be taken into account for prior claims is deducted to arrive at the usable amount of the surrenderable amounts.