Clause 681: Restriction on relief for non-trading loss on intangible fixed assets

2126.     This clause restricts relief for the company’s non-trading loss on its intangible fixed assets in cases in which this Chapter applies. It is based on section 768E of ICTA.

2127.     Subsection (3) corrects a drafting error in section 768E(5) of ICTA. This is a minor change in the law. See Change 49 in Annex 1. A similar correction is made in clause 698(4).

Clause 682: Restriction on the deduction of expenses of management

2128.     This clause restricts relief for the company’s expenses of management in cases in which this Chapter applies. It is based on section 768B of ICTA.

2129.     In rewriting section 768B(6), subsection (2) inserts “as” before the second occurrence of “expenses of management”, to correct a drafting slip in paragraph 3(3)(b) of Schedule 6 to FA 2004.

2130.     Section 768B(7) and (9)(b) of ICTA are not rewritten. See the commentary on the amendments made to that section by Schedule 1.

Clause 683: Disallowance of UK property business losses

2131.     This clause restricts relief for the company’s UK property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA.

Clause 684: Disallowance of overseas property business losses

2132.     This clause restricts relief for the company’s overseas property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA.

2133.     Section 768D(9) of ICTA has to be read as implying that, in a case in which section 768D applies in relation to an overseas property business, references to section 392A of ICTA have to be read as references to the corresponding provisions of section 392B of ICTA. Otherwise section 768D of ICTA will apply in such a case but will not actually do anything. This clause therefore refers to clause 66, which is based on section 392B of ICTA.

2134.     Section 768D(5) of ICTA can have no application in relation to an overseas property business, and is therefore not rewritten in this clause.

Clause 685: Apportionment of amounts

2135.     This clause stipulates how various amounts are to be apportioned for the purposes of this Chapter. It is based on section 768E of, and paragraphs 6, 7 and 8 of Schedule 28A to, ICTA.

2136.     The source legislation obliges the reader to tally sub-paragraphs of paragraph 6 of Schedule 28A to ICTA with sub-paragraphs of paragraph 7(1) of that Schedule. This is inconvenient, as the sub-paragraphs are not always in one-to-one correspondence and the legislation has been amended several times. Paragraphs 6 and 7(1) of that Schedule have therefore been rewritten in subsection (2) as a two-column table.

2137.     Detailed comments on the table are given below.

2138.     In rewriting paragraph 8 of Schedule 28A to ICTA, subsection (3) omits both instances of “appears”. See the commentary on clause 674.

Clause 686: Meaning of certain expressions in section 685

2139.     This interpretative clause is based on paragraphs 6, 6A and 7 of Schedule 28A to ICTA. The subsections of this clause are arranged in the order of the rows to which they refer in the table in clause 685(2).

Clause 687: Adjustment to balancing charges if relief is restricted

2140.     This clause prevents double taxation in certain cases within clauses 679, 680 and 682. It is based on sections 768 and 768B of ICTA.

2141.     This clause has the same function in this Chapter as clause 675 has in Chapter 2. See the commentary on that clause.

2142.     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 that Act in respect of loan relationships of the company. The reference to that section in section 768B(13) of ICTA is otiose. Subsection (2) therefore omits it.

2143.     Section 768(6) and (7) of ICTA use the expression “allowance or deduction”. Since “or deduction” adds nothing to “allowance”, subsections (4) to (6) omit “or deduction” as otiose.

Clause 688: Meaning of “significant increase in the amount of a company’s capital”

2144.     This clause is the first of a group of four clauses which together define “significant increase in the amount of a company’s capital” for the purposes of condition A in clause 677(2). It is based on paragraphs 1 and 2 of Schedule 28A to ICTA.

Clauses 689 and 690: Amount A; amount B

2145.     These interpretative clauses are based on paragraphs 3 and 4 of Schedule 28A to ICTA.

Clause 691: Meaning of “amount of capital”

2146.     This interpretative clause is based on paragraph 5 of Schedule 28A to ICTA.

2147.     In paragraph 5(1) of Schedule 28A to ICTA, “the capital of a company” has to be read as “the amount of the capital of a company”. Otherwise, in paragraph 3(1) of that Schedule, “the amount of the company’s capital” has to be read as “the amount of the aggregate of (a) the amount of ..”. Subsection (2) makes this clear. Paragraph 5(1)(b) of Schedule 28A to ICTA refers to section 417(7)(a) to (c) of ICTA, but this clause sets out the full words rather than make the cross-reference.

2148.     Paragraph 5(3) of Schedule 28A to ICTA provides for amounts of capital to be rounded up to the nearest pound. Subsection (4) omits this requirement because it has no practical effect.

Chapter 4: Company with investment business: restrictions on relief: asset transferred within group

Overview

2149.     Chapter 4 is the third of four Chapters dealing with various kinds of loss buying. It rewrites section 768C of ICTA and the corresponding provisions of sections 768D and 768E of ICTA.

2150.     Section 768C of ICTA was inserted by FA 1995 to block the following scheme. A company is about to realise a chargeable gain on an asset. The company purchases a company with excess management expenses. Relief for these is not restricted by section 768B of ICTA, because the conditions in section 768B(1)(a) to (c) are not met. The asset is transferred to the newly purchased company at no gain/no loss under section 171 of TCGA. When the transferee company disposes of the asset and crystallises the chargeable gain, it can use its pre-acquisition management expenses to shelter the gain.

2151.     Sections 768D and 768E of ICTA (inserted by FA 1998 and FA 2002 respectively) included provisions corresponding to section 768C to cover pre-acquisition property losses and pre-acquisition non-trading losses on intangible fixed assets: see sections 768D(1)(a)(ii) and 768E(1)(b).

2152.     Section 768C(13) (inserted by FA 2002) extended section 768C to cover tax-neutral intra-group transfers of intangible fixed assets.

2153.     Chapter 4 is similar in many respects to Chapter 3, but there are important differences of detail because, unlike Chapter 3, Chapter 4 needs to cater for chargeable gains and realisation gains on intangible fixed assets.

2154.     Chapter 4 has the following structure.

• Clauses 692 to 694 lay down the conditions for the Chapter to apply and define some key terms.

• If the Chapter applies, clause 695 (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 696 to 701 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 695.

• Clauses 702 and 703 contain the detailed rules for making apportionments of amounts for the purposes of this Chapter.

Clause 692: Introduction to Chapter

2155.     This clause introduces the Chapter. It is based on sections 768C, 768D and 768E of ICTA. If, having read this clause, the reader is satisfied that the conditions for this Chapter to apply are not all met, the reader need read no further in this Chapter.

2156.     Subsections (1) to (4) lay down the conditions for the Chapter to apply.

2157.     Subsection (1) is based on, among other things, section 768D(1)(a)(ii) 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)(ii) 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)).

2158.     Accordingly, if section 768D(1)(a)(ii) 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.

2159.     Subsections (5) and (6) supplement subsection (4).

2160.     Subsection (7) defines “the change in ownership”, “the company”, “non-trading chargeable realisation gain” and “the relevant gain” for the purposes of this Chapter.

Clause 693: Meaning of “amount of profits which represents a relevant gain”

2161.     This interpretative clause is based on section 768C of ICTA.

Clause 694: Meaning of “the relevant provisions”

2162.     This interpretative clause is based on section 768C of, and paragraph 13 of Schedule 28A to, ICTA.

2163.     Paragraph (a) refers to section 8(1) of TCGA, which provides (in summary) that the chargeable gains included in a company’s total profits are its chargeable gains after deducting allowable losses. Paragraph (a) also refers to Schedule 7A to that Act. That Schedule is directed against another kind of loss buying, namely the purchase of allowable losses for the purposes of corporation tax on chargeable gains. In summary, if that Schedule bites, relief for allowable losses is restricted to the extent that (1) they accrued before the company joined the relevant group and (2) they cannot be deducted from chargeable gains accruing before that date. Defining “the relevant provisions” in this way ensures that Schedule 7A to TCGA is applied before the provisions of this Chapter are applied.

2164.     The concept of “the relevant provisions” is used, in particular, in row 1 in the table in clause 702(2).

2165.     In a case in which section 768C of ICTA applies in relation to an asset to which Part 8 of CTA 2009 (intangible fixed assets) applies, section 768C(13)(d) of ICTA applies not only to section 768C(12) of that Act but also to paragraph 13(2) of Schedule 28A to that Act.

Clause 695: Notional split of accounting period in which change in ownership occurs

2166.     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 768C, 768D and 768E of ICTA.

2167.     Subsection (3) requires amounts for the actual accounting period to be apportioned between the two notional accounting periods in accordance with clause 702.

Clause 696: Restriction on debits to be brought into account

2168.     This clause restricts debits on the company’s loan relationships in cases in which this Chapter applies. It is based on section 768C of, and paragraph 10 of Schedule 28A to, ICTA.

2169.     This clause is the first of a group of six clauses (clauses 696 to 701) 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 these clauses restrict relief for property losses, and are arranged in the order in which those reliefs appear in Chapter 4 of Part 4 of this Bill.

2170.     Subsection (1) states the purpose of the clause.

2171.     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 768C(9) of ICTA is therefore otiose. Subsection (1) therefore omits it.

2172.     Subsection (2) limits the scope of the clause to cases in which gains arise or accrue as discussed in the ‘overview’ paragraphs of the commentary on this Chapter. Its inclusion here emphasises the point that the clause will only make a difference in practice if there are both debits to be restricted and a gain to be sheltered by those debits.

2173.     Subsections (3) to (5) set out the consequences of the apportionment made in accordance with clause 702.

2174.     The other five clauses in this group have a similar structure.

Clause 697: Restriction on the carry forward of non-trading deficit from loan relationships

2175.     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 768C of, and paragraph 10A of Schedule 28A to, ICTA.

2176.     Debits and deficits have different functions in the loan relationships regime, therefore this Chapter imposes different restrictions on them.

Clause 698: Restriction on relief for non-trading loss on intangible fixed assets

2177.     This clause restricts relief for the company’s non-trading loss on its intangible fixed assets in cases in which this Chapter applies. It is based on section 768E of ICTA.

2178.     Subsection (2) makes it clear that section 768E(5)(b) of ICTA refers to section 768C(6) of that Act by implication. This clarification is a minor change in the law: see Change 50 in Annex 1.

2179.     Subsections (4) and (5) include a minor change in the law. See Change 49 in Annex 1 and the commentary on clause 681.

Clause 699: Restrictions on the deduction of expenses of management

2180.     This clause restricts relief for the company’s expenses of management in cases in which this Chapter applies. It is based on section 768C of ICTA.

2181.     Subsection (4) only operates on subsection (5). The corresponding provision in the other clauses in this group operates, in each case, on the whole clause.

Clause 700: Disallowance of UK property business losses

2182.     This clause restricts relief for the company’s UK property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA.

2183.     Subsection (2) makes it clear that section 768D(6)(b) of ICTA refers by implication to section 768C(6) of that Act. This clarification is a minor change in the law: see Change 50 in Annex 1.

Clause 701: Disallowance of overseas property business losses

2184.     This clause restricts relief for the company’s overseas property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA.

2185.     Section 768D(9) of ICTA has to be read as implying that, in a case in which section 768D of ICTA applies in relation to an overseas property business, references to section 392A of ICTA have to be read as references to the corresponding provisions of section 392B of that Act. Otherwise section 768D of that Act will apply in such a case but will not actually do anything. Subsections (1) and (3) therefore refer to clause 66, which is based on section 392B of ICTA.

2186.     Subsection (2) includes a minor change in the law. See Change 50 in Annex 1 and the commentary on clause 700.

Clause 702: Apportionment of amounts

2187.     This clause stipulates how various amounts are to be apportioned for the purposes of this Chapter. It is based on sections 768C and 768E of, and paragraphs 13 to 17 of Schedule 28A to, ICTA.

2188.     The source legislation obliges the reader to tally sub-paragraphs of paragraph 13(1) of Schedule 28A to ICTA with sub-paragraphs of paragraphs 15 and 16(1) of that Schedule. This is inconvenient, as the sub-paragraphs are not always in one-to-one correspondence and the legislation has been amended several times. Paragraphs 13(1), 15 and 16(1) of that Schedule have therefore been rewritten in subsection (2) as a two-column table.

2189.     Detailed comments on the table are given below.

Clause 703: Meaning of certain expressions in section 702

2190.     This interpretative clause is based on paragraphs 13, 13A and 16 of Schedule 28A to ICTA.

Chapter 5: Company without investment business: disallowance of property losses

Overview

2191.     Chapter 5 is the fourth of four Chapters dealing with various kinds of loss buying.

Clause 704: Company carrying on UK property business

2192.     This clause restricts relief for UK property losses in cases in which this Chapter applies. It is based on section 768D of ICTA.

2193.     Subsections (1) to (3) lay down the conditions for the clause to apply.

2194.     Subsection (4) states the purpose of the clause. In subsection (4), “the company” has the meaning given by subsection (1).

2195.     Subsection (5) deems the accounting period in which the change of ownership occurs to be two separate accounting periods. The profits or losses of the actual accounting period must then be apportioned to the two notional accounting periods in accordance with subsections (6) and (7).

2196.     Subsections (8) and (9) set out the consequences of this apportionment.

2197.     Subsection (10) defines “major change in the nature or conduct of a trade or UK property business”.

Clause 705: Company carrying on overseas property business

2198.     This clause restricts relief for the company’s overseas property business loss in cases in which this Chapter applies. It is based on section 768D of ICTA, and has a similar structure to clause 704 of this Bill.

2199.     Section 768D(9) of ICTA has to be read as implying that, in a case in which section 768D applies in relation to an overseas property business, references to section 392A of ICTA have to be read as references to the corresponding provisions of section 392B of that Act. Otherwise section 768D of that Act will apply in such a case but will not actually do anything. Subsections (4) and (8) therefore refer to clause 66, which is based on section 392B of ICTA.

2200.     Section 768D(5) of ICTA can have no application in relation to an overseas property business, and is therefore not rewritten in this clause.

Chapter 6: Recovery of unpaid corporation tax

Overview

2201.     This Chapter is based on sections 767A to 767B of ICTA.

2202.     Sections 767A and 767B of ICTA were introduced by FA 1994 to counter the use of company purchase schemes to avoid the payment of corporation tax. In a typical case a profitable company is stripped of its trade or business, usually by way of transfer to another member of its group, leaving it only with sufficient cash to settle its outstanding corporation tax. The company is then sold - for a sum equivalent to a proportion of the tax outstanding - to a third party (often non-resident) who arranges for the company to participate in arrangements intended to eliminate the tax liability. On the assumption that the arrangements will be successful, the new owner then arranges for the cash to be withdrawn.

2203.     If the avoidance arrangements are effective, the company has no corporation tax to pay. But if they are found to be ineffective, HMRC will have little or no prospect of collecting the unpaid tax from the company, because the company will have been left with no funds. Sections 767A and 767B of ICTA enable HMRC to collect the unpaid corporation tax from a person linked with the company as mentioned in section 767A(2).

2204.     Subsequently, alternative schemes were developed that attempted to find ways around sections 767A and 767B of ICTA. For example, as sections 767A and 767B of ICTA only applied to tax liabilities for accounting periods beginning before the change in ownership, the new schemes ensured that the tax liability crystallised in an accounting period beginning after that date. They did this by using provisions such as rollover relief that postponed the tax charge or other provisions that involved income or gains being taxed in periods other than that in which they accrued. Section 767AA of ICTA was introduced by FA 1998 to block such schemes. If it bites, HMRC can collect the unpaid corporation tax from a person linked with the company as mentioned in section 767AA(4).

2205.     This Chapter has the following structure.

• Clauses 706 to 709 define some key expressions for the purposes of the Chapter.

• Clauses 710 to 712 enable HMRC to recover unpaid corporation tax for an accounting period beginning before the change in ownership. They are based on sections 767A and 767B of ICTA.

• Clauses 713 to 715 enable HMRC to recover unpaid corporation tax for an accounting period ending on or after the change in ownership. They are based on section 767AA of ICTA.

• Clauses 716 to 718 are miscellaneous provisions.