Chapter 4: Investment trusts

Overview

This Chapter sets out the meaning of “investment trust” for the purposes of the Corporation Tax Acts.

Clause 1158: Meaning of “investment trust”

3299.     This clause explains that an investment trust is a company that is not a close company and is approved by the Commissioners for HMRC as an investment trust. It is based on section 842(1) of ICTA.

3300.     Paragraph (b) makes it explicit that the requirement that the company is not a close company relates to the whole of the accounting period for which approval is sought.

Clause 1159: Conditions for approval

3301.     This clause sets out conditions A to F which a company must meet for an accounting period in order for it to be approved by the Commissioners for HMRC. It is based on section 842(1) of ICTA.

3302.     Conditions A, B and E make it clear that the conditions concerned relate to the whole of the accounting period for which approval is sought. This is implicit in section 842(1) of ICTA. Similarly, the reference in condition C to the income of the accounting period aims to state more clearly what is implied by the reference to “the company’s income” in section 842(1)(a).

Clause 1160: Calculation of income

3303.     This clause provides additional information on conditions C and D. It is based on section 842(1AB), (1AC), (2D), (2E) and (3A) of ICTA.

3304.     Some references to income in section 842 of ICTA, for example references to income derived from shares or securities, are in a context which implies that the term “income” is to be interpreted in the framework of tax language and principles. References to income in the context of the retention of income in section 842(2A) and (2B), on the other hand, do not appear to invoke the tax-based meaning of income.

3305.     Section 842(1AB) of ICTA, on which subsection (2) is based, makes provision for determining amounts of “income” for the purposes of subsections (1)(a) and (e) of that section (and accordingly of subsection (2A)(b)). The requirements in section 842(1)(a) and (e) are conditions C and D in clause 1159.

3306.      In contrast section 842(2D) and (3A) of ICTA are expressed to apply to section 842 as a whole. But it appears that those subsections also presuppose a tax-based measure of income and that their application is accordingly limited to the purposes for which section 842(1AB) applies.

3307.     Therefore subsection (1) provides that subsections (3) and (4) of this clause, based on section 842(2D) and (2E) and section 842(3A) respectively, as well as subsection (2), apply in determining what is to be included as the amount of the company’s income or the amount of income which a company derives from shares or securities for the purposes of conditions C and D (and accordingly of section 1161(2)(a)).

3308.     Subsection (5) is concerned specifically with what is to be included as income of the company for the purpose of condition C.

Clause 1161: The income retention condition: exceptions

3309.     This clause qualifies the application of condition D. It is based on section 842(2A), (2B) and (2C) of ICTA.

Clause 1162: The 15% holding limit: exceptions

3310.     This clause qualifies the application of condition E. It is based on section 842(1), (2) and (3) of ICTA.

3311.     A well-known HMRC practice with regard to the disposal of shares or securities from a holding is legislated for in subsections (4) and (5). See Change 63 in Annex 1.

Clause 1163: Basic meaning of “holding in a company”

3312.      This clause explains references to “holding in a company” for the purposes of condition E. It is based on section 842(3) of ICTA.

3313.     Subsection (2) explains the reference to a holding being “enlarged” in clause 1162.

Clause 1164: More about the meaning of “holding in a company”

3314.     This clause gives more information about how to interpret a holding in a company for the purposes of condition E. It is based on section 842(1A), (3) and (4) of ICTA.

3315.     Subsections (1) and (2) deal with certain cases involving a scheme of reconstruction. The newly issued shares or securities in the first company are treated under subsection (2) as forming part of the existing holding of shares or securities in the second company. Since the shares or securities are issued for no consideration there is no enlargement of the holding as defined in clause 1163(2).

Clause 1165: Other interpretation

3316.     This clause sets out the meaning of company, shares and scheme of reconstruction in this Chapter. It is based on section 842(4) of ICTA.

3317.     Under subsection (1) “company” has the meaning given by clause 1121, based on section 832(1) of ICTA, and references to company in this Chapter are read in accordance with section 99 and section 103A of TCGA. In section 842(4) of ICTA the definition of company in section 288 of TCGA is applied in addition to sections 99 and 103A of that Act. The only difference is that clause 1121 omits a local authority and a local authority association from the definition of company and this can have no relevance to an investment trust.

3318.     The references in clause 1165 to section 103A of TCGA do not take effect until paragraph 11(2) of Schedule 22 to FA 2009 comes into force. See Schedule 2 to the Bill.

Chapter 5: Other Corporation Tax Acts provisions

Clause 1166: Scotland

3319.     This clause provides interpretative rules in relation to Scotland. It is based on sections 24, 488, 780 and 832 of ICTA, paragraph 30(1) of Schedule 12 to FA 1997 and section 1320(1) of CTA 2009. The corresponding provision for income tax is in section 1008 of ITA.

Clause 1167: Sources of income within the charge to corporation tax or income tax

3320.     This clause is based on section 832(1) of ICTA. The corresponding provision for the Income Tax Acts is in section 1009 of ITA.

Clause 1168: Payment of dividends

3321.     This clause provides when dividends are treated as paid. It is based on section 834(3) of ICTA and regulation 15(4) of the Authorised Investment Funds (Tax) Regulations 2006 (SI 2006/964).

3322.     The clause does not rewrite the words making an exception by reference to provisions in Chapter 3 of Part 12 of ICTA that deal differently with dividends treated as paid under that Chapter. Following earlier amendments of that Chapter, there are now no such provisions nor any such dividends.

3323.     However, subsection (2) recognises that other provisions may make such an exception to the general rule. Regulation 15(4) of the Authorised Investment Funds (Tax) Regulations 2006 (SI2006/964) provides a different definition of “distribution date” for a distribution period of an authorised investment fund. That regulation is therefore included as an origin for this subsection.

Clause 1169: Settlements and trustees

3324.     This clause provides interpretative rules in relation to settlements and trustees for the purposes of the Corporation Tax Acts by reference to Chapter 2 of Part 9 of ITA. It is based on section 832(2A) of ICTA.

Clause 1170: Territorial sea of the United Kingdom

3325.     This clause takes the territorial sea of the United Kingdom into account in the meaning of “United Kingdom” for the purposes of the Corporation Tax Acts. It is based on section 830(1) of ICTA. The corresponding provision for income tax is in section 1013 of ITA.

Clause 1171: Orders and regulations

3326.     This clause sets out the rules for making orders and regulations. It is based on section 828 of ICTA. The corresponding provision for income tax is in section 1014 of ITA.

3327.     Subsection (2) identifies “excluded powers”. These are the powers that have their own rules. Paragraphs (a) to (h) deal with powers in other Acts, in which sections corresponding to this clause provide rules.

3328.     Paragraph (g)(i) deals with the power to designate a market, so that it is treated in the same way as a recognised stock exchange. This exclusion rewrites the mention of section 578B(9ZA) of ICTA in section 828(2) of ICTA.

3329.     Paragraph (g)(ii) deals with the power to specify an investment transaction for the purposes of the rules for permanent establishments. This exclusion rewrites the mention of paragraph 3(3) of Schedule 26 to FA 2003 in section 828(2) of ICTA.

3330.     Subsection (5) sets out three exceptions to the rule in subsection (4) that a statutory instrument is subject to the negative resolution procedure.

3331.     Paragraph (a) deals with the power in section 73A of FA 2004 to designate an international organisation so that the construction industry scheme does not apply to it. See Change 64 in Annex 1.

3332.     Paragraph (b)(i) deals with the power to designate an international organisation as a bank. This exception rewrites the mention of section 840A(1)(d) of ICTA in section 828(4) of ICTA.

3333.     Paragraph (b)(ii) deals with the new power in clause 1180(2) to make transitional or savings provision.

Clause 1172: Apportionment to different periods

3334.     This clause sets out how apportionments to different periods are to be made. It is based on section 834(4) of ICTA.

Clause 1173: Miscellaneous charges

3335.     This clause sets out a table of the provisions relevant to any reference in the Corporation Tax Acts to the provisions to which this clause applies. It is based on section 834A of ICTA. The equivalent provision is made for income tax in section 1016 of ITA.

3336.     The provisions in the table are all types of income or other amounts chargeable under the charge to corporation tax on income that were charged in predecessor legislation under Case VI of Schedule D in section 18 of ICTA.

3337.     The reference in Part 3 of the table to regulation 18(4) of the Offshore Funds (Tax) Regulations 2009 (SI 2009/[awaiting number]) derives from the substitution made by regulation 126(5) of those Regulations in section 834A of ICTA for the former reference to section 761 of ICTA.

3338.     For reference to this table, see in particular clause 91 (losses from miscellaneous transactions).

Part 25: Definitions for purposes of Act and final provisions

Overview

3339.     This Part contains definitions for the purposes of the Bill and provisions that introduce the Schedules, give powers to remedy errors and omissions and provide for the extent, commencement and short title of the Bill when enacted.

Clause 1174: Abbreviated references to Acts

3340.     This clause provides details of abbreviations used in this Bill.

Clause 1175: Claims and elections

3341.     This clause provides that a claim or election must be made in writing. It is based on paragraphs 57 to 59 of Schedule 18 to FA 1998. The corresponding provision for income tax is in section 1020 of ITA.

Clause 1176: Meaning of “connected” persons and “control”

3342.     This clause applies the meaning of “connected” and “control” in clauses 1122 and 1124 to the provisions of this Bill unless otherwise indicated in respect of a particular provision. It is based on numerous provisions that invoke the meaning of those terms in, respectively, sections 839 and 840 of ICTA (rewritten in those clauses). The corresponding provision for income tax is in section 1021 of ITA.

3343.     In the source legislation for clauses 511 to 513 (approved charitable investments and loans) the meaning of “control” is not defined. It has been brought within the application of clause 1124. See Change 40 in Annex 1.

Clause 1177: Minor and consequential amendments

3344.     This clause introduces Schedule 1.

Clause 1178: Power to make consequential provision

3345.     This clause provides for further consequential amendments to be made by secondary legislation. It is new. The corresponding provision for income tax is in section 1028 of ITA.

Clause 1179: Power to undo changes

3346.     This clause provides for the restoration by secondary legislation of the previous effect of the law where this Bill has unintentionally changed it. It is new. The corresponding provision for income tax is in section 1029 of ITA.

Clause 1180: Transitional provisions and savings

3347.     This clause introduces Schedule 2.

Clause 1181: Repeals and revocations

3348.     This clause introduces Schedule 3.

Clause 1182: Index of defined expressions

3349.     This clause introduces Schedule 4.

Clause 1183: Extent

3350.     This clause provides for the Bill to form part of the law of each part of the United Kingdom.

Clause 1184: Commencement

3351.     This section provides for the commencement of the Act.

3352.      This Bill deals for the most part only with corporation tax. However, it does amend legislation relating to income tax and capital gains tax, mostly consequentially. Separate provision is made about commencement in relation to those amendments.

Clause 1185: Short title

3353.     This clause specifies the short title for the Act.

Schedule 1: Minor and consequential amendments

Overview

3354.     This Schedule makes minor and consequential amendments.

3355.     The commentary on this Schedule makes specific points about certain of the amendments made.

Part 1: Income and Corporation Taxes Act 1988

Section 342: Tax on company in liquidation

3356.     Section 342(9) of ICTA applies to an assessment made by virtue of section 8(4) of that Act. It should have been repealed when sections 206(1) and 213 of, and Schedule 23 to, FA 1993 repealed section 8(4) of ICTA. Section 8(4) dealt with a situation where rates of tax were uncertain. Section 342(9) is obsolete and is repealed without replacement.

Section 343: Company reconstructions without a change of ownership

3357.     Section 343(11) of ICTA predates Corporation Tax Self Assessment and is now redundant. It is repealed without replacement.

3358.     Section 343(12) of ICTA is a saving for the amendments made to the predecessor of section 343(9) and (10) of that Act by FA 1986. It is now spent, and is repealed without replacement.

Section 505: Charitable companies: general

3359.     Section 505(1AA) defines “relevant foreign distribution” for section 505(1)(c)(iib). Subsection (1)(c) was repealed by paragraph 4(3) of Schedule 14 to FA 2009 leaving the definition otiose. The repeal of section 505(1AA) was overlooked by FA 2009 and that is now being corrected.

Section 511: The Electricity Council and Boards, the Northern Ireland Electricity Service and the Gas Council

3360.     The section deals with the Electricity Council and Boards, the Northern Ireland Electricity Service and the Gas Council. None of these bodies now exists. The only part of the section that has not so far been repealed is subsection (7). This deals with the application of the Corporation Tax Acts to the Gas Council. It is obsolete and is repealed without replacement.

Section 513: British Airways Board and National Freight Corporation

3361.     The section ensures continuity of tax treatment for the successor company of the British Airways Board and the successor company of the National Freight Organisation. The section is obsolete and is repealed without replacement.

Section 767B: Change of company ownership: supplementary

3362.     Section 767B(1) and (3) of ICTA refer to section 86 of TMA (interest on overdue tax) in so far as it has effect in relation to accounting periods ending on or before 30 September 1993. These references are spent and are repealed without replacement.

Section 768A: Change in ownership: disallowance of carry back of trading losses

3363.     Section 768A(3) of ICTA is the commencement provision for that section. It is spent and is repealed without replacement.

Section 768B: Change in ownership of company with investment business: deductions generally

3364.     Under paragraph 6(b) of Schedule 28A to ICTA, the amounts to be apportioned between notional accounting periods in section 768B(4)(c) of ICTA include excess business charges.

3365.     Paragraph 7(1)(aa) of Schedule 28A to ICTA states how the apportionment of excess business charges is to be made.

3366.     Section 768B(7) and (9)(b) of ICTA states how the apportioned charges are to be treated for the purposes of sections 75 and 338 of that Act.

3367.     Paragraphs 13(1)(c) and 16(1)(aa) of Schedule 28A to ICTA are the provisions corresponding to paragraphs 6(b) and 7(1)(aa) of that Schedule which apply in a case which comes within section 768C, rather than section 768B, of that Act.

3368.     The “charges” in section 768B(7) and (9)(b) of ICTA and paragraphs 6(b), 7(1)(aa), 13(1)(c) and 16(1)(aa) of Schedule 28A to that Act are charges on income. The scope of corporation tax relief for “charges on income” has been progressively cut down, and nowadays only charitable donations can rank as charges: see section 338A of ICTA, which is rewritten in Part 6 of this Bill.

3369.     To come within paragraph 6(b) or paragraph 13(1)(c) of Schedule 28A to ICTA, a payment must meet three conditions.

• It must be a charitable donation within section 338A(2)(b) or (c) of that Act.

• It must be wholly and exclusively for the purposes of the company’s business.

• It must not be deductible in computing profits or any description of profits for the purposes of corporation tax (for example, as an expense of management within Part 16 of CTA 2009). See section 338A(3) of ICTA.

3370.     It is not possible for a payment to meet all three of those conditions. Section 768B(7) and (9)(b) of ICTA and paragraphs 6(b), 7(1)(aa), 13(1)(c) and 16(1)(aa) of Schedule 28A to that Act are therefore obsolete, and are repealed without replacement.

Section 774: Transactions between dealing company and associated company

3371.     Section 774 of ICTA is not rewritten, as it is obsolete. This Schedule consequentially amends it, because its repeal is outside the scope of this Bill. HMRC will refer section 774 of ICTA to the Law Commission for inclusion in a future Statute Law (Repeals) Bill.

Section 776: Transactions in land: taxation of capital gains

3372.     Like section 772 of ITA, clause 833 does not rewrite the second limb of the definition of “land” in section 776(13)(a) of ICTA. That limb is repealed without replacement.

3373.     In Schedule 1 to the Interpretation Act 1978 land is defined as including “buildings and other structures, land covered with water, and any estate, interest, easement, servitude or right in or over land”. Although the Interpretation Act 1978 was largely a consolidation, the definition of land was new and only applies from the commencement of that Act.

3374.     The origin of section 776(13)(a) of ICTA is section 32(12)(a) of FA 1969. This definition therefore predates the definition of land in Schedule 1 to the Interpretation Act 1978.

3375.     The definition of “land” in force in 1969 was that contained in the Interpretation Act 1889. In section 3 of that Act land was defined as including “messuages, tenements, and hereditaments, houses and buildings of any tenure”. This section was derived from section 4 of Lord Brougham’s Act of 1850. The definition was never appropriate for Scotland, where messuages and hereditaments were unknown to the law.

3376.     There is nothing in the definition of “land” in the Interpretation Act 1978 which is not also within the definition of “land” in section 776(13)(a) of ICTA.

3377.     The Interpretation Act 1978 refers to “buildings and other structures”. Section 776(13)(a) of ICTA merely refers to “buildings”. But this cannot be read as excluding “structures”, because what is a building is a question of degree and circumstance and case law makes it clear that virtually any kind of structure is capable of being a building.

3378.     Adopting the Interpretation Act definition of “land” for the purposes of this Chapter would only be a change in the law if a “structure” (a) was not, a matter of normal English usage, “land”, (b) was not a “building” (and was therefore not brought within “land” by the second limb of section 776(13)(a) of ICTA), and (c) was nevertheless brought within “land” by the provision in the Interpretation Act that “land” includes buildings and other structures. There is no reason to believe that there are such “structures”.

3379.     The Interpretation Act 1978 refers to “land covered with water”; section 776(13)(a) of ICTA does not. But there is no doubt that for legal purposes land includes every species of ground as well as waters and marshes. The term “land covered with water” has been used in legislation to distinguish, for rating purposes, land covered by artificial bodies of water such as reservoirs, filter beds belonging to water companies, canals, dry docks etc; no such distinction would be appropriate in the context of section 776 of ICTA, and therefore none is made.

3380.     Finally, section 776(13)(a) of ICTA refers to “any estate or interest in land or buildings”, whereas the Interpretation Act 1978 is more specific, referring to “any estate, interest, easement, servitude or right in or over land” (emphasis added). Nonetheless, the section 776(13)(a) definition of land includes the rights italicised above. It is couched in generic terms and does not need to mention specific interests in land, including those particular to Scots law.

3381.     It is therefore a matter of historical accident that section 776 of ICTA includes its own non-exhaustive definition of “land”, rather than using the standard non-exhaustive definition in the Interpretation Act 1978. This Bill therefore omits the second limb of section 776(13)(a) of ICTA as redundant.

3382.     This Bill does not rewrite the first limb of section 776(13)(a) of ICTA as a Chapter-wide definition. Instead, references to “the land” are expanded to “all or part of the land” where appropriate.

3383.     See also the commentary on the amendments made by this Schedule to paragraph 21A of Schedule 15 to FA 2000 and paragraph 11A of Schedule 5 to ITEPA.