This change has an effect which is adverse to some taxpayers in principle and in practice. But the numbers affected and the amounts involved are likely to be small. It also has an effect which is in taxpayers’ favour in principle but which is not expected in practice to alter the position for taxpayers.

Change 22: Share loss relief: time of disposal: clause 90

This change makes explicit the accounting period in which the disposal is to be treated as occurring for the purpose of share loss relief.

The availability of share loss relief is dependent upon an allowable loss being incurred for the purposes of corporation tax on chargeable gains and this can only be incurred on a disposal within the meaning given in TCGA.

The provisions of TCGA which determine when a disposal occurs, including in particular section 28 of that Act, do not apply to Chapter 5A of Part 13 of ICTA. But in practice “the accounting period in which the loss was incurred” referred to in section 573(2) of ICTA is taken to be the accounting period in which the disposal is made or treated as made for the purposes of corporation tax on chargeable gains in accordance with TCGA.

Clause 90(7) contains explicit provision to this effect. This change is similar to that made in section 151(8) of ITA for the purposes of relief against income tax. See Change 35 in Annex 1 to the explanatory notes on ITA.

Although this change in principle affects the timing of relief and could be favourable to some taxpayers and adverse to others, it is entirely in line with generally accepted practice and so will have no practical effect.

Change 23: Recalculation of EEA amount: clause 113

This change clarifies how the EEA amount is recalculated in a case where the EEA amount arises in a period that is longer than a year.

In accordance with paragraph 11 of Schedule 18A to ICTA the EEA amount must be recalculated in accordance with the “applicable UK tax rules”. Those rules include (paragraph 14 of the Schedule) any necessary splitting of the loss period in which the EEA amount arises to produce assumed accounting periods.

The amount that is available for surrender is limited to the amount given by the recalculation.

The recalculation necessarily involves apportionment of the EEA amount to the assumed accounting periods. But there is no rule to say how the comparison of the original and recalculated amount should be done: the original amount is for the whole loss period; the recalculated amount is for the assumed accounting periods.

Example

An EEA company has a loss of £12,000 for the period 1 January 2010 to 30 June 2011. None of the loss qualifies otherwise for relief from corporation tax (section 402(1)(b) of ICTA). All of the loss meets the conditions in section 403F(2) of ICTA.

In this (unlikely) case, neither recalculated amount exceeds the EEA amount of £12,000. So it is apparently possible to argue that the amount available for surrender is £13,000. This result is illogical given that the EEA amount is only £12,000, but it is not explicitly excluded by Schedule 18A to ICTA. Clause 113(3) removes the possibility of this illogical result by making it clear that the maximum amount available for surrender in relation to all the assumed accounting periods comprised in the EEA period cannot be more than the qualifying part of the EEA amount.

This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 24: Multiple claims for group relief: clause 141

This change clarifies the position if more than one claim is made for a company’s loss etc.

Section 403A of ICTA limits a group relief claim to the smaller of:

• the “unused part of the surrenderable amount”; and

• the “unrelieved part of the claimant company’s total profits”.

Any claim for group relief reduces the surrendering company’s unused part of the surrenderable amount and the unrelieved part of the claimant company’s total profits. In general, earlier claims limit the amounts of later claims. So, in dealing with multiple claims, it is necessary to know in what order to deal with the claims.

Before Self Assessment for companies it was possible to say when a claim became final. Usually, that would be because the inspector had made an assessment giving effect to the relief and the appeal period had expired. So section 403A(6) of ICTA identifies the previously claimed group relief as that which has been the subject of claims that have become final.

Under Self Assessment it is not generally possible to know whether an enquiry will be made (paragraph 24 of Schedule 18 to FA 1998), so extending the time limit for withdrawing claims (paragraph 74(1)(b) of the Schedule). To overcome this practical difficulty there is a practice, set out in paragraph 80220 of the HMRC Company Taxation Manual, of simply dealing with claims in the order in which they are made (whether or not they are final).

This Bill enacts the practice.

In most cases the total amount of relief is not affected by this change. But, in principle, the relief may be given to one company instead of another.

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 25: Group relief: restriction of surrender by company owned by consortium: clause 148

This change relaxes the restriction that is made when group relief is surrendered by a company that is owned by a consortium and is also a member of a group.

The policy is that the total relief surrendered outside the group should not exceed the net loss (if any) of the group as a whole. So the losses etc of the surrendering company are treated for this purpose as reduced by any group relief claims that could be made by other companies in the group.

Example 1

Under section 405(2) of ICTA, S is assumed to make a group relief claim to cover its profits. S’s corresponding accounting period (see section 413(2A) of ICTA) is the 12 months ended 31 December 2009. So the assumed claim is for £2000 and (because no other companies are involved) that is the amount of the “potential group relief”. So C’s “loss or other amount” available for surrender to M1, M2 etc is reduced under section 405(1) of ICTA to £8000, the net loss of the group as a whole.

Example 2

The facts are the same as in Example 1 except that S’s accounting date is 30 September. The effect of section 413(2A) of ICTA is that, in relation to C’s accounting period ended 31 December 2009, S’s corresponding accounting period is the whole of the 12 months ended 30 September 2009.

The effect of section 405(2) of ICTA is that S is assumed to make a claim for group relief equal to the total of its profits of its entire accounting period ended 30 September 2009 (that is, its corresponding accounting period). Section 405 of ICTA does not provide for an apportionment of S’s profits, even though S could actually claim relief against no more than £1500, its profits attributable to the “overlapping period” (see section 403A of ICTA). So the £2000 restriction stands.

In clause 148(5) the “maximum amount of group relief that could be given” on a claim by S may require an apportionment of S’s total profits. This makes no difference in Example 1. But in Example 2 C’s loss available for surrender is treated as reduced to £8500, instead of £8000.

This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.

Change 26: Group relief: equity holder’s share of profits or assets referable to UK trade: clause 181

This change simplifies the calculation of the percentage of profits or assets to which an equity holder is entitled in cases involving non-resident companies.

The basic rule for all companies is that the percentage of profits to which an equity holder is entitled is calculated by reference to a company’s total profits (paragraph 2 of Schedule 18 to ICTA, rewritten in clause 165). If the company has no profits it would be impossible to say what the percentage is. So, in cases where the company has no profits, the calculation is made by reference to £100 total profits.

There is a similar basic rule in paragraph 3 of Schedule 18 to ICTA, rewritten in clause 166, for assets to which an equity holder is entitled in a winding up.

Paragraph 5F of Schedule 18 to ICTA deals with non-resident companies in which an equity holder’s entitlements may be related to a company’s “UK trade”. Sub-paragraph (7) caters for the possibility that the profits or assets referable to the UK trade are less than £100. The calculation is done on the assumption that the profits or assets referable to the UK trade are £100.

In accordance with the assumption in paragraph 5F(7)(c) of Schedule 18 to ICTA, the total profits or assets (adjusted if necessary in accordance with paragraph 2 or 3 of the Schedule) cannot be less than £100. Clause 181 rewrites paragraph 5F(7) of Schedule 18 so that, if the profits or assets referable to the UK trade are between nil and £100, the actual amount is used in the calculation.

The change affects only Assumptions 2 and 3. Assumption 4 (rewriting paragraph 5F(7)(c) of Schedule 18 to ICTA) retains the reference to £100.

In cases where the non-resident company’s profits or assets referable to its UK trade are more than zero but less than £100 this change may alter the percentage calculated (particularly if those profits or assets are small). But it is unlikely to result in a change to the conclusion about the extent of an equity holder’s stake in a company.

This change is in principle and in practice adverse to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.

Change 27: Charitable donations relief: gifts and benefits linked to periods of less than 12 months: priority between methods of calculating annualised amounts of gifts and benefits: clause 198

This change clarifies the operation of the rules about annualising the amounts of gifts and benefits in the various different sets of circumstances which can arise, by providing a priority rule to cater for certain cases where more than one of the statutory rules could apply in relation to a given set of circumstances.

If a company makes a donation of money to a charity, and receives a benefit in consequence of doing so, that benefit may affect whether the donation is “qualifying” (clause 191). And that in turn will affect whether the company obtains tax relief for the donation under clause 190 as a qualifying charitable donation.

The source legislation (section 339(3DB) to (3DD) of ICTA) contains rules to counter tax advantages from fragmentation of the time periods attaching to donations or to consequent benefits. In particular, section 339(3DD) of ICTA (rewritten in clause 198) lays down the method of annualising either the gift, or both the gift and the benefit, in different circumstances. Those circumstances are set out in section 339(3DB) and (3DC) of ICTA, rewritten in clause 198 of this Bill as conditions A to D.

But the source legislation does not set out what is to happen if the circumstances fall within one of Conditions C and D and within one of Conditions A and B, which in theory can occur.

This change provides a priority rule to cater for such cases, which is located in Step 2 of clause 198(8). It provides that, in such a case, the rule relating to Conditions C and D takes priority.

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 28: Community investment tax relief: permit deduction of expenses incurred by director, employee or associate: clause 250

This change permits consideration given by a director or employee of an investor or by an associate of such a director or employee for a benefit or facility provided by the CDFI to be deducted in calculating value received.

Paragraph 35 of Schedule 16 to FA 2002, rewritten in clause 249, provides for the circumstances in which the investor receives value from the CDFI for the purposes of determining whether any CITR falls to be reduced or withdrawn.

One of those circumstances (paragraph 35(1)(d)) is the provision by the CDFI of a benefit or facility for:

(i)     the investor or any associates of the investor, or

(ii)     directors or employees of the investor or any of their associates.

Associate is defined in paragraph 50 of Schedule 16 to FA 2002, rewritten in clause 268.

Paragraph 36(d) of Schedule 16 to FA 2002 determines the amount of the value received in a case falling within paragraph 35(1)(d) as:

(i)     the cost to the CDFI of providing the benefit or facility, less

(ii)     any consideration given for it by the investor or any associate of the investor.

But paragraph 36 does not permit the deduction of any consideration:

• in a case where the benefit or facility is provided to a director or employee, given by the director or employee or by any associate of the director or employee, or

• in a case where the benefit or facility is provided to an associate of a director or employee, given by the associate or by the director or employee.

As the consideration is most likely to be given by the recipient of the benefit or facility, this may put the investor in a worse position if the benefit or facility is provided to a director or employee or an associate of a director or employee than if the benefit or facility is provided to the investor itself or an associate of the investor.

In rewriting paragraph 36(d) of Schedule 16 to FA 2002 in clause 250 this omission has been rectified.

This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.

Change 29: Oil taxation: deduction for excess of nominated proceeds: clause 283

This change clarifies the meaning of section 493(1A)(b) of ICTA.

For income tax and corporation tax purposes a separate “ring fence trade” is deemed to exist by virtue of section 16 of ITTOIA (for income tax) or section 492(1) of ICTA (rewritten in clause 279 for corporation tax). The activities making up the ring fence trade are set out in section 16(2) of ITTOIA and section 492(1)(a) to (c) of ICTA (rewritten in clause 274 for corporation tax).

Section 493 of ICTA contains rules which ensure that the correct value of oil or gas is brought into account in computing the profits of the ring fence trade. Section 493(1A) of ICTA deals with what is termed “an excess of nominated proceeds”. This is a concept that is part of the Petroleum Revenue Tax (PRT) regime. It allows a company to “nominate” a crude oil sales contract (within the crude oil forward market) as being a contract through which crude oil will actually be delivered, rather than only being a financial (or “paper”) transaction. The “excess” may arise if crude oil is delivered through a contract that has not been so nominated, and HMRC’s value exceeds the actual contract price of the oil (the excess is calculated by multiplying the volume delivered by the price/value difference).

Where this is the case, the same “excess” is also treated as a deduction by virtue of section 493(1A)(b) of ICTA. But the wording of section 493(1A)(b) is unclear in referring to “any trade to which section 492(1) [of ICTA] does not apply”. It is not clear whether this refers to the activities listed in section 492(1)(a) to (c), or to the deemed “separate trade” referred to in the full-out words of section 492(1), or to both. The use of the word “any” in “any trade” suggests a wide application. The explanatory notes published with the legislation that introduced this provision (section 151 of FA 2006) state that the intention is to give a deduction in computing profits of the non-ring fence trade, whereas the wording of section 493(1A)(b) might suggest that it only applies in the case of a separate trade that is deemed to exist by section 492(1).

Clause 283 therefore clarifies the legislation by expanding the reference to refer to both the concept of the deemed separate trade, and the activities listed in section 492(1) of ICTA, thereby making it clear that the deduction can be given against the profits of any non-ring fence trade, not solely a deemed trade created by clause 279.

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 30: Close companies: charge to tax on loans and advances to participators: exception for small amounts: clause 456 and Schedule 2

This change brings into line with practice the statutory exception, for small amounts, from the charge to tax on loans and advances made to participators in close companies. It does so by extending the exception to include not only loans but also advances.

Section 419 of ICTA imposes a charge to tax when a close company (otherwise than in the ordinary course of a business carried on by it which includes the lending of money) makes any loan or advances any money to an individual who is a participator in the company or to an associate of a participator in the company.

Section 420(2) of ICTA makes an exception to this charge when the amounts are small. So far as relevant, it provides:

Section 419(1) shall not apply to a loan made to a director or employee of a close company, or of an associated company of the close company, if -

(a)     neither the amount of the loan, nor that amount when taken together with any other outstanding loans which -

(i)     were made by the close company or any of its associated companies to the borrower; and

(ii)     if made before 31^st March 1971, were made for the purpose of purchasing a dwelling which was or was to be the borrower’s only or main residence;

exceeds £15,000 and the outstanding loans falling within sub-paragraph (ii) above do not together exceed £10,000; .. and

(c)     the borrower does not have a material interest in the close company or in any associated company of the close company;

but if the borrower acquires such a material interest at a time when the whole or part of any such loan made after 30^th March 1971 remains outstanding the close company shall be regarded as making to him at that time a loan of an amount equal to the sum outstanding.

Section 420(2) of ICTA makes no reference to advances. But it would be anomalous to exclude advances from section 420(2) of ICTA, because an advance to a participator in a close company would then be subject to the charge under section 419 of ICTA in circumstances in which, if the participator had received the money by way of loan, section 420(2) of ICTA would have sheltered it from tax.

In practice, therefore, HMRC apply section 420(2) of ICTA to loans and advances alike.

Clause 456 and the saving for close companies in Part 11 of Schedule 2, which are based on section 420(2) of ICTA, bring the law into line with practice.

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 31: Charitable companies: gifts to eligible bodies under SA Donate: claims: clause 475

Under this change an eligible body will not be required to claim exemption from tax if it receives a qualifying gift as a result of a direction under section 429(2) of ITA (the “SA Donate” scheme).

Section 25(10) of FA 1990 treats a gift, which is both a qualifying donation for gift aid under Chapter 2 of Part 8 of ITA and paid to a charitable company, as the receipt, under deduction of income tax, of an annual payment of an amount equal to the grossed up amount of the gift. “Charitable company” is defined in section 25(12)(a) of FA 1990 to include not only companies established for charitable purposes but also bodies within section 507 of ICTA.

Section 505(1)(c)(iizb) of ICTA exempts annual payments and therefore qualifying donations received by a charitable company so far as they are applied for charitable purposes. Section 505 contains a general requirement for a claim for all the exemptions mentioned in the section. However section 83(4) of FA 2004 overrides this in one particular respect. It treats a charitable company as having made a claim to any exemption to which it is entitled under section 505(1)(c)(iizb) of ICTA in respect of qualifying donations which are received as a result of a direction under SA Donate by virtue of section 429(2) of ITA. (SA Donate allows an individual to give repayments of tax due under self-assessment to a charity of choice.)

Section 507 of ICTA gives eligible bodies, on receipt of a claim, the same exemption as charitable companies which apply the whole of their income to charitable purposes. But section 83(4) of FA 2004 does not include eligible bodies within its definition of charitable companies, leaving such bodies with the need to claim for relief on qualifying donations received as a result of a direction under section 429(2) ITA.

This change gives eligible bodies exemption if qualifying donations are received as a result of a direction under section 429(2) ITA without the need to make a claim, thus putting them on the same footing as charitable companies.

This change is reflected in the clauses as follows.

Clause 472 rewrites the exemptions for qualifying donations paid to charitable companies in section 505(1) of ICTA and section 25(10) and (12) of FA 1990. Subsection (5) rewrites section 83(4) of FA 2004 which exempts charities receiving qualifying donations under SA donate from the need to make a claim. Clause 475 is the equivalent for eligible bodies of clause 472, and subsection (7) exempts these bodies from making claims if qualifying donations are received under SA Donate, in the same way as clause 472(5) does for charitable companies.

This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.

Change 32: Charitable companies: exemption for post-cessation receipts of certain trades: clauses 478, 479, 485, 490, 491, 492 and Schedule 1

This change introduces an exemption from corporation tax, in the case of charitable companies, for the post-cessation receipts of trades whose profits would be exempt if the trade had not ceased.

In contrast with the equivalent income tax rules in ITA, adjustment income is subsumed within trading profits and, therefore, unlike the position for income tax, is already covered by the charitable exemptions.

Post-cessation receipts are taxed under Chapter 15 of Part 3 of CTA 2009. There is no exemption for post-cessation receipts in the source legislation for charitable companies, other than the exemption in section 46 of FA 2000 (rewritten in clauses 480 to 482) which applies only if the receipts are below a certain level. But HMRC practice is to treat post-cessation receipts as exempt from corporation tax if they arise from a trade that benefited from the exemption in section 505(1)(e) of ICTA (rewritten as clause 478).

If a trade is treated as two separate trades in accordance with clause 479(2) and (3) any post-cessation receipts will be apportioned to the two parts (and this could mean completely apportioned to just one part if relating only to that part) and an exemption will then be available for the receipts apportioned to the charitable part.

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 33: Requiring an apportionment to be just and reasonable: clauses 479, 599, 875, 880, 952, 956 and 994

This change requires certain apportionments that are not required by the source legislation to be made on a just and reasonable basis to be made on such a basis.

In some cases where there is an apportionment under legislation rewritten in this Bill, the apportionment is required by the source legislation to be made on a just and reasonable basis. In other cases, it is required to be made only on a just basis or only on a reasonable basis, or there are no requirements. In new tax legislation it is now the practice to require an apportionment to be just and reasonable. For example, before it was repealed by ITEPA, section 140B(4) of ICTA (inserted by FA 1998) required a just and reasonable apportionment to be made of any consideration given partly in respect of one thing and partly in respect of another. There is no reason why an apportionment should not be on a just and reasonable basis. And it is desirable that all apportionments should be made on the same basis.

On the other hand, section 784(4) of ICTA provides that “the amount to be deducted .. shall be such proportion of the capital expenditure which is still unallowed as is reasonable” (rather than such proportion as is just and reasonable).

If an apportionment under legislation rewritten in this Bill is not required to be made on a just and reasonable basis, the rewritten provision requires the apportionment to be made on a just and reasonable basis. The changes are as follows.

• Sections 505(1B) and 784(4) of ICTA and section 120(6) of FA 2006 require apportionments (or a “proportion”) to be reasonable. Clauses 479, 875(5)(a) and 599 respectively require those things to be just as well as reasonable.

• Sections 343(9), 343ZA(7), 518(9) and 783(8) of ICTA require apportionments to be just. Clauses 952, 956, 994 and 880 respectively require apportionments to be reasonable as well as just.

The same change has been made in previous rewrite Acts to provide a uniform expression of the basis on which apportionments are to be made.