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These notes refer to the Corporation Tax Bill as introduced to the House of Commons on 19 November 2009 [Bill 1] Annex 2
CORPORATION TAX BILL
EXPLANATORY NOTES
[VOLUME IV]
The Explanatory Notes are divided into four volumes.
Volume I contains the Introduction to the Bill and Notes on clauses 1 to 465 of the Bill.
Volume II contains Notes on clauses 466 to 937 of the Bill
Volume III contains Notes on clauses 938 to 1185 of and Schedules 1 to 4 to the Bill
Volume IV contains Annexes to the Notes.
Bill 1—EN (IV) 54/5
CORPORATION TAX BILL
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EXPLANATORY NOTES - VOLUME 4
(ANNEXES 1 AND 2)
TABLE OF CONTENTS
ANNEX 1: MINOR CHANGES IN THE LAW 425
Change 1: Small profits rate and marginal relief: drop the need for a claim: clauses 18, 19, 20 and 21 425
Change 2: Small profits rate and marginal relief: ignore “passive companies”: clauses 25 and 26 425
Change 3: Small profits rate and marginal relief: relaxations in the test for being an associated company: clauses 25 and 28 to 30 and Schedule 1 (section 99 of CAA) 426
Change 4: Trading income: omission of references to a company carrying on a profession or a vocation: clauses 36, 188, 452, 456, 673, 837, 851, 860, 864, 880, 883, 886, 939, 957, 1071 and 1119 428
Change 5: References to “officer of Revenue and Customs” and “Her Majesty’s Revenue and Customs”: clauses 37, 198, 199, 472, 474 to 478, 480, 481, 484 to 488, 495, 504, 507, 510, 511, 514, 525, 527, 533, 540, 545, 546, 561, 565, 571 to 578, 582, 586, 587, 592, 658, 670, 671, 710, 713, 740, 743 to 746 and 977 429
Change 6: Interpretation: references to Scottish and Northern Ireland legislation: clauses 44, 64, 67, 486, 488, 511 and 1119 429
Change 7: Industrial and provident societies: enactment of ESC C5: clause 47 430
Change 8: Trading losses: restrictions: contribution to the firm in place of contribution to the trade: clauses 56, 57, 58, 59, and 60 431
Change 9: Trading losses: restrictions: withdrawal of capital ignored where amounts charged to tax as profits of a trade: clauses 57 and 60 433
Change 10: Trading losses: restrictions: restrictions not to apply where an overseas property business carried on in the exercise of functions conferred by or under the law of a territory outside the United Kingdom: clause 67 433
Change 11: Share loss relief, community investment tax relief and the corporate venturing scheme: omit the words “for full consideration”: clauses 68 and 244 and Schedule 1 (paragraph 46(2)(a) of Schedule 15 to FA 2000) 434
Change 12: Share loss relief: corresponding bonus shares: clauses 73 and 90 436
Change 13: Share loss relief: restrictions on the amount of share loss relief: clause 75 437
Change 14: Share loss relief: meaning of a mixed holding: clause 76 439
Change 15: Share loss relief: identification of which shares are disposed of: clause 76 440
Change 16: Share loss relief: identification of shares disposed of out of a mixed holding: clause 76 441
Change 17: Share loss relief: shares to which section 127 of TCGA applies: clause 77 443
Change 18: Share loss relief: nominees and bare trustees: clause 77 444
Change 19: Share loss relief: resolution of conflicting provisions: clauses 74 and 87 and Schedule 2 (disposals of new shares, and relief after an exchange of shares for shares in another company) 445
Change 20: Share loss relief: time of issue of corresponding bonus shares: clause 89, Schedule 1 (paragraph 57A of Schedule 2 to ITA) and Schedule 2 (application of Part 5 of Schedule 2 in relation to corresponding bonus shares) 447
Change 21: Share loss relief: investment company: omission of reference to savings bank and bank for savings: clause 90, Schedule 1 (section 151 of ITA) and Part 5 of Schedule 2 (interpretation of Chapter 5 of Part 4) 448
Change 22: Share loss relief: time of disposal: clause 90 450
Change 23: Recalculation of EEA amount: clause 113 450
Change 24: Multiple claims for group relief: clause 141 451
Change 25: Group relief: restriction of surrender by company owned by consortium: clause 148 452
Change 26: Group relief: equity holder’s share of profits or assets referable to UK trade: clause 181 453
Change 27: Qualifying charitable donations: gifts and benefits linked to periods of less than 12 months: priority between methods of calculating annualised amounts of gifts and benefits: clause 198 454
Change 28: Community investment tax relief: permit deduction of expenses incurred by director, employee or associate: clause 250 455
Change 29: Oil taxation: deduction for excess of nominated proceeds: clause 283 456
Change 30: Close companies: charge to tax on loans and advances to participators: exception for small amounts: clause 456 and Schedule 2 457
Change 31: Charitable companies: gifts to eligible bodies under SA Donate: claims: clause 475 458
Change 32: Charitable companies: exemption for post-cessation receipts of certain trades: clauses 478, 479, 485, 490, 491, 492 and Schedule 1 459
Change 33: Requiring an apportionment to be just and reasonable: clauses 479, 599, 875, 880, 952, 956 and 994 460
Change 34: Charitable companies: limit on exemption for profits etc of small-scale trades and certain miscellaneous income: clauses 480, 481 and 482 461
Change 35: Charitable companies: exemption for profits from fund-raising events: clauses 483, 490, 491, 492 and Schedule 1 462
Change 36: Charitable companies: exemption for income from intellectual property etc: clauses 488, 490, 491 and Schedule 1 462
Change 37: Charitable companies: exemption for income from estates in administration: clauses 489, 490, 491, 492 and Schedule 1 463
Change 38: Charitable companies: meaning of non-charitable expenditure: clauses 496 to 498 464
Change 39: Charitable companies: accounting period in which certain expenditure treated as incurred: clause 499 465
Change 40: Charitable companies: approved charitable investments: clauses 511, 512, 513 and 1176 465
Change 41: Non-UK companies: clauses 520, 535, 536, 541, 579 and 581 469
Change 42: UK REITs: conditions as to property rental business: exclusion of non-member’s interest: clause 529 470
Change 43: Enactment of regulations: clause 543 and many other clauses in Part 12 (Real Estate Investment Trusts) 471
Change 44: UK REITs: notional amount charged following breach of condition: exclusion of non-member’s interest: clause 567 472
Change 45: Corporate beneficiaries under trusts: treatment of trustees’ expenses: clause 611 473
Change 46: Co-operative housing associations and self-build societies: change from tax year to accounting period: clauses 642, 647, 648, 651, 655 and 656. 474
Change 47: Co-operative housing associations and self-build societies: Department for Social Development for Northern Ireland: clauses 644, 645, 649, 653 and 657. 474
Change 48: Receipt of club benefits by members: arm’s length agreements for employment or for goods or services: clause 660 475
Change 49: Changes in company ownership: company with investment business: restriction on relief for non-trading loss on intangible fixed assets: clauses 681 and 698 476
Change 50: Changes in company ownership: company with investment business: asset transferred within group: restriction on reliefs for non-trading loss on intangible fixed assets and property losses: clauses 698, 700 and 701 477
Change 51: Manufactured payments and repos: definition of “manufactured interest”: clause 801 and Schedule 1 (Schedule 23A to ICTA) 478
Change 52: Transactions in land: company chargeable: provider of opportunity to realise a gain: clause 821 480
Change 53: Transactions in land: clearance procedure: clause 831 481
Change 54: Transactions in land: power to obtain information: “reasonably requires”: clause 832 482
Change 55: Sale and lease-back etc: restriction of excessive lease rentals: relationship with accounting practice: clauses 838 and 865 482
Change 56: Sale and lease-back etc: exclusion of service charges etc to be on just and reasonable basis: clause 843 484
Change 57: Company distributions: premium paid on redemption of share capital: clause 1024 485
Change 58: Company distributions: duty to provide a tax certificate: interest that is not a qualifying distribution: clauses 1104 and 1106and Schedule 1 485
Change 59: Interpretation: definition of “personal representatives” for the purposes of the Corporation Tax Acts: clause 1119 487
Change 60: Corporation Tax Acts definitions: meaning of “local authority” in relation to Northern Ireland: claims: clause 1130 and Schedule 1 491
Change 61: Non-UK resident companies: transactions through brokers: clause 1145 492
Change 62: Meaning of permanent establishment: substitution of reference to income for reference to chargeable profits in paragraph 4(3) of Schedule 26 to FA 2003: clause 1148 494
Change 63: Investment trusts: disposal of shares or securities from a holding: clause 1162 495
Change 64: Procedure for making orders and regulations: clause 1171 496
Change 65: Corporation Tax Acts definitions: amendment of section 991 of ITA: Schedule 1 498
Change 66: Company distributions: demergers: Schedule 2 499
ANNEX 2: EXTRA-STATUTORY CONCESSIONS, CASE LAW, AND LIST OF REDUNDANT MATERIAL NOT REWRITTEN 500
TABLE 1 500
TABLE 2 501
TABLE 3 501
ANNEX 1: MINOR CHANGES IN THE LAW
Change 1: Small profits rate and marginal relief: drop the need for a claim: clauses 18, 19, 20 and 21
This change removes the requirement that a company should make a claim for small profits rate or marginal relief.
Section 13(1) of ICTA provides that a company “may claim” that its basic profits are charged at the small companies’ rate. And section 13(2) makes the same provision for marginal small companies’ relief. The general approach of this Bill is not to require a claim if the relief can be shown in a return.
In practice a claim for small companies’ relief is usually made in a return, by putting an “X” in a box. In accordance with SP1/91, HMRC accept that such an entry is a valid claim.
The provisions that govern claims are not the same as the provisions that govern returns. But in practice dropping the need for a claim has only the following two consequences, both of which relate to the time available for “claiming” the relief.
First, the absolute time limit for making a claim is replaced by a time limit that may vary according to the particular circumstances. That may be because the return is issued late or because the taxpayer makes a late return. Accordingly, HMRC are no longer able to refuse a claim because it is late by reference to an absolute time limit: returns time limits and sanctions apply and they depend on the date the return is issued and made.
Second, mistake relief claims under paragraph 51 of Schedule 18 to FA 1998 are possible if too much tax is paid as a result of omitting to include the relief in the tax return. Claims under paragraph 51 of Schedule 18 to FA 1998 must be made within six years of the end of the accounting period to which the return relates.
This change is in taxpayers’ favour in principle and may benefit some taxpayers in practice. But the numbers affected and the practical effects are likely to be small.
Change 2: Small profits rate and marginal relief: ignore “passive companies”: clauses 25 and 26
This change enacts SP5/94 which excludes some non-holding companies from those treated as “associated companies”.
Although the HMRC practice in this area is presented formally as a statement of practice it contains an element of concession. So its enactment is a change in the law.
The statement of practice applies only if the company does not carry on a trade (see clause 26(1)(a)). And it applies only to a “holding company”. So it must have at least one 51% subsidiary (see clause 26(1)(b)). Those conditions are straightforward.
The statement of practice includes three detailed conditions (and a definition of 51% subsidiary). Clause 26 sets out six conditions for a company to be a “passive company” in an accounting period.
The first condition (corresponding to the first detailed condition in SP5/94) is that the company has no assets in addition to shares in its subsidiaries. Subsection (5) of the clause relaxes this condition for assets representing a dividend received.
The second condition (corresponding to part of the third detailed condition in SP5/94) is that the company has no income other than dividends from its subsidiaries.
The third condition (corresponding to part of the third detailed condition in SP5/94) is that any dividends received by the company are distributed in full. The clause expresses this condition in more detail than the statement of practice because a company cannot distribute a dividend that it receives: the dividend received is part of its profits, out of which it may pay a dividend of its own. So subsection (4) of the clause sets out a “redistribution condition” which compares the dividends received with dividends paid.
The fourth condition (corresponding to part of the third detailed condition in SP5/94) is that the company has no chargeable gains.
The fifth condition (corresponding to part of the second detailed condition in SP5/94) is that the company is not entitled to a deduction for management expenses. A company may incur minor administrative expenses. But the benefit of the treatment in the clause is incompatible with a deduction for management expenses.
The sixth condition (corresponding to part of the second detailed condition in SP5/94) is that the company is not entitled to a deduction for qualifying charitable donations.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 3: Small profits rate and marginal relief: relaxations in the test for being an associated company: clauses 25 and 28 to 30 and Schedule 1 (section 99 of CAA)
This change enacts parts of ESC C9.
Under section 13(4) of ICTA two companies are associated, for the purpose of small companies’ relief, if one has control of the other, or if both are under the control of the same person. “Control” is construed in accordance with section 416 of ICTA (see now clause 450 of this Bill).
ESC C9 has four main parts, set out in paragraphs 2, 3, 4 and 5 of the concession.
Paragraph 2: Fixed-rate preference shares
Under section 416(2) of ICTA a company controls another if it possesses the greater part of its share capital. Share capital includes preference shares.
So a lending company providing finance to a borrowing company by way of preference shares may technically control the borrowing company with the result that the two companies are associated. Furthermore, all borrowing companies controlled in this way by the lender are associated with each other.
By concession, some holdings of fixed-rate preference shares are ignored for the purpose of determining control for the purposes of small companies’ relief. The concession applies if the holding of fixed-rate preference shares is the only reason for two companies to be treated as associated.
Clause 28 enacts this part of the concession.
Paragraph 3: Loan creditors
Under section 416(2) of ICTA a company controls another if it possesses such rights as would entitle it to the greater part of the assets of the other company. A loan creditor may have such rights.
So a loan creditor may technically control the borrowing company with the result that the two companies are associated. Furthermore, all borrowing companies controlled in this way by the lender are associated with each other.
By concession loans made between companies that are otherwise completely unconnected are ignored if the loan creditor is not a close company or is a “bona fide commercial loan creditor”. And there is a similar concession if unconnected companies are controlled by a common loan creditor.
Clause 29 enacts this part of the concession.
Paragraph 4: Trustee companies
Under section 416(1) of ICTA a company is associated with another if one controls the other.
ICTA does not specifically exclude control which is established by rights and powers held on trust. By concession, such rights and powers are ignored.
Clause 30 enacts this part of the concession.
Paragraph 5: Relatives
Section 417(3) and (4) of ICTA (see now clause 448 of this Bill) defines “associate” to include a relative. By concession, in some circumstances, HMRC restrict the definition of “relative” to a husband, wife or minor child. This part of the concession depends on there being “no substantial interdependence” between the companies concerned. This test forms part of the review of the associated companies rules, announced by the Chancellor in his Autumn 2007 Statement on Tax Simplification Reviews. For the moment this Change does not legislate paragraph 5 of the concession.
Capital allowances
It is not clear from the words of the concession whether or not it applies also for the purpose of section 99 of CAA (monetary limit for long-life assets). In practice the concession is applied for the purpose of section 99 of CAA. Schedule 1 to the Bill amends the capital allowances rule so that the treatment in clauses 28 to 30 applies also to the monetary limit for long-life assets.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 4: Trading income: omission of references to a company carrying on a profession or a vocation: clauses 36, 188, 452, 456, 673, 837, 851, 860, 864, 880, 883, 886, 939, 957, 1071 and 1119
This change omits references to a profession and to a vocation where the source legislation refers to the carrying on by a company of a trade, profession or vocation.
The change is reflected in numerous sections in Part 3 of CTA 2009 (trading income). It is included in the origins of the main provisions affected in CTA 2009, where it is acknowledged as Change 2. It is carried through into clauses 36, 188, 452, 456, 673, 837, 851, 860, 864, 880, 883, 886, 939 957 and 1071 of this Bill. It is also carried through into paragraph (b) of the definition of “period of account” in clause 1119 of this Bill.
There are strong grounds for believing that for the purposes of the charge to corporation tax there are no activities that should be taken to constitute the carrying on of a profession or vocation by a corporate body or unincorporated association. There was a full discussion of the issues involved in Change 2 in Annex 1 to the commentary on CTA 2009.
It is theoretically possible that the application of trading income rules to activities that a company could argue is a profession or a vocation could lead to a change in the measure of taxable profits.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.
Change 5: References to “officer of Revenue and Customs” and “Her Majesty’s Revenue and Customs”: clauses 37, 199, 472 to 478, 480, 481, 484 to 488, 495, 504, 507, 510, 511, 514, 525, 527, 533, 540, 545, 546, 561, 565, 571 to 578, 582, 586, 587, 592, 658, 670, 671, 710, 713, 740, 743 to 746 and 977
This change replaces references to the “Board of Inland Revenue” in the source legislation with references to “an officer of Revenue and Customs” or “Her Majesty’s Revenue and Customs”.
It brings the income and corporation tax codes back into line.
References in the source legislation to the “Commissioners of Inland Revenue (however expressed)” are treated by section 50(1) of CRCA as references to “the Commissioners for Her Majesty’s Revenue and Customs”. The rest of this note accordingly refers to the Commissioners for HMRC (“the Commissioners”) rather than to the Board of Inland Revenue.
The provisions affected by this change will in future authorise or require things to be done by or in relation to an officer of Revenue and Customs rather than by or in relation to the Commissioners. This reflects the way in which Her Majesty’s Revenue and Customs is organised and operates in practice. Section 13 of CRCA allows nearly all functions conferred on the Commissioners to be exercised by any officer. All of the functions affected by this change, which are in the main concerned with administrative processes, are in fact exercised by officers of the Commissioners, and the Commissioners themselves are not personally involved in their exercise.
Where the source legislation provides for a claim or election to be made to the Commissioners, this Bill does not expressly state to whom such a claim or election is to be made. Where a notice to deliver a corporation tax return has been issued, paragraphs 57 and 58 of Schedule 18 to FA 1998 require the claim to be made in the return or by amendment of the return if possible. A return must be made to the officer who issued it. A notice amending a return must be made to an officer. Similarly, where the claim is made outside a return or amendment, paragraph 2(1) of Schedule 1A to TMA requires the claim to be made to an officer.
This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.
Change 6: Interpretation: references to Scottish and Northern Ireland legislation: clauses 44, 64, 67, 486, 488, 511 and 1119
This change is about the extent to which references to “Act” are to be interpreted as including references to Scottish and Northern Irish primary legislation.
“Northern Ireland legislation” is defined in section 24(5) of the Interpretation Act 1978 (the 1978 Act) and the definition applies generally by virtue of section 5 and Schedule 1 to the 1978 Act. It is the term commonly used in legislation when referring to Northern Irish primary legislation. The definition of “Northern Ireland legislation” has seven limbs, (a) to (g).
Section 832(1) of ICTA defines “Act” to include Acts of the Parliament of Northern Ireland and a Measure of the Northern Ireland Assembly. So it expressly covers limbs (b) and (d) of the definition of “Northern Ireland legislation” in the 1978 Act. As a consequence of various deeming provisions contained in Schedule 12 to the Northern Ireland Act 1998, it also covers limbs (c), (e) and (f) of the definition of “Northern Ireland legislation”. Only limbs (a) and (g) of the definition of “Northern Ireland legislation” are not covered.
To simplify the definition of “Act” the current wording in section 832(1) of ICTA is replaced in clause 1119 with an unqualified reference to “Northern Ireland legislation”. The change in the law is that limbs (a) and (g) of the definition of “Northern Ireland legislation” are now covered, although the change is formal rather than substantial as the provisions mentioned in those limbs are not relevant to the Corporation tax Acts.
“Act” on its own does not include Acts of the Scottish Parliament (see the definition of “Act” in Schedule 1 to the 1978 Act). But it is appropriate that references to “Act” in clauses 44, 64, 67, 486, 488 and 511 should include references to Acts of the Scottish Parliament. In each of these cases the extension of the meaning of “Act” can only be advantageous to taxpayers.
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