Part 14: Co-operative housing associations and self-build societies

Concurrent exercise of functions

3451.     Clauses 644 and 653 provide a clear separation of powers between the Secretary of State and the Welsh Ministers for bodies in England and Wales. However, where the body is a “cross-border body”, that is a body which operates both in England and Wales, these provisions preserve the concurrent exercise of functions by the Secretary of State and the Welsh Ministers. See article 2(c) of SI 1999/672 in relation to concurrent exercise, and paragraph 3(2) of Schedule 3 to the Government of Wales Act 1998 for the definition of “cross-border body”.

Delegation of functions to the Regulator of Social Housing

3452.     This provision concerns the delegation of functions to the Regulator of Social Housing. Paragraphs 13 and 14 of Schedule 9 to the Housing and Regeneration Act 2008 amend sections 488(7A) and 489(5A) of ICTA respectively from a day to be appointed. Until that day is appointed, the provision in this Schedule preserves the existing arrangements. See also, in Schedule 1 to this Bill, the amendments of the Transfer of Housing Corporation Functions (Modification and Transitional Provisions) Order 2008 (SI 2008/2839), which enable this provision to operate as if the substituted references to the Housing Corporation were references to the Regulator of Social Housing, in accordance with that Order.

Part 15: Transactions in securities

Transactions in securities: general

3453.     This paragraph makes transitional provision for transactions in securities. It concerns corporation tax cases straddling 1 April 2010.

3454.     Sub-paragraph (1) lays down the general rule that Part 15 supersedes Chapter 1 of Part 17 of ICTA. Most of the differences between that Chapter and Part 15 of this Bill are verbal and not substantive. See the commentary on that Part. The only change in the law made in that Part is the replacement of references to “the Board” with references to officers of Revenue and Customs. See Change 5 in Annex 1 and the commentary on clause 740.

3455.     Sub-paragraph (2) ensures that the six-year time limit for making assessments is not disturbed.

3456.     Sub-paragraph (3) requires preliminary notifications commencing counteraction to be given under clause 743 of this Bill (and not under section 703(9) of ICTA) after 31 March 2010. Once HMRC have started counteraction under the new law, everything will fall to be done under the new law.

3457.     Sub-paragraph (4) provides that, if preliminary notification has been given under section 703(9) of ICTA before 1 April 2010, the old law (including, for example, the appeal provisions) will continue to apply after 31 March 2010.

3458.     Paragraph 129 of Schedule 2 to ITA also makes transitional provision for transactions in securities. It concerns income tax cases straddling 6 April 2007. The drafting of that paragraph was criticised by the First-Tier Tribunal in Grogan v Commissioners for HMRC. ³ HMRC do not agree with the First Tier-Tribunal’s view of that paragraph. But, in this paragraph, the opportunity has been taken to forestall future disputes over the validity of counteraction notices by making different transitional provision for corporation tax cases.

Part 16: Factoring of income etc

Application of section 771 (finance arrangements: exceptions)

3459.     Clause 771 is based on section 774E of ICTA.

3460.     Sub-paragraph (1) of this paragraph is a saving for the second sentence of section 774E(1) of ICTA, which was repealed by paragraph 9(3)(b) of Schedule 25 to FA 2009. This saving applies in relation to transfers before 22 April 2009 in accounting periods which begin before that date and end on or after 1 April 2010.

3461.     Section 774E(4)(b) of ICTA originally read as follows:

(4)     Section 774B or 774D does not apply so far as the structured finance arrangement is an arrangement in relation to which -

(b)     paragraph 15 of Schedule 9 to the Finance Act 1996 (repo transactions and stock-lending) applies, or ..

3462.     Paragraph 9 of Schedule 14 to FA 2007 substituted a new section 774E(4)(b) reading as follows:

(b)     Schedule 13 to the Finance Act 2007 (sale and repurchase of securities) applies, ..

3463.     In that substituted version, CTA 2009 inserted before “applies” the words “or Chapter 10 of Part 6 of CTA 2009 (repos).”

3464.     The amendment made by paragraph 9 of Schedule 14 to FA 2007 applied with effect in relation to an arrangement that comes into force on or after 1 October 2007: see article 3 of the Finance Act 2007 (Schedules 13 and 14) Order 2007 (SI 2007/2483).

3465.     Furthermore, because of article 5 of that instrument, the pre-FA 2007 version of paragraph 15 of Schedule 9 to FA 1996 is still in force in relation to arrangements which would have been within Schedule 13 to FA 2007 but for having come into force before 1 October 2007.

3466.     Section 774E(4)(b) of ICTA, as amended by FA 2007 and CTA 2009, is rewritten to clause 771(5)(b) and new section 809BZN(5)(b) of ITA (which is inserted by Schedule 5 to TIOPB). Sub-paragraph (2) of this paragraph accordingly makes transitional provision for arrangements which came into force before 1 October 2007. See also paragraph 78 of Schedule 2 to CTA 2009 for modifications with which paragraph 15 of Schedule 9 to FA 1996 (as it stood before the substitution made by paragraph 18 of Schedule 14 to FA 2007) has effect.

Application of section 779 (income-transfer under loan or credit transaction)

3467.     This paragraph is a saving for the words in section 786 of ICTA omitted by paragraph 9(1)(d) of Schedule 25 to FA 2009. This saving applies in relation to transfers before 22 April 2009 in accounting periods which begin before that date and end on or after 1 April 2010.

Part 17: Manufactured payments and repos

Manufactured dividends and manufactured overseas dividends: distributions paid before 1 July 2009

3468.     This is a saving for provisions repealed by paragraphs 11 and 12 of Schedule 14 to FA 2009. These savings apply in relation to distributions paid before 1 July 2009 in accounting periods which begin before that date and end on or after 1 April 2010.

Manufactured overseas dividends: overseas dividends paid before 22 April 2009

3469.     The paragraph headed “Manufactured overseas dividends: overseas dividends paid before 22 April 2009” is a saving for provisions repealed by paragraph 1 of Schedule 29 to FA 2009. This saving applies in relation to overseas dividends paid before 22 April 2009 in accounting periods which begin before that date and end on or after 1 April 2010.

Part 21: Transfers of trade without a change in ownership

3470.     These savings preserve the effect of the closing sentences of section 343(2) and (4) of ICTA.

Part 22: Use of different accounting practices within a group

3471.     It is possible - although in practice very unlikely - that there could be companies with periods of account which (a) began before 1 January 2005 but (b) have not ended before the entry into force of this Bill. Accordingly, the Schedule contains a saving for section 51(6)(a) of FA 2004.

Part 23: Company distributions

3472.     The paragraphs in this Part primarily rewrite date-related rules in the source legislation for Part 23 of the Bill or the commencement rules for amendments of that source legislation.

Exempt distributions

3473.     This paragraph switches off paragraph 8(1) of this Schedule (which preserves the effect of a transitional or savings provision repealed by this Bill) in respect of the repeal by this Bill of the Corporation Tax (Implementation of the Mergers Directive) Regulations 2009 (SI 2009/2797), which amended section 213(4) of ICTA. It does so to allow the rule in clause 1081(1) to apply to the whole of the first accounting period of a company to which this Bill applies (that is, the first accounting period to end on or after 1 April 2010) rather than only to the part of that accounting period that follows the effective date of those regulations (distributions made on or after 11 November 2009). See Change 66 in Annex 1.

Schedule 3: Repeals and revocations

3474.     This Schedule contains repeals and revocations of enactments, including some spent enactments.

3475.     The repeals and revocations in Part 2 of this Schedule have effect only for the purposes of corporation tax (and in one case also PRT).

Schedule 4: Index of defined expressions

3476.     This Schedule provides an index of defined expressions used in this Act. Nearly all of the definitions appear in this Act, but a few are contained in other Acts.

FINANCIAL EFFECTS OF THE BILL

3477.     The Bill will not require any additions to previously planned expenditure. Revision of guidance for users and for staff will be undertaken as part and parcel of the process of improving such material and keeping it up to date in response to new legislation and other changes. The minor changes in the law in the Bill are expected to have negligible effect on tax revenues.

EFFECTS OF THE BILL ON PUBLIC SERVICE MANPOWER

3478.     The Bill will not require any increase in the number of staff in HMRC or other departments.

SUMMARY OF THE IMPACT ASSESSMENT

3479.     An implementation stage impact assessment of the effects of the Bill is available at or from Jon Fuller, Tax Law Rewrite Project, HMRC, 8th Floor, SW Wing, Bush House, Strand, London WC2B 4RD (Telephone 020 7438 7538).

3480.     In summary, the Bill is expected to benefit companies, external tax professionals and agents as well as HMRC staff. The benefits are broadly summarised as:

• greater ease of use of the legislation with fewer disputes or errors concerning the meaning of the law; and

• less time spent navigating, understanding and applying the legislation correctly.

3481.     In addition:

• tax professionals new to the legislation will find it easier to understand and learn; and

• greater ease of use of the legislation will result in lower costs.

3482.     There will be some one-off costs to business: there will be retraining costs for users in familiarising themselves with the new legislation and commercial publishers and software suppliers will need to update their products.

EUROPEAN CONVENTION ON HUMAN RIGHTS

3483.     Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement, before second reading, about the compatibility of the provisions of the Bill with the Convention rights (as defined in section 1 of that Act).

3484.     The Chancellor of the Exchequer has made the following statement:

In my view the provisions of the Corporation Tax Bill are compatible with the Convention rights.

3485.     The provisions of the Bill have been the subject of careful consideration in order to ensure that they are compatible with the Convention rights. The following provisions have received closest scrutiny. Articles referred to below are Articles of the Convention.

Clauses 229 and 1107: Penalty provisions

3486.     Tax penalties are criminal in nature and will therefore engage the protections in Article 6 - eg King v Walden (2001) STC 822. Provisions in this Bill containing penalties, and any with a potentially deterrent and punitive content, have been considered against the requirements of Article 6 and been found to be compatible. There are general rights of appeal in section 100B of the Taxes Management Act 1970 which apply to penalty determinations made by HMRC.

3487.     Clause 229 provides for the tax relief certificates which must be issued by a company before an investor in the company can obtain community investment tax relief. Subsection (9) imposes a penalty (maximum £3,000) if a body issues a certificate which is made fraudulently or negligently. This provision is entirely proportionate, given the clear aim of preventing the fraudulent or negligent making of claims by corporate bodies to a very generous tax relief.

3488.     Clause 1107 supports the duty (in clauses 1104 and 1105) to provide a tax certificate, where a company has distributed a dividend or interest. The tax certificate is a fundamental information requirement, as it shows the amount and date of the payment and the amount of tax credit for an eligible person to claim. The modest penalty is, therefore, proportionate in seeking to prevent the problems caused by a failure to provide the certificate.

Clauses 438 to 465

3489.     These clauses rewrite sections 414 to 422 of ICTA. The broad aim of the provisions is to counter tax avoidance by individuals (“participators” defined in clause 454) who are able to influence the activities of a company. In particular, clauses 455 to 464 seek to ensure that benefits and loans made to participators are not used to obtain a company’s untaxed reserves without themselves being taxed. Where control is with more than five participators, the provisions do not apply.

3490.     In terms of the Convention rights engaged, the aim of countering tax avoidance by participators through the use of companies to confer benefits and make loans is a legitimate one. The provisions strike a fair balance between the individual and the community, and the method chosen does not impose an individual and excessive burden. A charge to corporation tax (together with the income tax charge on participators) is not economically disproportionate as the measures are reasonably necessary to serve the general interest and is firmly within the permissible margin of appreciation. There is also a variety of checks and limitations on the scope of the charge such as the exclusion of the personal interests of commercial and open company loan creditors, control by open companies (clause 444) and the exclusion of quoted companies (clauses 446 and 447). These result from the legitimate balancing exercise and ensure the policy has been applied in a proportionate manner.

Clauses 706 to 718

3491.     These clauses rewrite sections 767A to 767B of ICTA, dealing with changes in ownership of a company. They are anti-avoidance provisions which target company purchase schemes. They bring into play the balance between the individual and the general interest which is required by Article 1 Protocol 1 of the Convention. The person with control of the taxpayer company (under clause 707) is made accountable for the tax. The general interest in combating tax avoidance justifies these provisions, which deem income of the transferee of property to be that of the tax avoider/transferor (leaving the income tax liability of the transferee intact). This is within the margin of discretion available to the tax authorities and is proportionate in the given circumstances.

3492.     Clause 713, rewriting section 767AA of ICTA, permits a charge to tax on the controller of the transferred company, or a company controlled by the controller, in circumstances where there is an expectation of the mitigation or avoidance of future tax by one of the parties to the transaction(s), in respect of at least one transaction. These provisions are also compatible with Article 1 Protocol 1 of the Convention for precisely the same reasons given above. In addition, the taxpayer is protected by the specific need for HMRC to demonstrate an expectation of tax avoidance or mitigation in the terms of clause 714.

Part 2 of Schedule 2

3493.     The Bill makes minor changes to the law in the interests of simplification and to bring the legislation into line with current practice. These changes have either no practical effect or only small effects. A small number may make small increases in the amount of tax payable for a small group of taxpayers. In addition, the wording of the Bill differs from the wording of the legislation it replaces in very many detailed particulars. Although the contents of the Bill have been examined with great care, it is still possible that some of these detailed changes will operate to change the law in ways that cannot now be foreseen. Some of the changes arising in this way may have effect so as to impose a charge to tax in respect of events occurring before the respective provisions have effect.

3494.     Part 2 of Schedule 2, therefore, addresses the possibility of an unfair adverse effect upon a taxpayer, and possibly upon the taxpayer’s Convention rights. A corresponding provision was included in ITA and CTA 2009. If there is an action or event prior to the coming into force of the Bill which has certain tax consequences, and the effect of the Bill is that those tax consequences change when the Bill comes into force, the taxpayer may opt that the tax consequences after the Bill comes into force are to be the same as they were under the “old” law. While Article 1 of Protocol 1 is engaged, the provision satisfies the fair balance test in that Article.

TERRITORIAL EXTENT

3495.     The Bill extends to the whole of the United Kingdom.

3496.     Because the Sewel Convention provides that Westminster will not normally legislate with regard to devolved matters in Scotland without the consent of the Scottish Parliament, if there are amendments relating to such matters which trigger the Convention, consent of the Scottish Parliament will be sought for them.

COMMENCEMENT

3497.     The substantive provisions of this Bill will come into force on 1 April 2010. Clause 1184 provides for it to have effect:

• for corporation tax purposes, for accounting periods ending on or after that day, and

• for income tax and capital gains tax purposes, for the tax year 2010-11 and subsequent tax years.