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Clause 706: Meaning of “linked” person
2206. This interpretative clause explains when a person is “linked” to a company for the purposes of this Chapter. It is based on sections 767A and 767AA of ICTA.
2207. If the statutory conditions are met, such a person may be assessed and charged to an amount of unpaid corporation tax under clause 710(2) or, as the case may be, clause 713(2).
Clause 707: Meaning of “control”
2208. This interpretative clause is based on section 767B of ICTA.
Clause 708: Rights to be attributed for the purposes of section 707
2209. This clause supplements clause 707. It is based on section 767B of ICTA.
Clause 709: Meaning of “the relevant period”
2210. This interpretative clause is based on sections 767A and 767AA of ICTA.
2211. Subsection (3) makes an exception to the general rule laid down by subsection (2). Suppose A sells a company to B without intending to avoid tax and B enters into a company purchase scheme with C: B may be liable under this Chapter but A may not. The rationale is that A can be expected to ensure, when selling the company to B, that B does not behave in a way which would trigger this Chapter, but A cannot be expected to ensure that B does not enter into arrangements with C whereby C triggers this Chapter. Subsection (3) begins “But if ..” to make it clear that subsection (2) is subject to subsection (3).
Clause 710: Recovery of unpaid corporation tax for accounting period beginning before change
2212. This clause enables an officer of Revenue and Customs to assess and charge a linked person to an amount of unpaid corporation tax for an accounting period beginning before the change in the ownership of a company. It is based on section 767A of ICTA.
2213. Section 767A(1) of ICTA gives this assessment function to “the Board”, ie to the Commissioners for HMRC. In practice, the Commissioners delegate this function to officers of Revenue and Customs, and subsections (1) and (2) reflect this. This is a minor change in the law. See Change 5 in Annex 1. In practice, the administration of sections 767A and 767AA of ICTA and the provisions which supplement them is restricted to a specialist group of officers. Change 5 will have no effect on this practice.
2214. Like the source legislation, subsection (2) provides that “[a person].. may be assessed ..”. This gives officers the power, but not the obligation, to assess linked persons, and therefore allows HMRC to exercise managerial discretion.
Clause 711: Conditions relating to company’s trade or business
2215. This clause lists three conditions which relate to the company’s trade or business; if none of these conditions is met, clause 710 does not apply. This clause is based on sections 767A and 767B of ICTA.
2216. The meaning of “connected” in subsection (5) is given by clause 1176(1). Section 767B(9) of ICTA is therefore not rewritten as a separate proposition.
Clause 712: Meaning of “a major change in the nature or conduct of a trade or business”
2217. This interpretative clause is based on section 767B of ICTA.
2218. Section 767B(7) of ICTA refers to section 245 of that Act. In repealing section 245 of ICTA, FA 1998 inadvertently omitted to make the necessary consequential amendment to section 767B(7) of ICTA.
2219. As it stood before its repeal, section 245(4)(a) of ICTA read:
In subsection (1) above “a major change in the nature or conduct of a trade or business” includes -
(a) a major change in the type of property dealt in, or services or facilities provided, in the trade or business; or
(b) a major change in customers, outlets or markets of the trade or business; or
(c) a change whereby the company ceases to be a trading company and becomes an investment company or vice versa; or
(d) where the company is an investment company, a major change in the nature of the investments held by the company.
2220. Before its repeal, section 245(5) of ICTA defined “trading company” and “investment company” for the purposes of that section:
“trading company” means a company whose business consists wholly or mainly of the carrying on of a trade or trades and
“investment company” means a company (other than a holding company) whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom;
“holding company” means a company whose business consists wholly or mainly in the holding of shares or securities of companies which are its 90 per cent subsidiaries and which are trading companies.
2221. Departmental practice in applying section 767B(7) of ICTA has not changed since 1998.
2222. If the repeal of section 245(4) of ICTA repealed section 767B(7) of that Act by implication, then it enabled the taxpayer to argue that a change which used to be mentioned in section 245(4) was not necessarily a major change in the nature or conduct of a trade or business.
2223. Section 245 of ICTA was one of a number of provisions repealed by Schedule 3 to FA 1998 as part of the abolition of advance corporation tax (ACT). It would be anomalous if, as part of the abolition of ACT, Parliament implicitly repealed section 767B(7) of ICTA and thereby weakened section 767A of that Act. It would be particularly anomalous if Parliament did this in FA 1998, since FA 1998 inserted section 767AA of ICTA to catch schemes which section 767A of that Act did not. In statutory interpretation, there is a presumption that Parliament wishes to avoid an anomalous result. Accordingly, the repeal of section 245 of ICTA did not by implication repeal section 767B(7) of that Act.
2224. Accordingly, this clause draws on section 245 of ICTA (repealed) to rewrite section 767B(7) of ICTA.
Clause 713: Recovery of unpaid corporation tax for accounting period ending on or after change
2225. This clause enables an officer of Revenue and Customs to assess and charge a linked person to an amount of unpaid corporation tax for an accounting period ending on or after the change in the ownership of a company. It is based on section 767AA of ICTA.
2226. Section 767AA(1) of ICTA gives this assessment function to “the Board”, ie to the Commissioners for HMRC. In practice, the Commissioners delegate this function to officers of Revenue and Customs, and subsections (1) and (2) reflect this. This is a minor change in the law. See Change 5 in Annex 1. In practice, the administration of sections 767A and 767AA of ICTA and the provisions which supplement them is restricted to a specialist group of officers. Change 5 has no effect on this practice.
2227. Like the source legislation, subsection (2) provides that “[a person].. may be assessed ..”. This gives officers the power, but not the obligation, to assess linked persons, and therefore allows HMRC to exercise managerial discretion.
2228. For the sake of consistency, subsection (1)(b) has been brought into line with clause 710(1)(b).
Clause 714: The expectation condition
2229. This clause spells out the expectation condition mentioned in clause 713(1)(d). It is based on section 767AA of ICTA.
2230. Subsection (2) omits as otiose “either or both of” in section 767AA(2) of ICTA.
2231. In subsection (4)(a), the words in brackets warn the reader that “an associated company” is not necessarily the “associated company” mentioned in clause 713(1)(b). Which company in a group has a corporation tax liability may depend on (for example) how the group allocates its group relief.
Clause 715: Meaning of “transaction entered into in connection with change in ownership”
2232. This interpretative clause is based on section 767AA of ICTA.
Clause 716: Interest
2233. This clause imposes interest on tax which has been assessed under clause 710 or clause 713 and is overdue. It is based on section 767B of ICTA.
Clause 717: Effect of payment in pursuance of assessment under section 710 or 713
2234. This clause is about payments in pursuance of an assessment under clause 710 or 713. It is based on section 767B of ICTA.
2235. Subsection (1) disallows such a payment. Subsection (2) gives the maker of such a payment a right of recovery.
Clause 718: Meaning of “associated company”
2236. This interpretative clause is based on section 767AA of ICTA.
Chapter 7: Meaning of “change in the ownership of a company”
Overview
2237. This Chapter defines “change in the ownership of a company” for the purposes of this Part. It applies both for the purposes of Chapters 2 to 5 (restriction of corporation tax reliefs) and for the purposes of Chapter 6 (recovery of unpaid corporation tax).
2238. This Chapter is based on section 769 of ICTA. Section 769 of ICTA does not expressly mention section 768E of that Act, but the references in section 769 of ICTA to sections 768B and 768C of that Act include by implication references to section 768E of that Act.
Clause 719: Meaning of “change in the ownership of a company”
2239. This clause gives the basic definition of “change in the ownership of a company” for the purposes of this Part of the Bill. It is based on section 769 of ICTA.
2240. Section 769(1)(a) of ICTA is satisfied “if a single person acquires more than half the ordinary share capital of the company”. This raises the question: is this a reference to acquiring:
- An additional holding (A);
- The existing holding (X);
- The total holding after the acquisition (T = A + X); or
2241. Section 769(1)(a) of ICTA cannot be read as referring to the acquisition of X. Otherwise, a person who held more than 50% of the ordinary share capital and did not acquire any more shares would “acquire more than half the ordinary share capital”. As a matter of normal English usage, “acquires” cannot imply that.
2242. Section 769(1)(a) of ICTA cannot be read as referring to the acquisition of T, whether or not X<50%. according to bramwell et al. 3:
If one person owns 50 per cent. of a company’s shares and then buys 1 per cent. more, he does not thereby “acquire more than half” of the shares - he acquires 1 per cent. [Section 769(1)(b) and (c) of ICTA] refers to any number of persons acquiring holdings of shares that together amount to more than half of the ordinary shares in a company, but [section 769 (1)(c)] makes it clear that acquired holdings must be distinguished from existing holdings.
2243. Bramwell et al. are correct on this point, because:
- There is no indication that “acquire” has to have a different scope in section 769(1)(a) and (c) of ICTA;
- Since Parliament has not said “acquires a total of more than half the ordinary share capital” it is not legitimate for any such words to be read in; and
- Section 769(2)(b) of ICTA says “.. may be regarded as having acquired a percentage holding equal to the increase” (emphasis added).
2244. The acquisition of “more than half the ordinary share capital” in section 769(1)(a) of ICTA is therefore a reference to the acquisition of the additional holding, A. Accordingly, to sharpen the drafting, subsection (2) expressly refers to the acquisition of “a holding of more than half the ordinary share capital”.
2245. Section 769(1)(c) of ICTA says “less that 5 per cent”. Subsection (5) corrects this typo.
Clause 720: Section 719: supplementary
2246. This interpretative clause is based on section 769 of ICTA.
2247. The meaning of “connected” in subsection (4) is given by clause 1122, which is applied “for the purposes of this Act” by clause 1176(1). Unlike section 769(2)(c) of ICTA, therefore, subsection (4) does not specifically apply the definition of “connected persons” in section 839 of that Act.
2248. Section 769(2)(d) of ICTA has the expression “under the will or on the intestacy of a deceased person”. The words “of a deceased person” add nothing and so subsection (5) compresses that expression to “under a will or on intestacy”.
Clause 721: When things other than ordinary share capital may be taken into account: Chapters 2 to 5
2249. This clause allows other interests in a company, such as voting power attaching to shares, to be taken into account in determining whether there has been a change in ownership. It applies in cases when applying the “ordinary share capital” test in clause 719 would give anomalous results. It is based on section 769 of ICTA.
2250. Section 769(3) of ICTA uses the expression “under the articles of association or under any other document regulating the company”. Subsection (2) compresses this to “under any document regulating the company”.
2251. Section 769(3) of ICTA uses the old-fashioned term “enure”. In response to representations, the term “enure” was retained in section 723(1) of ITA (transfer of assets abroad: charge where power to enjoy income: enjoyment conditions). It has therefore also been retained in subsection (3).
2252. Section 769(3) of ICTA uses the expression “all kinds of share capital, including preference shares”. Subsection (4)(a) compresses this to “all kinds of share capital”.
Clause 722: When things other than ordinary share capital may be taken into account: Chapter 6
2253. In cases when applying the “ordinary share capital” test in clause 719 would give anomalous results, this clause allows other interests in a company, such as voting power attaching to shares, to be taken into account in determining whether there has been a change in ownership. It is based on section 769 of ICTA.
Clause 723: Changes in indirect ownership
2254. This clause extends the basic rule about changes in company ownership in clause 719. It is based on section 769 of ICTA.
2255. The basic rule in clause 719 only relates to the direct ownership of a company. It does not capture a change in the ultimate ownership of a company, so this clause contains additional rules for groups of companies.
Clause 724: Disregard of change in company ownership
2256. This clause excludes certain changes in company ownership from the scope of Chapters 2 to 6. It is based on section 769 of ICTA.
Clause 725: Provision applying for the purposes of Chapters 2 to 5
2257. This supplementary clause is based on section 769 of ICTA.
2258. Subsection (2) is a “tie-breaker” provision, to deal with shareholdings being acquired piecemeal.
2259. Subsections (3) to (6) explain how the three-year maximum in clause 720(2) is to be applied in cases involving (for example) options or contracts for future delivery.
Clause 726: Interpretation of Chapter
2260. This interpretative clause is based on section 769 of ICTA.
Chapter 8: Supplementary provision
Clauses 727 to 730: Extended time limit for assessment; provision of information about ownership of shares etc; meaning of “company with investment business”; meaning of “relevant non-trading debit”
2261. These clauses extend the time limit for assessments giving effect to the provisions of Chapters 2 to 6 of this Part of the Bill, enable officers of Revenue and Customs to obtain information about the ownership of shares, stock and securities for the purposes of this Part, and define “company with investment business” and “relevant non-trading debit”. They are based on sections 767B and 768 to 768E of, and paragraphs 11 and 12 of Schedule 28A to, ICTA.
Part 15: Transactions in securities
Overview
2262. This Part rewrites sections 703 to 705 and 707 to 709 of ICTA for the purposes of corporation tax.
2263. Sections 703 to 709 of ICTA were enacted as a wide-ranging anti-avoidance rule which would enable the Crown to counter all manner of devices to avoid tax involving transactions in shares or other securities or the manipulation of a company’s assets or both, and to forestall the creation of such devices in future.
2264. Chapter 1 of Part 13 of ITA rewrote sections 703 to 709 of ICTA for the purposes of income tax, and paragraphs 154 to 161 of Schedule 1 to ITA consequentially amended those sections to apply solely for the purposes of corporation tax.
2265. This Part replicates Chapter 1 of Part 13 of ITA as far as possible. It differs from Chapter 1 of Part 13 of ITA in two respects.
2266. First, where this Part rewrites provisions of ICTA which are corporation tax specific there are no corresponding provisions in ITA. These are noted in detail in the commentary on clause 735. In addition there are some provisions in ITA which are not reflected in this Part. Sections 703 to 709 of ICTA, as amended, do not include any provisions corresponding to sections 699 and 712 of ITA (limit on amount assessed in section 689 and 690 cases; application of Chapter where individual within section 684 dies), because these sections are income tax specific; accordingly, no such provisions appear in this Part.
2267. Second, where necessary this Part uses terminology specific to corporation tax where Chapter 1 of Part 13 of ITA uses terminology specific to income tax. For example, since persons other than companies are not liable to corporation tax, this Part uses the word “company” to refer to the taxpayer where Chapter 1 of Part 13 of ITA uses the word “person”.
Clauses 731 to 734: Overview of Part; meaning of “corporation tax advantage”; company liable to counteraction of corporation tax advantages; exception where no tax avoidance object shown
2268. These clauses introduce the Part and provide definitions of “corporation tax advantage” and the company liable to counteraction. They are based on sections 703(1) and (2) and 709(1) and (2A) of ICTA.
2269. Except as noted in the Overview above, these clauses replicate exactly sections 682 to 685 of ITA.
Clause 735: Abnormal dividends used for exemptions or reliefs (circumstance A)
2270. This clause is the first in a sequence of clauses in which the sets of circumstances in section 704 of ICTA are laid out and expanded in five separate clauses. It is based on sections 704 A and 709(3) of ICTA.
2271. This clause is similar to section 686 of ITA. The main change is in subsection (4) where the purpose stated differs from those listed in section 686(4) of ITA to cater for the application of the clause to companies.
2272. Section 704 A(a) to (c) of ICTA are no longer capable of having any practical effect for corporation tax purposes and are therefore not rewritten.
2273. To avoid confusion, this sequence of clauses has been given the same titles as the corresponding provisions of Chapter 1 of Part 13 of ITA. There is accordingly no mention of “circumstance B”, because section 704 B of ICTA was repealed by FA 2008.
Clauses 736 to 738: Receipt of consideration representing company’s assets, future receipts or trading stock (circumstance C); receipt of consideration in connection with relevant company distribution (circumstance D); receipt of assets of relevant company (circumstance E)
2274. These clauses are based on sections 704 C, D and E and 709 of ICTA.
2275. Except as noted in the Overview above, these clauses replicate exactly sections 688 to 690 of ITA.
Clause 739: Meaning of “relevant company” in sections 737 and 738
2276. This clause defines “relevant company” in the same way as section 691 of ITA. It is based on section 704 D of ICTA.
Clause 740: Abnormal dividends: general
2277. This clause is the first of three interpretative sections about abnormal dividends. It is based on section 709(4) of ICTA. This clause and section 692 of ITA are identical.
2278. This clause replaces the reference to “the Board” with a reference to “an officer of Revenue and Customs”. See Change 5 in Annex 1.
2279. HMRC internal procedures restrict the exercise of the Commissioners for HMRC’ functions under Chapter 1 of Part 17 of ICTA to a small group of specialist officers. This change in the law will have no effect on this practice.
Clauses 741 and 742: Abnormal dividends: the excessive return condition and the excessive accrual condition
2280. These interpretative clauses are based on section 709(4) to (6) of ICTA.
2281. Except as noted in the Overview above, these clauses replicate exactly sections 693 and 694 of ITA.
Clauses 743 to 746: Preliminary notification that section 733 may apply, opposed notifications and counteraction notices
2282. These clauses are concerned with the procedure for counteraction of corporation tax advantages. They are based on sections 703(3), (9), (10) and (12) of ICTA. Apart from differences of the kind described in the Overview, they replicate sections 695 to 698 and 700 of ITA.
2283. Clauses 743 to 746 replace references to “the Board” with references to “an officer of Revenue and Customs”. See Change 5 in Annex 1.
Clauses 747 to 751: Timing of assessments in section 738 cases; application for clearance of transactions; effect of clearance notification under section 748; appeals against counteraction notices; interpretation of Part
2284. These clauses make a special rule for the timing of assessments in section 738 cases, provide a clearance procedure and deal with appeals against counteraction notices, and define certain expressions. They are based on sections 704 E(2) and (3), 705(1) and (5), 707 and 709(2) of ICTA.
2285. Except as noted in the Overview above, these clauses replicate exactly sections 700 to 702, 705 and 713 of ITA.
2286.
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