Corporation Tax Bill

House of Commons

Session 2009 - 10
Internet Publications
Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 12 — Real Estate Investment Trusts
Chapter 4 — Entering the UK REIT regime
269

(2)
Condition A is that the asset was used wholly and exclusively for the purposes
of property rental business of the company.
(3)
Condition B is that the asset was used during one or more periods of (in total)
less than a year—
(a)
partly for the purposes of property rental business of the company, and
5
(b)
partly for the purposes of residual business of the company,

but was otherwise used as mentioned in subsection (2).
(4)
Subsection (5) applies if a gain accrues to a company which is, or is a member
of, a UK REIT on the disposal of an asset which for one or more periods of (in
total) at least a year has been used—
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(a)
partly for the purposes of property rental business of the company, and
(b)
partly for the purposes of residual business of the company.
(5)
Such part of the gain as may reasonably be attributed to property rental
business of the company, having regard to—
(a)
the extent to which the asset was used for the different purposes, and
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(b)
the length of the periods during which it was used for those purposes,

is not a chargeable gain.
(6)
Gains which—
(a)
accrue to residual business of a company which is, or is a member of, a
UK REIT, and
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(b)
are charged to corporation tax,

are to be so charged at a rate determined without reference to sections 18 to 23
(small profits rate and marginal relief).
(7)
If a percentage of the gains of property rental business of a member of a group
UK REIT is excluded from a financial statement in accordance with section
25
533(3), that percentage of those gains is to be treated for corporation tax
purposes as gains of the member’s residual business.
(8)
This section has effect in relation to a non-UK member of a group UK REIT as
if references to property rental business of the member were to its UK property
rental business.
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(9)
This section is to be read as if it were contained in TCGA 1992.
Chapter 4
Entering the UK REIT regime
536
Effects of entry: corporation tax
(1)
Property rental business carried on before entry by a company which becomes,
35
or becomes a member of, a UK REIT (an “incoming company”) is to be treated
for corporation tax purposes as ceasing at entry.
(2)
Assets which immediately before entry are involved in property rental
business of an incoming company are to be treated for corporation tax
purposes as being—
40
(a)
sold by the pre-entry company immediately before entry, and
(b)
reacquired immediately after entry by the company so far as it carries
on property rental business.

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Part 12 — Real Estate Investment Trusts
Chapter 4 — Entering the UK REIT regime
270

(3)
The sale and reacquisition deemed under subsection (2) is to be treated as being
for a consideration equal to the market value of the assets.
(4)
A gain accruing as a result of subsection (2) is not a chargeable gain.
(5)
For corporation tax purposes, one accounting period of an incoming company
ends on entry and a new one begins.
5
(6)
In the case of a group UK REIT—
(a)
if a percentage of the assets of a member of the group is excluded from
a financial statement in accordance with section 533(3), that percentage
of those assets is to be ignored in the application of subsection (2) to the
member, and
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(b)
this section has effect in relation to a non-UK member of the group as if
references to property rental business were references to UK property
rental business of the member.
(7)
This section does not apply if—
(a)
a company which was a member of one group UK REIT becomes a
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member of a different group UK REIT, or
(b)
a company which was a company UK REIT becomes a member of a
group UK REIT.
(8)
This section and section 537 are subject to section 559 (demergers: company
leaving group UK REIT).
20
(9)
For the meaning of “entry”, see section 607(1).
537
Effects of entry: CAA 2001
(1)
Subsections (2) to (4) apply for the purposes of CAA 2001.
(2)
The sale and reacquisition deemed under section 536(2)—
(a)
does not give rise to allowances or charges, and
25
(b)
does not enable an election to be made under section 198 or 199 of CAA
2001 (apportionment).
(3)
Section 536(3) (deemed consideration for sale and reacquisition) does not
apply.
(4)
Anything done by or to a company which becomes, or becomes a member of,
30
a UK REIT in relation to an asset which is deemed under section 536(2) to be
sold and reacquired is to be treated after entry as having been done by or to the
company so far as it carries on property rental business.
538
Entry charge
(1)
An amount of notional income calculated in accordance with section 539 (“the
35
notional amount”) is treated as arising to a company at entry.
(2)
The notional amount is treated as arising to the company’s residual business.
(3)
If the company is a UK company, it is chargeable to corporation tax under the
charge to corporation tax on income on the notional amount (which is
accordingly charged at the rate mentioned in section 534(3)).
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Corporation Tax Bill
Part 12 — Real Estate Investment Trusts
Chapter 4 — Entering the UK REIT regime
271

(4)
If the company is a non-UK company, it is chargeable to income tax on the
notional amount (which is accordingly charged at the basic rate in accordance
with section 11 of ITA 2007).
(5)
No loss, deficit, expense or allowance may be set off against the notional
amount or against tax arising under this section.
5
(6)
This section does not apply if a company—
(a)
which was a member of one group UK REIT becomes a member of
another group UK REIT, or
(b)
which was a company UK REIT becomes a member of a group UK
REIT.
10
(7)
This section is subject to section 559 (demergers: company leaving group UK
REIT).
539
Calculation of the notional amount
(1)
This section provides for the calculation of the amount of notional income
mentioned in section 538(1).
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(2)
The calculation is—

(3)
“MV” means the total market value of assets which immediately before entry
are involved in—
(a)
property rental business of the company (in the case of a UK company),
or
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(b)
UK property rental business of the company (in the case of a non-UK
member of a group UK REIT),

ignoring any asset of negative market value.
(4)
If a percentage of the assets of a member of a group UK REIT is excluded from
a financial statement in accordance with section 533(3), that percentage of those
25
assets is to be ignored for the purposes of subsection (3).
(5)
“TR” means—
(a)
in the case of a UK company, the rate of corporation tax mentioned in
section 534(3), and
(b)
in the case of a non-UK company, the rate of income tax mentioned in
30
section 538(4).
540
Election to treat notional income as arising in instalments
(1)
A company may elect to have the amount of notional income mentioned in
section 538(1) treated as arising in 4 instalments, the first on the date of entry
and the other 3 on the first three anniversaries of that date.
35
(2)
For this purpose section 539(2) has effect as if the percentage referred to were—
(a)
0.50% for the first instalment,
(b)
0.53% for the second instalment,

Corporation Tax Bill
Part 12 — Real Estate Investment Trusts
Chapter 5 — Assets etc
272

(c)
0.56% for the third instalment, and
(d)
0.60% for the fourth instalment.
(3)
If a company makes an election under subsection (1)—
(a)
notice of the election must be given to an officer of Revenue and
Customs with the notice under section 523 or 524 (as the case may be),
5
and
(b)
the election cannot be revoked.
(4)
Subsection (5) applies if—
(a)
a company makes an election under subsection (1), and
(b)
before the third anniversary of entry, the company ceases to be, or to be
10
a member of, a UK REIT.
(5)
Any remaining instalments become chargeable immediately.
(6)
The Treasury may by regulations amend a percentage specified in subsection
(2) in order to reflect a change in interest rates; but any such regulations are not
to have effect in relation to elections made before the regulations come into
15
force.
Chapter 5
Assets etc
Ring-fencing of property rental business
541
Ring-fencing of property rental business
20
(1)
This section applies—
(a)
in the case of a group UK REIT, to the group and to each company
which is a member of the group, and
(b)
to a company UK REIT.
(2)
For corporation tax purposes property rental business of the group or
25
company is treated as a separate business, distinct from—
(a)
business of the pre-entry group or pre-entry company,
(b)
residual business of the group or company, and
(c)
business of the post-cessation group or post-cessation company.
(3)
For corporation tax purposes the group or company is treated as a separate
30
group or company so far as it carries on property rental business, distinct
from—
(a)
the pre-entry group or pre-entry company,
(b)
the group or company so far as it carries on residual business, and
(c)
the post-cessation group or post-cessation company.
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(4)
In particular—
(a)
a loss made in property rental business may not be set off against
profits of residual business,
(b)
a loss made in residual business may not be set off against profits of
property rental business,
40
(c)
a loss made in business carried on before entry may not be set off
against profits of property rental business,

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Part 12 — Real Estate Investment Trusts
Chapter 5 — Assets etc
273

(d)
a loss made in property rental business may not be set off against
profits of business carried on after cessation (in respect of business of
any kind), and
(e)
receipts accruing after entry but relating to business carried on before
entry are not treated as receipts of property rental business.
5
(5)
Nothing in this section prevents a loss made in business carried on before entry
from being set off against profits of residual business.
(6)
In subsections (4) and (5) references to a loss include references to a deficit,
expense, charge or allowance.
(7)
If a percentage of the profits of property rental business of a member of a group
10
UK REIT is excluded from a financial statement in accordance with section
533(3), that percentage of those profits is to be treated for the purposes of this
section as profits of the member’s residual business.
(8)
This section has effect in relation to a non-UK member of a group, as if
references to property rental business were references to UK property rental
15
business.
(9)
For the meaning of “cessation”, see section 607(2).
542
Disapplication of certain provisions
(1)
Section 66 (ring-fencing of losses from overseas property business) does not
apply to property rental business of a UK company which is, or is a member of,
20
a UK REIT.
(2)
Sections 166 to 171 of TIOPA 2010 (transfer pricing: exemption for small and
medium enterprises) do not apply to a UK company which is, or is a member
of, a UK REIT (whether to property rental business or residual business of the
company).
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Profits: financing-cost ratio
543
Profit: financing-cost ratio
(1)
This section applies to a UK REIT if the result of the calculation in subsection
(2) is less than 1.25 for an accounting period.
(2)
The calculation is—

30

where—
PP is the UK REIT’s property profits for the accounting period (see section
544(1)), and
PFC is the UK REIT’s property financing costs for the accounting period
(see section 544(3)).
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(3)
The amount (“the excess”) given by subtracting—

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Part 12 — Real Estate Investment Trusts
Chapter 5 — Assets etc
274

(a)
the property financing costs which would cause the calculation in
subsection (2) to equal 1.25 for the accounting period, from
(b)
the UK REIT’s actual property financing costs for the period,

is charged to corporation tax in relation to the period under the charge to
corporation tax on income.
5
(4)
The excess is treated as profits of residual business—
(a)
in the case of a group UK REIT, of the principal company of the group,
and
(b)
in the case of a company UK REIT, of the company.
(5)
Accordingly it is charged to corporation tax at the rate mentioned in section
10
534(3) (rate at which profits of residual business are charged).
(6)
No loss, deficit, expense or allowance may be set off against the excess.
(7)
The Commissioners for Her Majesty’s Revenue and Customs may waive a
charge to corporation tax under this section in respect of an accounting period
if they think that—
15
(a)
the company was in severe financial difficulties at a time in the
accounting period,
(b)
the result of the calculation in subsection (2) is less than 1.25 in respect
of the accounting period because of circumstances that arose
unexpectedly, and
20
(c)
in those circumstances the company could not reasonably have taken
action to avoid the result being less than 1.25.
(8)
The Treasury may make regulations which specify criteria to be applied by the
Commissioners in determining whether to waive a charge under subsection
(7).
25
544
Meaning of “property profits” and “property financing costs”
(1)
For the purposes of section 543 “property profits” for an accounting period
means—
(a)
in the case of a group UK REIT, the sum of the profits of property rental
business of members of the group that arise in the period, as shown in
30
the financial statement under section 532(2)(b), and
(b)
in the case of a company UK REIT, the amount of the profits of the
company’s property rental business (calculated in accordance with
section 599) that arise in the period.
(2)
References in subsection (1) to a company’s profits are to its profits before the
35
offset of—
(a)
capital allowances,
(b)
losses from a previous accounting period, and
(c)
amounts taken into account as a result of section 599(3).
(3)
For the purposes of section 543 “property financing costs” for an accounting
40
period means—
(a)
in the case of a group UK REIT, the amount of the financing costs
incurred in respect of property rental business of members of the
group, excluding financing costs owed by one member of the group to
another, as shown in the financial statement under section 532(2)(a),
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and

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Part 12 — Real Estate Investment Trusts
Chapter 5 — Assets etc
275

(b)
in the case of a company UK REIT, the amount of the financing costs
incurred in the period in respect of the company’s property rental
business.
(4)
In subsection (3) “financing costs” means the cost of debt finance.
(5)
In calculating the costs of debt finance in relation to an accounting period the
5
matters to be taken into account include—
(a)
costs giving rise to debits in respect of debtor relationships of the group
or company under Part 5 of CTA 2009 (loan relationships), other than
debits in respect of exchange losses from such relationships (within the
meaning given by section 475 of that Act),
10
(b)
any exchange gain or loss from a debtor relationship within the
meaning of that Part in relation to debt finance,
(c)
any credit or debit falling to be brought into account in accordance with
Part 7 of CTA 2009 (derivative contracts) in relation to debt finance,
(d)
the financing cost implicit in a payment under a finance lease, and
15
(e)
any other costs arising from what would be considered, in accordance
with generally accepted accounting practice, to be a financing
transaction.
Cancellation of tax advantage
545
Cancellation of tax advantage
20
(1)
If an officer of Revenue and Customs thinks that a company which is, or is a
member of, a UK REIT has tried to obtain a tax advantage for itself or another
person, the officer may give a notice to the company specifying the tax
advantage.
(2)
Subsections (3) and (4) apply if a notice is given under subsection (1).
25
(3)
The tax advantage is to be counteracted, in accordance with the notice, by an
adjustment by way of—
(a)
an assessment;
(b)
the cancellation of a right of repayment;
(c)
a requirement to return a repayment already made;
30
(d)
the calculation or recalculation of profits or gains, or liability to tax, on
a basis specified in the notice.
(4)
An officer of Revenue and Customs may (in addition to the adjustment under
subsection (3)) assess the company to such amount of corporation tax or
income tax (as the case may be) as the officer thinks is equivalent to the value
35
of the tax advantage.
(5)
For the purposes of this section “tax advantage” has the meaning given by
section 1139 (and includes, in particular, entering into arrangements the sole or
main purpose of which is to avoid or reduce a charge to tax under section 538).
(6)
But a company does not obtain a tax advantage merely because it is, or is a
40
member of, a UK REIT unless the company does anything (whether before or
while it is, or is a member of, the UK REIT) which in the opinion of an officer
of Revenue and Customs is wholly or principally designed—
(a)
to create or inflate or apply a loss, deduction or expense (whether or not
made or incurred by the company), or
45