|
Example 1
Company A (the principal company of the group) has a property worth £40. Company B (wholly owned subsidiary of A) has a property worth £20. Company C (75% subsidiary of A) has a property worth £40. The remaining 25% interest in C is held by a non-member of the group.
If 100% of the value of C’s property is taken into account, the 40% test is passed (40 is not more than 40%x(40+20+40)). If only 75% of the value of C’s property is taken into account, the 40% test is failed (40 is more than 40%x(40+20+30)).
Example 2
Company A (the principal company of the group) has a property worth £25. Company B (wholly owned subsidiary of A) has a property worth £30. Company C (75% subsidiary of A) has a property worth £45. The remaining 25% interest in C is held by a non-member of the group.
If 100% of the value of C’s property is taken into account, the 40% test is failed (45 is more than 40%x(25+30+45)). If only 75% of the value of C’s property is taken into account, the 40% test is passed (33.75 (75%x45) is not more than 40%x(25+30+33.75)).
It is easier in general to pass the 40% test if the interest in the subsidiary’s property is restricted to the extent of the parent’s holding. And applying the test in that way follows the economic reality of the relationship.
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 43: Enactment of regulations: clauses 551 to 554, 561 to 568, 573 to 577, and 584 to 598
This change relates to the enactment and revocation of:
- SI 2006/2864: the Real Estate Investment Trusts (Breach of Conditions) Regulations 2006 (except regulation 11);
- SI 2006/2866: the Real Estate Investment Trusts (Joint Ventures) Regulations 2006;
- SI 2007/3425: the Real Estate Investment Trusts (Joint Venture Groups) Regulations 2007; and
- SI 2007/3540: the Real Estate Investment Trusts (Breach of Conditions) (Amendment) Regulations 2007
These regulations were made by the Treasury under sections 114 to 116 and 138 of FA 2006 and sections 973 and 974 of ITA.
The regulation-making powers are not rewritten to the extent that regulations made under them are enacted in this Bill. The omission or restriction of the various regulation-making powers means that it is no longer possible to amend by secondary legislation the provisions enacted in this Bill.
But some regulation-making powers are retained.
- Clause 543(8) (based on section 115(3B) of FA 2006) is a power to specify the criteria to be applied by HMRC in deciding whether a charge under clause 543 should be waived.
- Clause 554 (based on section 114 of FA 2006) contains powers to provide that a charge does not arise or is reduced if the company takes certain action and for the collection of information.
- Clause 600 (based on section 136A of FA 2006) is a power to treat persons as members of a group UK REIT.
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 44: UK REITs: notional amount charged following breach of condition: exclusion of non-member’s interest: clause 567
This change excludes from the total market value of a group’s assets the value of the percentage of those assets held by a non-member of the group.
If there is a breach of Condition 2 in section 108(3) of FA 2006 (balance of business: assets involved in tax-exempt business) a charge to tax is imposed by regulation 7A of SI 2006/2864 (inserted by regulation 5 of SI 2007/3540). The amount of the charge is based on the market value of the assets involved in the UK property rental business of G (property rental business).
Some of those assets may be held by a company in which a non-member of the group has an interest. In that case, the non-member’s percentage of the assets may be excluded from the financial statements prepared under paragraph 31 of Schedule 17 to FA 2006 (see, in particular, sub-paragraph (5)).
Clause 567 of this Bill rewrites the rule in regulation 7A of SI 2206/2864. It includes, in subsection (4)(c) of the clause, a rule excluding a non-member’s share in the assets of the group. The exclusion is on the same basis as that for the purposes of financial statements (see clause 533(3)).
This change reduces the amount that may be charged to tax on the occasion of a breach of the balance of business (assets) condition.
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 45: Corporate beneficiaries under trusts: treatment of trustees’ expenses: clause 611
This change makes explicit some of the rules about the way expenses, incurred by trustees in connection with income to which a corporate beneficiary is entitled, reduce the amount of the beneficiary’s income for tax purposes.
Clause 611 applies sections 500 and 503 ITA to a corporate beneficiary. These sections are concerned with the treatment of trustees’ expenses in a case where a beneficiary, liable to income tax, is entitled to trust income as it arises. This is where the beneficiary has an interest in possession (IIP).
Section 689A(2) ICTA, which was repealed by ITA, made reference to the effect on a beneficiary with an IIP where the trustees have incurred expenses. But section 689B was the only provision in ICTA that provided details of the tax treatment of trustees’ expenses in relation to IIP income (as well as other income from trusts, for example discretionary payments).
This part of section 689B is rewritten in section 503(2) and (3) of ITA. Other rules introduced by sections 500 and 503 of ITA are based on established practice and case law - see Change 91 in Annex 1 to the explanatory notes accompanying ITA.
There are few, if any, examples of a trust in which there are corporate beneficiaries with an IIP and so this change is very unlikely to have any effect for corporation tax purposes.
This change is in principle adverse to some taxpayers and favourable to others. But it is likely to have no practical effect as it is in line with generally accepted practice.
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.
This change amends the references to year of assessment in relation to co-operative housing associations (section 488 of ICTA) and self-build societies (section 489 of ICTA).
These bodies are all within the charge to corporation tax. However, in the source legislation, their claims to exemption in respect of rents receivable from tenants are in terms of tax years. This is because there is also a potential impact on the tenant’s income tax liability - for example, the tenant might have been entitled to deduct the rent payable as an expense for tax purposes.
In addition, earlier versions of the legislation transferred entitlement to relief for interest payable from the association/society to the tenant under the relief for mortgage interest provisions until that relief was abolished. It therefore made sense to operate by reference to tax years.
In contrast, the exemption from corporation tax on chargeable gains in respect of disposals of property by these bodies to their members has always been by reference to an accounting period.
As the link to mortgage interest relief has now gone the rationale for retaining the tax year as the basis of the claim and relief is significantly reduced and this change therefore standardises the claim and relief on the basis of an accounting period.
There is no need for a transitional provision as these bodies can claim for part of a tax year or accounting period so no there will be no gaps in eligibility for exemption.
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 47: Co-operative housing associations and self-build societies: Department for Social Development for Northern Ireland: clauses 644, 645, 649, 653 and 657.
This change replaces references to “the Head of the Department of the Environment for Northern Ireland”, “the Head of the Department for Social Development for Northern Ireland” and “the Department of the Environment for Northern Ireland” with “the Department for Social Development”.
Article 6(e) and Part 5 of Schedule 4 of the Departments (Transfer and Assignment of Functions) Order (Northern Ireland) 1999 (SI 1999/481) transferred housing functions under the Housing (Northern Ireland) Orders 1981 to 1992 from the Department of the Environment to the Department for Social Development (DSD). In view of the transfers of functions and the responsibility of the DSD for other matters relating to housing, it is appropriate for the functions under sections 488 and 489 of ICTA relating to Northern Ireland to be exercisable by the DSD. This change therefore replaces the references in sections 488(6)(b) and (8) and 489(12) of ICTA to “the Department of the Environment for Northern Ireland” with the “Department for Social Development”.
Article 5 of the Scotland Act 1988 (Transfer of Functions to the Scottish Ministers etc) Order 2004 substituted the reference to “the Head of the Department for Social Development for Northern Ireland” in section 488(6)(iii) of ICTA. It is unclear whether there was sufficient power under this Order to make that substitution. Subsections (5) and (6) of clause 645 make it clear that the functions concerned are exercisable by the DSD as regards Northern Ireland.
By virtue of paragraph 11(2) of Schedule 12 to the Northern Ireland Act 1998, references in section 488 of ICTA to the Head of a Department are to a Minister. In clauses 644, 645 and 649 functions are expressed to be conferred on the Northern Ireland department concerned, rather than on the Minister in charge of the department, in line with modern practice.
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 48: Receipt of club benefits by members: arm’s length agreements for employment or for goods or services: clause 660
This change removes certain formalities which apply where a club member supplies goods or services to the club or is employed by the club and the club wishes to satisfy the requirements for tax exemptions.
In order to qualify as an amateur sports club paragraph 3(1) of Schedule 18 to FA 2002 requires that only the ordinary benefits of a community amateur sports club can be provided to members and guests. Those benefits are set out in paragraph 3(3) of Schedule 18. A club’s powers are thus restricted to the actions which allow them to provide those benefits to their members. Paragraph 3(4) of Schedule 18 however makes provision for clubs to enter into agreements to pay for goods or services or to pay remuneration to a member and to continue to satisfy the requirements for exemption. The main rule is that where there are such agreements with members then they must be at arm’s length.
Paragraph 3(4) also imposes the condition that the terms of such agreements with the member should be approved by the club’s governing body without the member concerned being present. In practice HMRC do not enforce this rule, being only concerned that the agreement is at arm’s length. This change omits these formalities in the rewritten clause. This means that the only requirement is that the agreement should be at arm’s length. This does not, of course, exclude the necessity for evidence demonstrating that the agreement is at arm’s length.
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 49: Changes in company ownership: company with investment business: restriction on relief for non-trading loss on intangible fixed assets: clauses 681 and 698
This change clarifies the restriction imposed by section 768E of ICTA, when there is a change in the ownership of a company with investment business, on relief for a non-trading loss on intangible fixed assets.
If there is a change in the ownership of a company with investment business, and the relevant conditions are met, section 768E of ICTA has effect to prevent relief being given for a non-trading loss on intangible fixed assets incurred before the change of ownership against profits arising after that change.
In particular, section 768E(5) of ICTA provides that a loss made in any accounting period beginning before the change of ownership may not be set off against profits under section 753(3) of CTA 2009.
But an unrelieved non-trading loss on intangible fixed assets is not, as such, set against profits. Section 753(3) of CTA 2009, so far as relevant, says:
To the extent that the loss is not set off .. it is carried forward to the next accounting period of the company and treated as if it were a non-trading debit of that period
Section 768E(5) of ICTA blurs the distinction between:
- calculating the company’s non-trading gain or loss under section 751 of CTA 2009; and
- setting a non-trading loss against profits under section 753(1) of that Act.
Section 768E(5) uses wording derived from paragraph 35(1) of Schedule 29 to FA 2002, which has been rewritten as section 753(1) of CTA 2009; it does not reflect section 753(3) of that Act.
The purpose of section 768E of ICTA is set out in section 768E(1) of that Act. It is therefore considered that the courts would adopt a rectifying construction of section 768E(5) of that Act in order to restrict relief which would otherwise be given under section 753(3) of CTA 2009.
Accordingly, clauses 681(3) and 698(4) (which are based on section 768E(5)(a) and (b) respectively of ICTA) reflect the wording of section 753(3) of CTA 2009. This has different effects in the context of clauses 681(3) and 698(4). In a case within clause 681(3), profits arising after the change in ownership cannot be sheltered at all. In a case within clause 698(4), the extent to which profits arising after the change in ownership can be sheltered is restricted. This reflects the differing wording of section 768E(5)(a) and (b) of ICTA: “profits” and “so much of those profits”.
This is a change in the law, in that it will prevent taxpayers arguing for an alternative interpretation.
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 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
This change clarifies the restrictions imposed by sections 768D and 768E of ICTA on relief for, respectively, property losses and non-trading losses on intangible fixed assets when there is a change in the ownership of a company with investment business and an asset is transferred within the corporate group of which that company is a member.
If there is a change in the ownership of a company with investment business, and section 768C of ICTA (deductions: asset transferred within group) applies, sections 768D and 768E of ICTA have effect to prevent relief being given for, respectively, property losses and non-trading losses on intangible fixed assets incurred before the change of ownership against profits arising after that change.
Sections 768D(6)(b) and 768E(5)(b) of ICTA quantify this restriction by reference to the amount of profits which “represents the relevant gain within the meaning of [section 768C of that Act]”, but they do not expressly define this technical expression.
But sections 768D(6)(b) and 768E(5)(b) of ICTA only apply in cases in which section 768C of that Act applies, and it would be anomalous if the words under review had a different meaning in sections 768D(6)(b) and 768E(5)(b) of ICTA from the meaning which they have in section 768C(8) of that Act. Sections 768D(6)(b) and 768E(5)(b) of ICTA therefore refer to section 768C(8) of that Act by implication. Since section 768C(8) of ICTA only applies if section 768C(6) of that Act applies, sections 768D(6)(b) and 768E(5)(b) of that Act also refer to section 768C(6) of that Act by implication and so are similarly restricted by that provision.
Clause 698 of this Bill (restriction on relief for non-trading loss on intangible fixed assets) is based on section 768E of ICTA, and clauses 700 and 701 of this Bill (disallowance of UK property business losses and disallowance of overseas property business losses) are based on section 768D of ICTA. Clauses 698(2), 700(2) and 701(2) of this Bill mirror the restriction in section 768C(6) of that Act. They therefore expressly restrict the application of clauses 698, 700 and 701 of the Bill.
This limitation is a change in the law, since it will prevent HMRC arguing that any of these restrictions has a wider scope.
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 51: Manufactured payments and repos: definition of “manufactured interest”: clause 801 and Schedule 1
This change:
- adopts the definition of “manufactured interest” used in the loan relationships regime in rewriting the unallowable purpose test for manufactured payments; and
- abolishes the power to apply, with modifications, prescribed provisions of TMA to manufactured interest.
Section 539 of CTA 2009 (relationships treated as loan relationships etc: manufactured interest etc) defines “manufactured interest” in relation to a manufactured interest relationship. A company has a manufactured interest relationship if (a) an amount is payable by or on behalf of a company or to a company under arrangements relating to the transfer of an asset representing a loan relationship and (b) this amount either (i) is representative of interest under the loan relationship or (ii) will fall to be treated as representative of such interest when it is paid. Such an amount is “manufactured interest”.
“Loan relationship” is defined in section 302 of CTA 2009. Also, Part 6 of that Act treats certain other matters as loan relationships.
Paragraph 1(1) of Schedule 23A to ICTA defines “manufactured interest” as:
an amount -
(a) which is representative of a periodical payment of interest on United Kingdom securities [as defined in paragraph 1(1) of that Schedule], and
(b) which, under a contract or other arrangements for the transfer of the securities, one of the parties is required to pay to the other
These two definitions are similar but not the same.
“Manufactured interest” as defined in CTA 2009, unlike “manufactured interest” as defined in ICTA, does not necessarily relate to United Kingdom securities. Paragraph 4(1) of Schedule 23A to ICTA however, provides:
This paragraph applies in any case where, under a contract or other arrangements for the transfer of overseas securities, one of the parties (the “overseas dividend manufacturer”) is required to pay to the other (“the recipient”) an amount representative of an overseas dividend on the overseas securities; and in this Schedule the “manufactured overseas dividend” means any payment which the overseas dividend manufacturer makes in discharge of that requirement
Paragraph 1(1) of Schedule 23A to ICTA gives “overseas securities” a wide definition, and any manufactured interest as defined in CTA 2009 which does not relate to United Kingdom securities is a MOD. (The converse does not hold; a MOD relating to foreign shares is not manufactured interest within either definition.)
Broadly speaking, therefore, manufactured interest as defined in CTA 2009 is either manufactured interest as defined in ICTA or else a MOD.
There are two technical differences between the two definitions of “manufactured interest”.
First, “United Kingdom securities” is defined using the expression “securities”, which is non-exhaustively defined in paragraph 1(1) of Schedule 23A to ICTA as including any loan stock or similar security. It is logically possible for an instrument to rank as a “United Kingdom security” as defined in paragraph 1(1) without being a loan relationship as defined in CTA 2009. In this respect, the ICTA definition is wider than the CTA 2009 definition.
Second, “manufactured interest” as defined in CTA 2009, unlike “manufactured interest” as defined in ICTA, is not necessarily representative of a periodical payment. In this respect, the CTA 2009 definition is wider than the ICTA definition.
“Manufactured interest” is defined in these two different ways for historical reasons. Schedule 23A to ICTA (manufactured dividends and interest) was inserted by FA 1991; in that Schedule, “manufactured interest” was chiefly used in provisions relating to income tax which have since been rewritten in ITA. By contrast, CTA 2009 uses “manufactured interest” in the corporation tax provisions relating to loan relationships, which are based on FA 1996. The income tax provisions of Schedule 23A to ICTA were rewritten in Chapter 2 of Part 11 and Chapter 9 of Part 15 of ITA and repealed.
“Manufactured interest”, as defined in paragraph 1(1) of Schedule 23A to ICTA, is used in:
- the definition of “manufactured payment” in paragraph 7A(10) of that Schedule (manufactured payments under arrangements having an unallowable purpose); and
- the power given by paragraph 8(3)(a) of that Schedule to apply, with modifications, prescribed provisions of TMA to manufactured interest.
The opportunity has been taken to simplify and harmonise the corporation tax legislation by adopting the CTA 2009 definition of “manufactured interest” in rewriting paragraph 7A(10) of Schedule 23A in clause 801 of this Bill.
In principle, adopting the CTA 2009 definition of “manufactured interest” in clause 801 of this Bill changes the scope of the unallowable purpose test for manufactured payments, because it narrows the definition of “manufactured interest” in one respect and broadens the definition in another respect. In principle, the former change to the definition is favourable to some taxpayers and the latter change is adverse to some taxpayers.
But, in the context of this provision, the technical differences between the two definitions of “manufactured interest” do not amount to any difference in practice.
As paragraph 8(3)(a) of Schedule 23A to ICTA has been superseded by Corporation Tax Self Assessment, Schedule 1 repeals it as unnecessary. The Treasury has not exercised its power to make regulations for corporation tax purposes under paragraph 8(3)(a). Abolishing this power will therefore have no practical effect.
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 52: Transactions in land: company chargeable: provider of opportunity to realise a gain: clause 821
This change omits words from section 776(8) of ICTA indicating that where a gain on a transaction of land that is charged under that section is derived from an opportunity of realising a gain provided by another person and as a result that person is liable for the tax, it does not matter whether or not the opportunity was put at the disposal of the person to whom the gain actually accrues.
Section 776 of ICTA charges gains of a capital nature relating to the land to corporation tax where the gains are made by persons connected with land or the development of land and the statutory conditions are met.
In certain circumstances, companies which are liable to pay corporation tax in the United Kingdom may enter into transactions in land as a result of which value, or an opportunity of realising a gain, is provided to another person (who may not be so liable). In such cases, section 776(8) of ICTA lays down that the provider of the value or, as the case may be, the opportunity is the company chargeable to corporation tax under section 776.
Section 776(8), so far as relevant, reads: “If all or any part of the gain accruing to any person is derived from value, or an opportunity of realising a gain, provided directly or indirectly by some other person.., whether or not put at the disposal of the first-mentioned person ..”.
In Yuill v Wilson (1980), 52 TC 674 3 on page 706, Goff LJ criticised the drafting of what is now section 776(8):
I find it very difficult to appreciate what [the words “whether or not put at the disposal of the first-mentioned person” in what is now section 776(8)] were intended to cover. In the case of value I can well see that a gain may be derived by one person from value provided by another, whether directly or indirectly, without that value being put at the disposal of the first-mentioned person; for example, if A pays money to B as consideration for the grant of an option to C. As at present advised, however, I find it very difficult to see how one can gain from an opportunity provided by another without that opportunity being put at the disposal of the first-mentioned person. (emphasis added)
As it is considered that no sensible meaning can be given to the words “whether or not put at the disposal of the first-mentioned person” so far as they relate to the earlier words “an opportunity of realising a gain”, in rewriting the passage under review clause 821 (transactions in land: company chargeable) refers only to the value provided by another person and not the opportunity of realising a gain.
If this view were incorrect, then the restriction of the scope of clause 821 might in some circumstances exclude taxpayers from liability under the “transactions in land” Part.
| 
