Clause 658: Meaning of “community amateur sports club” and “registered club”

2046.     This clause sets out the three qualifying conditions which must be met for a club to be entitled to be registered as a CASC and be able to obtain an exemption from tax on relevant income or gains. It is based on paragraphs 1, 11(1) to (3) and (5) and 15(2) of Schedule 18 to FA 2002.

2047.     In subsections (2) to (4) there is a reference to “an officer of Revenue and Customs”. This is a change from the source legislation in Schedule 18 to FA 2002 where the reference is to “the Inland Revenue” which is a reference to “the Board” under paragraph 15(2) of Schedule 18 to FA 2002. See Change 5 in Annex 1.

2048.     There is also a change in the words used in subsection (5). In this case the change is to replace a reference to “Inland Revenue” which is a reference to “the Board” under paragraph 15(2) in the source legislation with a reference to “Her Majesty’s Revenue and Customs” for the publication of the names and addresses of clubs. See Change 5 in Annex 1.

Clause 659: Meaning of “open to the whole community”

2049.     This clause defines the term “open to the whole community”, which is the first of the qualifying conditions for being a registered club. It is based on paragraph 2 of Schedule 18 to FA 2002.

Clause 660: Meaning of “organised on an amateur basis”

2050.     This clause defines the term “organised on an amateur basis”, which is the second of the qualifying conditions for being a registered club. It is based on paragraph 3 of Schedule 18 to FA 2002.

2051.     “Match officials” in subsection (4)(h) includes coaches.

2052.     This clause does not rewrite the requirement in paragraph 3 of Schedule 18 to FA 2002 for certain formalities to apply if a club member supplies goods or services to the club or is employed by the club. See Change 48 in Annex 1.

Clause 661: Meaning of “eligible sport”, “qualifying purposes” etc

2053.     This clause sets out the definitions of “eligible sport”, “qualifying purposes”, “non-qualifying purposes” and “non-qualifying expenditure” specific to this Chapter. It is based on paragraphs 8(1) and (7), 14(1), and 16 of Schedule 18 to FA 2002.

2054.     There is an additional definition for “non-qualifying expenditure” which is implicit in the source legislation but this is now made explicit in the rewritten legislation.

2055.     This clause omits the provision in paragraph 14(2) of Schedule 18 to FA 2002 that a Treasury order designating a sport as an “eligible sport” is subject to annulment in pursuance of a resolution of the House of Commons. That provision is unnecessary as this Bill contains general provisions to the same effect in clause 1171.

Clause 662: Exemption for UK trading income

2056.     This clause provides for the trading income of a registered club to be exempt from tax if the relevant conditions are met. It is based on paragraph 4 of Schedule 18 to FA 2002.

Clause 663: Exemption for UK property income

2057.     This clause provides for the property income of a registered club to be exempt from tax if the relevant conditions are met. It is based on paragraph 6 of Schedule 18 to FA 2002.

Clause 664: Exemption for interest and gift aid income

2058.     This clause provides for the interest and gift aid income of a registered club to be exempt from tax if the relevant conditions are met. It is based on paragraph 5 of Schedule 18 to FA 2002.

2059.     Subsection (2) provides that if a club is registered for only part of an accounting period, that part is treated as a separate accounting period and the club’s interest income for that separate period is proportionately reduced. This approach follows that of the source legislation.

2060.     In subsection (3) the definition of “gift aid income” now relies on Chapter 2 of Part 8 of ITA rather than section 25(10) of FA 1990 (see paragraph 5(3)(b) of Schedule 18 to FA 2002). Paragraph 5(4) of that Schedule is not now necessary because section 430 of ITA itself includes CASCs within the definition of charities for the purposes of gift aid.

Clause 665: Exemption for chargeable gains

2061.     This clause provides for the chargeable gains of a registered club to be exempt from tax. It is based on paragraphs 7 and 16 of Schedule 18 to FA 2002.

Clause 666: Exemptions reduced if non-qualifying expenditure incurred

2062.     This clause provides for exemptions to be restricted if the club incurs expenditure for non-qualifying purposes. It is based on paragraphs 8 and 16 of Schedule 18 to FA 2002.

2063.     The reference to “income receipts” replaces the reference in paragraph 8 to “income (whether taxable or not and before deduction of expenses)”.

2064.     Paragraph 8(5) of Schedule 18 to FA 2002 provides a formula to ascertain the relevant surplus amount of non-qualifying expenditure. This is unpacked and set out in narrative form.

Clause 667: Rules for attributing surplus amount to earlier periods etc

2065.     This clause supplements clause 666. It is based on paragraph 8(5) to (8) of Schedule 18 to FA 2002.

Clause 668: How income and gains are attributed

2066.     This clause provides that a club may specify or be required to specify how the exempted income and gains are to be reduced in accordance with clause 666. It is based on paragraphs 8(9) and 15(1) of Schedule 18 to FA 2002.

Clause 669: Asset ceasing to be held for qualifying purposes etc

2067.     This clause provides that the exemption for chargeable gains on assets is not available if the club ceases to be registered or to hold the asset for qualifying purposes. It is based on paragraphs 10 and 16 of Schedule 18 to FA 2002.

2068.     Paragraph 10 of Schedule 18 to FA 2002 refers to “property” but TCGA refers to disposals of “assets”. Consequently, the clause refers to disposals of “assets” for the purposes of TCGA rather than disposals of “property”.

2069.     Subsections (5) and (6) separate and clarify the process for making assessments and the time limit for doing so. These are dealt with together in paragraph 10(3) of Schedule 18 to FA 2002.

Clause 670: Notification of HMRC decision

2070.     This clause provides for the notification of the decision by HMRC for registering a club, the refusal to register a club and the cancellation of the registration of a club. It is based on paragraphs 11(4) and 15(2) of Schedule 18 to FA 2002.

2071.     Reference to “the Inland Revenue”, which is a reference to “the Board” under paragraph 15(2) in the source legislation, is replaced with a reference to “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Clause 671: Appeals

2072.     This clause sets out the provisions relating to appeals against decisions concerning a club’s application or registration. It is based on paragraphs 13 and 15 of Schedule 18 to FA 2002.

2073.     In subsections (1), (5) and (6), reference to “the Inland Revenue”, which is a reference to “the Board” under paragraph 15(2) in the source legislation, has been replaced with a reference to “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Part 14: Change in company ownership

Overview

2074.     Sections 767A to 769 of, and Schedule 28A to, ICTA have been enacted and amended piecemeal over many years; what is now section 768 of ICTA made its first appearance as section 30(1) to (4) of FA 1969 and paragraphs 8 to 10 of Schedule 15 to that Act. The structure of the legislation is tight and intricate - see, for example, section 768C(5).

2075.     The opportunity has been taken to restructure the source legislation to make it easier for users to navigate. In summary, this Part of the Bill has the following structure.

2076.     Chapter 1 provides a bird’s eye view of the Part.

2077.     Chapter 2 disallows trading losses in defined situations. It applies both to companies with investment business and to companies without investment business. It is based on sections 768 and 768A of ICTA.

2078.     Chapters 3 and 4 apply to companies with investment business. They impose restrictions on corporation tax relief. Chapter 3 provides the general rules and Chapter 4 deals with special circumstances involving the transfer of an asset within a corporate group. Chapter 3 is chiefly based on sections 768B, 768D and 768E of ICTA and paragraphs 1 to 9A of Schedule 28A to that Act. Chapter 4 is based on sections 768C to 768E of, and paragraphs 10, 10A and 13 to 17 of Schedule 28A to, ICTA.

2079.     Chapter 5 applies to companies without investment business. It disallows property losses. It is based on section 768D of ICTA.

2080.     Chapter 6 is concerned with recovery of unpaid corporation tax. It is based on sections 767A to 767B of ICTA.

2081.     Chapter 7 defines the key expression “change in the ownership of a company” for the purposes of the Part. It is based on section 769 of ICTA.

2082.     Chapter 8 is supplementary.

Chapter 1: Introduction

Clause 672: Overview of Part

2083.     This clause introduces the Part. It is new.

2084.     Subsection (6) signposts the Chapter on recovery of unpaid corporation tax due from non-UK resident companies. It is similar to Chapter 6, but is not located in this Part because it applies whether or not there is a change in company ownership.

2085.     Subsection (7) signposts three important definitions.

Chapter 2: Disallowance of trading losses

Overview

2086.     Chapter 2 is the first of four Chapters dealing with variations on the theme of “loss buying”.

2087.     Companies can obtain corporation tax relief for various expenses and losses in different periods from the periods in which the expenses or losses arise. They can, however, only turn these reliefs into a reduction in tax liability if they have taxable profits against which the expenses or losses can be set. The shareholders of an unsuccessful company might therefore wish to monetise these tax reliefs by selling the company to people who might be able to make use of them. Sections 768 to 768E of, and Schedule 28A to, ICTA are directed against such “loss buying”.

2088.     This Part of the Bill does not deal with the buying in of group relief. Clause 142, which is based on section 403A(9) and (10) of ICTA, prevents companies claiming group relief in relation to expenses and losses arising before a company joined the group.

2089.     The loss buying provisions of TCGA are outside the scope of this Bill. See, however, the commentary on clause 694.

Clause 673: Introduction to Chapter

2090.     This clause introduces the Chapter. It is based on sections 6, 768, 768A and 834 of ICTA.

2091.     Subsections (1) to (3) lay down the conditions for the Chapter to apply.

2092.     Subsection (2) omits as otiose the words “either earlier or later in the period, or at the same time” in sections 768(1) and 768A(1) of ICTA.

2093.     Section 767A(4)(b) of ICTA refers to a “significant revival” of activities; sections 768(1)(b) and 768B(1)(c) of ICTA refer to a “considerable revival” of a trade or business. Sections 768(1)(b) and 768B(1)(c) contrast “considerable” with “small or negligible”; in section 767A(4)(b), the contrast is not only with “small or negligible” but also with cessation. The rewrite of these provisions eliminates this variation by consistently using “significant” in subsection (3) and clauses 677(2) and (4), 704(3) and 705(3).

2094.     Subsection (4) defines, non-exhaustively, “major change in the nature or conduct of a trade”. The phrase “major change” has been retained in this definition, because there is case law on it: Willis v Peeters Picture Frames Ltd (1982), 56 TC 436 CA(NI) ¹ and Purchase v Tesco Stores Ltd (1984), 58 TC 46 HC. ² For the same reason, the phrase “major change” has also been retained in the similar definitions in clauses 677(5), 704(10) and 705(9).

---

1   [1983] STC 453.

2   [1984] STC 304.

2095.     Subsection (5) defines “the change in ownership”, “the company” and “trade” for the purposes of this Chapter. It defines “trade” to include an office, but does not define “trade” to include “vocation”. This is a minor change in the law. See Change 4 in Annex 1.

Clause 674: Disallowance of trading losses

2096.     This clause restricts relief for trading losses in cases in which this Chapter applies. It is based on sections 768 and 768A of ICTA.

2097.     Subsection (1) restricts relief under clauses 37 and 42 (relief for trade losses). It is aimed at the abuse known as “profits buying” or “loss capacity buying” whereby a trading company with large profits is sold to new owners who feed new activities into the trade which will result in heavy initial losses for which early relief would not otherwise be available. The price paid to the old owners would reflect the tax benefit expected to accrue to the new owners.

2098.     Subsection (2) restricts relief under clause 45 (carry forward of trade loss against subsequent trade profits).

2099.     Section 768(1) of ICTA refers to “relief .. given under section 393 [of that Act] by setting a loss incurred by the company .. against any income or other profits ..”. But section 393 of ICTA only gives relief for losses against “trading income” (as defined in section 393(8) of that Act). The reference to “other profits” is a missed consequential amendment. The words should have been omitted when FA 1991 replaced section 393(2) of ICTA with section 393A of ICTA. Subsection (2) of this clause therefore omits the reference to “other profits”.

2100.     Section 768(3) of ICTA provides:

The apportionment under subsection (2) above shall be on a time basis according to the respective lengths of those parts except that if it appears that that method would work unreasonably or unjustly such other method shall be used as appears just and reasonable. (emphasis added)

2101.     Subsection (5) omits the first instance of “appears” in section 768(3) of ICTA for the sake of consistency with clauses 685(3) and 702, which are based on paragraphs 8 and 17 respectively of Schedule 28A to ICTA, and clauses 704(7) and 705(7), which are based on section 768D(4) of ICTA. It also omits the second instance of “appears” in section 768(3) of ICTA to sharpen the drafting.

Clause 675: Disallowance of trading losses: calculation of balancing charges

2102.     This clause prevents double taxation in cases in which this Chapter applies. It is based on section 768 of ICTA.

2103.     If clause 674(2) restricts relief for trading losses carried forward under clause 45, the underlying computations of capital allowances are not affected, because the trade itself does not cease. This means that if, at the time of the change of ownership, a company owns assets on which capital allowances have been given, it can be effectively penalised twice by:

• disallowance of any unused capital allowances included in the losses disallowed; and

• a balancing charge when the assets are disposed of.

2104.     Subsections (2) and (3) solve this problem. If an extinguished loss includes unallowed capital allowances, those capital allowances are treated as not having been given when calculating the balancing charges on an asset owned at the date of the change in ownership and disposed of later.

2105.     Subsection (4) sets an identification rule. If, in any period, both losses and capital allowances were available for setting against profits, capital allowances are treated as set off before other losses. As requested by respondents, we have sharpened the drafting of this subsection.

2106.     Section 768(6) and (7) of ICTA use the expression “allowance or deduction”. Since “or deduction” adds nothing to “allowance”, subsections (2) to (4) omit “or deduction” as otiose.

Clause 676: Disallowance of trading losses where company reconstruction without change in ownership

2107.     This clause deals with the interaction between clauses 674(2) and 944(3). It is based on section 768 of ICTA.

2108.     When a trade is transferred from a predecessor company to a successor company, and the relevant conditions are met for a company reconstruction without a change in ownership, clause 944(3) provides for the successor to be entitled to relief under clause 45 for a trading loss made by the predecessor. Clause 674(2) restricts relief under clause 45 if there is a change in company ownership. If there is both a company reconstruction without a change in ownership (such that clause 944(3) applies) and, separately, a change in ownership (such that clause 674(2) applies), then this clause extends clause 674(2) to restrict relief given under clause 944(3).

2109.     Section 768(5) of ICTA refers to “section 343” of that Act. But section 768(5) only operates on section 768(1) of ICTA, and section 768(1) only restricts relief under section 393 of that Act. The only provision of section 343 of ICTA which gives relief under section 393 of that Act is section 343(3). This clause refers precisely to clause 944(3), which is based on section 343(3) of ICTA.

Chapter 3: Company with investment business: restrictions on relief: general provision

Overview

2110.     Chapter 3 is the second of four Chapters dealing with various kinds of loss buying. It has the following structure.

• Clause 677 (introduction) lays down the conditions for the Chapter to apply and defines some key terms.

• If the Chapter applies, clause 678 (notional split of accounting period in which change in ownership occurs) sets the stage. It splits the period in which the change in ownership occurs into two notional accounting periods, and indicates that certain amounts will need to be apportioned between these two periods.

• Clauses 679 to 684 are a group of six clauses restricting various kinds of corporation tax relief. If, having reviewed them, the reader is satisfied that in the case under review these clauses will make no practical difference, the reader will be able to conclude that there will in practice be no need to make the apportionments required by clause 678.

• Clauses 685 and 686 are the detailed rules for making apportionments of amounts for the purposes of this Chapter.

• Clause 687 provides for the adjustment of balancing charges in certain cases in which corporation tax relief is restricted.

• Clauses 688 to 691 define “significant increase in the amount of a company’s capital”.

Clause 677: Introduction to Chapter

2111.     This clause introduces the Chapter. It is based on sections 768B, 768D and 768E of ICTA. If, having read this clause, the reader is satisfied that the conditions for this Chapter to apply are not met, the reader need read no further in this Chapter.

2112.     Subsections (1) to (4) lay down the conditions for the Chapter to apply.

2113.     Subsection (1) is based on, among other things, section 768D(1)(a)(i) of ICTA. Unlike section 768D(1) of ICTA, subsection (1) does not refer to a change in the ownership of a company carrying on a UK property business; it refers to a change in the ownership of a company with investment business. The reason is that, if section 768D(1)(a)(i) of ICTA applies, then:

• There is a change in the ownership of a company carrying on a UK property business (see the opening words of section 768D(1)); and

• The company whose ownership has changed is a company with investment business (see the opening words of section 768D(1)(a)).

2114.     Accordingly, if section 768D(1)(a)(i) of ICTA applies, there is by implication a change in the ownership of a company with investment business. There is therefore no need for section 768D(1) of ICTA to pick up the opening words of section 768B of that Act.

2115.     Subsection (5) defines, non-exhaustively, “major change in the nature or conduct of a business”.

Clause 678: Notional split of accounting period in which change in ownership occurs

2116.     This clause deems the accounting period in which the change in ownership occurs to be split into two notional accounting periods for the purposes of this Chapter. It is based on sections 768B, 768D and 768E of ICTA.

2117.     Subsection (3) requires amounts for the actual accounting period to be apportioned between the two notional accounting periods in accordance with clause 685.

Clause 679: Restriction on debits to be brought into account

2118.     This clause restricts debits on the company’s loan relationships in cases in which this Chapter applies. It is based on section 768B of ICTA and paragraph 9 of Schedule 28A to that Act.

2119.     This clause is the first of a group of six clauses (clauses 679 to 684) imposing restrictions on corporation tax relief. The first four of these clauses restrict reliefs given by CTA 2009, and are arranged in the order in which those reliefs appear in that Act. The fifth and sixth of those clauses restrict relief for property business losses, and are arranged in the order in which those reliefs appear in Chapter 4 of Part 4 of this Bill.

2120.     Section 574 of CTA 2009 provides that non-trading credits and debits from derivative contracts are to be brought into account as if they were non-trading credits or non-trading debits for the purposes of Part 5 of CTA 2009 in respect of loan relationships of the company. The reference to that section in section 768B(10) of ICTA is otiose. Subsection (1) therefore omits it.

2121.     Subsections (2) to (4) set out the consequences of the apportionment made under clause 678.

2122.     “Relevant non-trading debits” in subsections (2) and (3) translates “debits falling within paragraph 11 below” in paragraph 9(2) of Schedule 28A to ICTA. Subsection (5) tells the reader where this expression is defined.

Clause 680: Restriction on the carry forward of non-trading deficit from loan relationships

2123.     This clause restricts relief for the company’s non-trading deficit on its loan relationships in cases in which this Chapter applies. It is based on section 768B of, and paragraph 9A of Schedule 28A to, ICTA.

2124.     Debits and deficits have different functions in the loan relationships regime, therefore this Chapter imposes different restrictions on them.

2125.     Section 574 of CTA 2009 provides that non-trading credits and debits from derivative contracts are to be brought into account as if they were non-trading credits or non-trading debits for the purposes of Part 5 of CTA 2009 in respect of loan relationships of the company. The reference to that section in section 768B(10) of ICTA is otiose. Subsection (1) therefore omits it.