Clause 1121: “Company”

3221.     This clause defines “company”. It is based on section 832(1) and (2) of ICTA. The corresponding provision for income tax is in section 992 of ITA.

3222.     Subsection (2) indicates that an “authorised unit trust” is treated as a company for specified purposes of the Corporation Tax Acts.

3223.     The clause does not rewrite the tail words of section 832(2) of ICTA as clause 1118(4) fulfils the function, so far as now necessary (given the redundancy or repeal of some of the provisions mentioned in section 832(2) of ICTA), of ceding priority to a different definition.

3224.     The reference to “sections 774 to 777” in the provisions listed in section 832(2) of ICTA implies the inclusion of sections 774A to 774G of ICTA. Those new sections were inserted by FA 2006, i.e. after that list was drafted for ICTA in 1988. Those sections (rewritten in Chapter 2 of Part 16 of this Bill) do not provide a bespoke definition of “company” nor did the drafter making the FA 2006 insertion provide that the exclusions in section 832(2) of ICTA should include those sections. Having regard to all that, and to give sensible effect in particular to the former section 774G(5) of ICTA (see clause 774), the general definition in this clause applies in those sections (so far as the use of the term in Chapter 2 of Part 16 of this Bill needs a definition).

Clause 1122: “Connected” persons

3225.     This clause when various persons are regarded as “connected”. It is based on section 839 of ICTA. The corresponding provision for income tax is in section 993 of ITA.

3226.     The definition operates only where specifically applied. Clause 1176 applies the definition for the purposes of this Bill unless otherwise indicated.

Clause 1123: “Connected” persons: supplementary

3227.     This clause contains interpretative material for clause 1122. It is based on section 839 of ICTA. The corresponding provision for income tax is in section 994 of ITA.

Clause 1124: “Control”

3228.     This clause defines what “control” of a company or partnership means. It is based on section 840 of ICTA. The corresponding provision for income tax is in section 995 of ITA.

3229.     The drafting largely follows the approach adopted in section 574 of CAA.

3230.     The definition operates only where specifically applied. Clause 1176 applies the definition for the purposes of this Bill unless otherwise indicated.

Clause 1125: “Farming” and related expressions

3231.     This clause defines “farming” and “market gardening” and modifies the meaning of “forestry” and “woodlands”. It is based on section 832 of ICTA and section 154 of FA 1995. The corresponding provision for income tax is in section 996 of ITA.

3232.     Subsection (3) provides that the cultivation of short rotation coppice is to be regarded as husbandry. To be then regarded as farming, within the meaning given by subsection (1), the cultivation of short rotation coppice must involve the occupation of land. As it is impossible to cultivate short rotation coppice without occupying land, such cultivation is also regarded as farming.

3233.     As with section 996 of ITA, there is no territorial restriction in the definitions in this clause. There is therefore no need in clause 48, which rewrites section 397 of ICTA (restriction of loss relief in farming and market gardening cases), to apply the provision to farming outside the United Kingdom as was the case in section 397(5) of ICTA. Similarly, the cultivation of short rotation coppice on land outside the United Kingdom is regarded as husbandry and therefore as farming.

3234.     If a territorial restriction is required, it is applied to a particular section (following the pattern in ITA). So subsection (7) restricts the definitions, in their application to paragraph 26 of Schedule 15 to FA 2000 (corporate venturing scheme), to farming or market gardening in the United Kingdom.

Clause 1126: “Franked investment income”

3235.     This clause defines “franked investment income” and provides for the construction of references to an amount of franked investment income. It is based on sections 13(8AB) and 832(1) and (4A) of ICTA.

Clause 1127: “Generally accepted accounting practice” and related expressions

3236.     This clause defines a number of terms referring to accounting practice. It is based on the definition of “for accounting purposes” in section 832(1) of ICTA and on section 50 of FA 2004. The corresponding provision for income tax is in section 997 of ITA.

Clause 1128: “Grossing up”

3237.     This clause sets out how to calculate the gross amount of an amount from which income tax has been deducted. To the extent it is not new, it is based on section 25(12) of FA 1990. The corresponding provision for income tax is in section 998 of ITA.

Clause 1129: “Hire-purchase agreement”

3238.     This clause defines a “hire-purchase agreement”. It is based on section 784(6) of ICTA and section 57(3), (4) and (6) of CTA 2009.

Clause 1130: “Local authority”

3239.     This clause defines a “local authority” in relation to the constituent parts of the United Kingdom. It is based on section 842A of ICTA. The corresponding provision for income tax is in section 999 of ITA.

3240.     The definition, in its application to Northern Ireland, is restricted to bodies of a local rather than central government character. See Change 60 in Annex 1. An amendment in Schedule 1 makes the equivalent restriction in section 999 of ITA.

Clause 1131: “Local authority association”

3241.     This clause defines a “local authority association”. It is based on section 519(3) of ICTA. The corresponding provision for income tax is in section 1000 of ITA.

Clause 1132: “Offshore installation”

3242.     This clause defines an “offshore installation”. It is based on section 837C(1) to (4) of ICTA. The corresponding provision for income tax is in section 1001 of ITA.

Clause 1133: Regulations about the meaning of “offshore installation”

3243.     This clause provides regulatory power for the purposes of clause 1132. It is based on section 837C(5) and (6) of ICTA. The corresponding provision for income tax is in section 1002 of ITA.

Clause 1134: “Oil and gas exploration and appraisal”

3244.     This clause defines the expression “oil and gas exploration and approval”. It is based on section 837B of ICTA. The corresponding provision for income tax is in section 1003 of ITA.

Clause 1135: “Property investment LLP”

3245.     This clause defines a “property investment LLP”. It is based on section 842B of ICTA. The corresponding provision for income tax is in section 1004 of ITA.

Clause 1136: “Qualifying distribution”

3246.     This clause defines a “qualifying distribution”. It is based on sections 14(2) and 832(1) of ICTA.

Clause 1137: “Recognised stock exchange”

3247.     This clause defines a “recognised stock exchange”. It is based on section 841 of ICTA. The corresponding provision for income tax is in section 1005 of ITA.

3248.     This clause operates by cross-reference to the definition in section 1005 of ITA. This guards against any risk of orders being made (under powers in that section) which might inadvertently result in the two definitions getting out of step.

Clause 1138: “Research and development”

3249.     This clause defines the expression “research and development”. It is based on section 837A of ICTA. The corresponding provision for income tax is in section 1006 of ITA.

Clause 1139: “Tax advantage”

3250.     This clause defines “tax advantage”. It is based on section 840ZA of ICTA. The clause is modelled on the definition of “income tax advantage” in section 683 of ITA.

Clause 1140: “Unauthorised unit trust”

3251.     This clause defines an “unauthorised unit trust”. It is based on section 832(1) of ICTA. The corresponding provision for income tax is in section 989 of ITA.

3252.     Subsection (2) applies the effect of regulations made under section 1007 of ITA that exclude certain unit trust schemes from those that would otherwise meet the definition in subsection (1).

3253.

Chapter 2: Permanent establishments

Overview

3254.     This Chapter determines what constitutes a permanent establishment in a territory of a company which is not resident in that territory. It is based on sections 148 and 152 of, and Schedule 26 to, FA 2003.

3255.     The determination is in line with various internationally recognised characteristics commonly used in the United Kingdom’s double tax agreements.

3256.     If a non-UK resident company trades in the United Kingdom through a permanent establishment here, it is chargeable to corporation tax on its “chargeable profits”. Section 19 of CTA 2009 defines “chargeable profits” as the trading income arising directly or indirectly through or from the permanent establishment and the other income and chargeable gains referred to in section 19(3) attributable to the permanent establishment in accordance with sections 20 to 32 of that Act.

3257.     If a non-UK resident company is chargeable to tax in respect of any other income from a United Kingdom source, it is charged to income tax and its liability is limited in accordance with Chapter 1 of Part 14 of ITA. The extent to which the non-UK resident company is chargeable to tax in respect of such income may be limited by the terms of any applicable DTA.

Clause 1141: Permanent establishments of companies

3258.     This clause sets out the basic tests for determining whether a company resident in a territory has a permanent establishment in another territory. It is based on section 148(1) and (2) of FA 2003.

3259.     This clause is not limited to permanent establishments in the United Kingdom of non-UK resident companies but also serves to determine whether a UK resident company has a permanent establishment in another territory. Under DTAs adopting the OECD model convention, primary taxing rights in relation to the profits of a trade carried on by a company resident in the territory of one of the contracting states, through a permanent establishment in the territory of the other contracting state, are accorded to the fiscal authorities of the other contracting state.

3260.     Subsection (3) refers to the following three clauses which set out circumstances in which there is no permanent establishment, notwithstanding that the conditions in subsection (1) are met.

Clause 1142: Agent of independent status

3261.     This clause prevents a company which is not resident in a territory from being treated as having a permanent establishment in that territory merely because it carries on business in that territory through an agent of independent status there. It is based on sections 148(3) and 152 of, and paragraph 1 of Schedule 26 to, FA 2003.

3262.     Subsection (2) introduces clauses 1145 to 1151 which contain special provisions in relation to non-UK resident companies concerning transactions carried out through a broker in the United Kingdom, investment transactions carried out through an investment manager in the United Kingdom and Lloyd’s underwriting business.

Clause 1143: Preparatory or auxiliary activities

3263.     This clause treats a company which is not resident in a territory as not having a permanent establishment in that territory if the activities carried on in that territory are only of a preparatory or auxiliary character. It is based on section 148(4) and (5) of FA 2003.

3264.     Subsection (3) sets out a non-exhaustive list of activities of a preparatory or auxiliary character.

Clause 1144: Alternative finance arrangements

3265.     This clause provides that a non-UK resident company that receives sums treated as alternative finance return is not treated as having a permanent establishment in the United Kingdom merely because of anything done by the counter-party to the alternative finance arrangements under which the return is paid or by any other person acting for the non-UK resident company in relation to the arrangements. It is based on section 148(5A) of FA 2003.

3266.     Alternative finance return is defined in subsection (3) by cross-reference to the application of provisions, in identical terms, contained in Part 10A of ITA (which is inserted by Schedule 2 to TIOPB and applies for income tax purposes) and in Chapter 6 of Part 6 of CTA 2009 (which applies for corporation tax purposes). See the transitional provisions in Schedule 9 to TIOPB and Schedule 2 to CTA 2009 which provide in like terms for the application of the treatment of sums received as alternative finance return for the purposes of that Part and that Chapter.

Clause 1145: The independent broker conditions

3267.     This clause sets out the conditions to be met if a broker in the United Kingdom is to be treated as an agent of independent status for the purposes of clause 1142(1), and therefore not a permanent establishment, in relation to a transaction carried out on behalf of a non-UK resident company by the broker. It is based on paragraphs 1(1) and 2 of Schedule 26 to FA 2003.

3268.     In subsection (6) the words “(apart from this subsection)” have been added for the reasons given in Change 61 in Annex 1.

Clause 1146: The independent investment manager conditions

3269.     This clause sets out the conditions to be met if an investment manager in the United Kingdom is to be treated as an agent of independent status for the purposes of clause 1142(1), and therefore not a permanent establishment, in relation to an investment transaction carried out on behalf of a non-UK resident company by the investment manager. It is based on paragraphs 1(1), 3 and 7(2) of Schedule 26 to FA 2003.

Clause 1147: Investment managers: the 20% rule

3270.     This clause sets out the “20% rule” for investment managers. It is based on paragraph 4(1) of Schedule 26 to FA 2003.

3271.     The 20% rule has two requirements. The first requirement is that the investment manager and connected persons must intend that any interest that they may have in the non-UK resident’s “relevant disregarded income” will not exceed 20% of that income. The second requirement applies if that intention is not fulfilled. The 20% rule will continue to be met if the only reason why it is not fulfilled is because of matters outside the control of the investment manager or connected persons despite their having taken reasonable steps to mitigate the effect of those matters.

3272.     In subsection (2) the term “relevant disregarded income” has been substituted for the term “relevant excluded income” which appears in paragraph 4(1) of Schedule 26 to FA 2003. The same substitution was made in section 819(2) of ITA which is also based on paragraph 4(1) of Schedule 26 to FA 2003.

Clause 1148: Section 1147: interpretation

3273.     This clause defines three terms used in clause 1147. It is based on paragraph 4(2) to (4) of Schedule 26 to FA 2003.

3274.     Subsection (2) makes explicit that the accounting periods referred to in paragraph 4(2) of Schedule 26 to FA 2003 are those of the non-UK resident company.

3275.     Subsection (3) adopts the term “relevant disregarded income” in preference to the term “relevant excluded income” in paragraph 4(3) of Schedule 26 to FA 2003. Section 821 of ITA, which is also based on paragraph 4(3) of Schedule 26 to FA 2003, similarly adopts the term “relevant disregarded income”.

3276.     In subsection (3), a reference to “the total of the non-UK resident company’s income” has been substituted for the reference in paragraph 4(3) of Schedule 26 to FA 2003 to “the aggregate of such of the chargeable profits of the company”. See Change 62 in Annex 1.

Clause 1149: Application of 20% rule to collective investment schemes

3277.     This clause modifies the 20% rule where the non-UK resident company is a participant in a collective investment scheme. It is based on paragraph 5 of Schedule 26 to FA 2003.

3278.     This clause applies at the level of the scheme itself, treating the scheme as if it were a non-UK resident company, see subsection (3).

3279.     A minor drafting change has been made in subsection (3) by substituting reference to a non-UK resident company for the reference in paragraph 5(2) of Schedule 26 to FA 2003 to a company resident outside the United Kingdom. This has been done to clarify the assumption and in this context does not change the effect of the law. The same minor drafting change was made in section 824(3) of ITA.

3280.     Subsection (4) applies to a scheme which, if it was assumed to be a non-UK resident company, would not be regarded as carrying on a trade in the United Kingdom. The 20% rule is treated as satisfied in relation to such a scheme.

3281.     Subsection (5) applies to a scheme which, if it was assumed to be a non-UK resident company, would be regarded as carrying on a trade in the United Kingdom. The 20% rule applies to such a scheme with the modifications in subsection (6).

Clause 1150: Meaning of “investment manager” and “investment transaction”

3282.     This clause defines the terms “investment manager” and “investment transaction” which underlie the independent investment manager conditions. It is based on paragraph 3(1), (3) and (4) of Schedule 26 to FA 2003.

3283.     The transactions currently specified as “investment transactions” are set out in the Investment Manager (Specified Transactions) Regulations 2009 made under the powers in paragraph 3(3) and (4) of Schedule 26 to FA 2003 and which came into force on 12 May 2009.

Clause 1151: Lloyd’s agents

3284.     This clause applies if a person in the United Kingdom acts as the members’ agent of a non-UK resident company which is trading as a corporate member of Lloyd’s or if the person acts as the managing agent of a Lloyd’s syndicate of which the non-UK resident company is a member. It is based on paragraphs 1(1) and 6 of Schedule 26 to FA 2003.

3285.     This clause provides that the members’ agent or managing agent is to be treated as an agent of independent status for the purposes of clause 1142(1), and therefore not a permanent establishment, in relation to a transaction carried out on behalf of the non-UK resident company in the course of the non-UK resident company’s underwriting business at Lloyd’s.

Clause 1152: Investment managers: disregard of certain chargeable profits

3286.     This clause applies if an investment manager falls to be treated as a permanent establishment in the United Kingdom of a non-UK resident company. It is based on paragraph 5A of Schedule 26 to FA 2003.

3287.     The clause provides that in the two cases specified in subsection (2) some or all of the profits derived from an investment transaction carried out by the investment manager on behalf of the non-UK resident company are disregarded when attributing profits to the permanent establishment.

3288.     If Case 2 applies, the disregard will only be of that part of the non-UK resident company’s income from the transaction to which the investment manager and persons connected with the investment manager are not beneficially entitled (see subsection (3)).

Clause 1153: Miscellaneous

3289.     This clause explains when a person is to be regarded as carrying out a transaction on behalf of another and makes provision for a person part only of whose business is as a broker or investment manager. It is based on paragraph 7(1) and (4) of Schedule 26 to FA 2003.

3290.     Paragraph 7(3) of Schedule 26 to FA 2003, which provides that section 839 of ICTA (connected persons) applies for the purposes of that Schedule, has not been rewritten. This provision is not required, as clause 1176(1) applies clause 1122 (rewriting section 839 of ICTA) for the purposes of this Bill unless otherwise indicated.

Chapter 3: Subsidiaries

Overview

3291.     This Chapter sets out the circumstances in which one body corporate is regarded for the purposes of the Corporation Tax Acts as a “51% subsidiary”, “75% subsidiary” or “90% subsidiary” of another. It is based on section 838 of ICTA.

3292.     The definitions apply in respect of a “body corporate” rather than a “company” as the definition of the latter term in clause 1121 includes other types of body to whom these definitions are not relevant. But all bodies corporate in relation to whom the definitions are relevant are companies.

Clause 1154: Meaning of “51% subsidiary”, “75% subsidiary” and “90% subsidiary”

3293.     This clause defines “51% subsidiary”, “75% subsidiary” and “90% subsidiary” in terms of beneficial ownership of the subsidiary’s ordinary share capital. It is based on section 838(1), (2) and (3) of ICTA.

3294.     In the case of the definitions of “51% subsidiary” and “75% subsidiary” (but not “90% subsidiary”), “indirect ownership” counts towards meeting the test. Indirect ownership means the attribution to one company (“A”) of all or part of the ordinary share capital in the subsidiary in question held by a company in which A has an interest. The remainder of the Chapter sets out how such indirect ownership is identified and quantified.

Clause 1155: Indirect ownership of ordinary share capital

3295.     This clause explains indirect ownership. It is based on section 838(2), (4) and (5) of ICTA.

Clause 1156: Calculation of amounts owned indirectly: main rules

3296.     This clause sets out how to find how much of the ordinary share capital of a company that may be a “51% subsidiary” or “75% subsidiary” of another company (“A”) is owned indirectly by A. It is based on section 838(6), (7), (8) and (9) of ICTA.

Clause 1157: Adding fractions together

3297.     This clause supplements clause 1156 for the case where A owns part of the ordinary share capital of the potential “51% subsidiary” or “75% subsidiary” directly as well as having an indirect holding, or where a number of indirect holdings arise because of chains of ownership that have one or more different members. It is based on section 838(6) and (10) of ICTA.

3298.