Corporation Tax Act 2009

2009 Chapter 4

An Act to restate, with minor changes, certain enactments relating to corporation tax; and for connected purposes.

[26th March 2009]

Chapter 1The charge to corporation tax

Charge to tax on profits

2Charge to corporation tax

1

Corporation tax is charged on profits of companies for any financial year for which an Act so provides.

2

In this Part “profits” means income and chargeable gains, except in so far as the context otherwise requires.

3

In this Act “the charge to corporation tax on income” means the charge under subsection (1) so far as relating to income.

4

The charge to corporation tax on income has effect in accordance with the provisions of the Corporation Tax Acts that deal with its application.

3Exclusion of charge to income tax

1

The provisions of the Income Tax Acts relating to the charge to income tax do not apply to income of a company if—

a

the company is UK resident, or

b

the company is not UK resident and the income is within its chargeable profits as defined by section 19.

2

Subsection (1) does not apply to income accruing to a company in a fiduciary or representative capacity.

4Exclusion of charge to capital gains tax

Capital gains tax is not charged on gains accruing to a company in respect of which the company is chargeable to corporation tax, or would be so chargeable but for an exemption.

General scheme of corporation tax

5Territorial scope of charge

1

4

Subsection (3) is subject to any contrary provision in the Corporation Tax Acts.

5

If a company’s accounting period falls within more than one financial year, the amount of the profits arising in the accounting period that is chargeable to corporation tax must be apportioned between the financial years in which the accounting period falls.

Chapter 2Accounting periods

9Beginning of accounting period

1

An accounting period of a company begins—

a

when the company comes within the charge to corporation tax, or

b

immediately after the end of the previous accounting period of the company, if the company is still within the charge to corporation tax.

2

For the purposes of this section a UK resident company is treated as coming within the charge to corporation tax when it starts to carry on business, if it would not otherwise be within the charge to corporation tax.

3

If a chargeable gain or allowable loss accrues to a company at a time which is not (ignoring this subsection) within an accounting period of the company—

a

an accounting period of the company begins at that time, and

b

the gain or loss accrues in that accounting period.

4

This section does not apply if section 12 (companies being wound up) applies.

5

This section is subject to any provision of the Corporation Tax Acts which provides for an accounting period of a company to which this section applies to begin at a different time.

b

if earlier, when the winding up is completed.

5

After the winding up starts, an accounting period of the company begins immediately after the end of the previous accounting period of the company, if the winding up has not been completed.

6

This section is subject to any provision of the Corporation Tax Acts which provides for an accounting period of a company to which this section applies to begin or end at a different time.

7

For the purposes of this section a winding up of a company starts—

a

when the company passes a resolution for the winding up of the company,

b

when a petition for the winding up of the company is presented, if the company has not already passed such a resolution and a winding up order is made on the petition, or

c

when an act is done in relation to the company for a similar purpose, if the winding up is not under the Insolvency Act 1986 (c. 45).

Chapter 3Company residence

13Overview of Chapter

1

This Chapter contains rules for determining the residence of companies.

2

Section 14 gives the main rule for companies incorporated in the United Kingdom (including SEs and SCEs incorporated in the United Kingdom).

3

Section 15 deals with companies which have been UK resident under the rules of common law and provides for their continued residence when certain circumstances arise.

4

Sections 16 and 17 deal with SEs and SCEs which transfer their registered office to the United Kingdom.

5

Section 18 contains a special rule for companies treated as non-UK resident under double taxation arrangements.

14Companies incorporated in the United Kingdom

1

A company which is incorporated in the United Kingdom is UK resident for the purposes of the Corporation Tax Acts.

2

Accordingly, even if a different place of residence is given by a rule of law, the company is not resident in that place for the purposes of the Corporation Tax Acts.

15Continuation of residence established under common law

1

This section applies to a company which is neither—

a

incorporated in the United Kingdom, nor

b

resident in the United Kingdom by virtue of section 16 or 17.

2

If the company—

a

is no longer carrying on a business, and

b

was UK resident for the purposes of the Corporation Tax Acts immediately before it ceased to carry on business,

the company continues to be UK resident for the purposes of the Corporation Tax Acts.

3

If the company—

a

is being wound up outside the United Kingdom, and

b

b

non-UK resident,

for the purposes of any double taxation arrangements.

2

For the purposes of the Corporation Tax Acts the company is—

a

resident outside the United Kingdom, and

b

non-UK resident.

3

Subsection (2) applies even if the company would otherwise be UK resident for the purposes of the Corporation Tax Acts by virtue of section 14, 15, 16 or 17 or another rule of law.

4

To decide whether a company is treated as mentioned in subsection (1)(a) and (b) for the purposes of any double taxation arrangements, assume that—

a

the company has made a claim for relief under the arrangements, and

b

in consequence of the claim it falls to be decided whether the company is to be treated as mentioned in subsection (1)(a) and (b) for the purposes of the arrangements.

Chapter 4Non-UK resident companies: chargeable profits

Chargeable profits

19Chargeable profits

1

This section applies if a non-UK resident company carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom.

2

The company’s chargeable profits are its profits that are—

a

of a type mentioned in subsection (3), and

b

attributable to the permanent establishment in accordance with sections 20 to 32.

3

The types of profits referred to in subsection (2)(a) are—

a

trading income arising directly or indirectly through or from the establishment,

b

income from property or rights used by, or held by or for, the establishment, and

c

chargeable gains falling within section 10B of TCGA 1992 (non-resident company with United Kingdom permanent establishment)—

i

as a result of assets being used in or for the purposes of the trade carried on by the company through the establishment, or

ii

as a result of assets being used or held for the purposes of the establishment or being acquired for use by or for the purposes of the establishment.

20Profits attributable to permanent establishment: introduction

1

Sections 21 to 32 apply for the purpose of determining the amount of profits of a non-UK resident company that are attributable to a permanent establishment of the company in the United Kingdom.

2

Sections 21 to 28 contain provision about the separate enterprise principle.

3

See also paragraph 5A of Schedule 26 to FA 2003 (non-resident companies: transactions through broker, investment manager or Lloyd’s agent), which provides for profits of certain investment transactions to be disregarded in determining the amount of profits attributable to a permanent establishment.

The separate enterprise principle

21The separate enterprise principle

1

The profits of the non-UK resident company that are attributable to the permanent establishment are those that the establishment would have made if it were a distinct and separate enterprise which—

a

engaged in the same or similar activities under the same or similar conditions, and

b

dealt wholly independently with the non-UK resident company.

2

In applying subsection (1) assume that—

a

The separate enterprise principle: application to non-UK resident banks

25Non-UK resident banks: introduction

1

Sections 26 to 28 contain provision in relation to the application of the separate enterprise principle if the non-UK resident company is a bank.

2

Nothing in sections 26 to 28 is to be read as preventing similar principles to those provided for in those sections from applying when the separate enterprise principle is applied to a non-UK resident company that is not a bank.

3

In this section and those sections “bank” has the meaning given by section 840A of ICTA.

26Transfer of financial assets

1

This section applies if—

a

the non-UK resident company is a bank, and

b

there is a transfer of a loan or other financial asset between the permanent establishment and any other part of the company.

2

In accordance with the separate enterprise principle, the transfer is recognised only if it would have taken place between independent enterprises.

3

The transfer is not recognised if it cannot reasonably be considered that it is carried out for valid commercial reasons.

4

For this purpose the obtaining of a tax advantage is not a valid commercial reason.

the holding of capital is required for the financial risk (or would be required if the transaction were between parties at arm’s length).

28Borrowing: permanent establishment acting as agent or intermediary

1

This section applies if—

a

the non-UK resident company is a bank, and

b

the permanent establishment borrows funds for the purposes of another part of the company and (in relation to that borrowing) acts only as an agent or intermediary.

2

In accordance with the separate enterprise principle—

a

the profits attributable to the permanent establishment, and

b

the capital attributable to the permanent establishment under section 21(2)(b),

are to be those appropriate in the case of an agent acting at arm’s length, taking into account the risks and costs borne by the establishment.

Rules about deductions

29Allowable deductions

1

A deduction is allowed for any allowable expenses incurred for the purposes of the permanent establishment.

2

Expenses incurred for the purposes of the permanent establishment include executive and general administrative expenses so incurred, whether in the United Kingdom or elsewhere.

3

It does not matter whether the expenses are incurred by, or reimbursed by, the permanent establishment.

4

The amount of expenses to be taken into account under subsection (1) is the actual cost to the non-UK resident company.

5

“Allowable expenses” means expenses of a kind in respect of which a deduction would be allowed for corporation tax purposes if incurred by a UK resident company.

30Restriction on deductions: costs

No deduction is allowed for costs in excess of those which would have been incurred on the assumptions in section 21(2).

31Restriction on deductions: payments in respect of intangible assets

1

No deduction is allowed for royalties paid, or other similar payments made, by the permanent establishment to any other part of the non-UK resident company in respect of the use of intangible assets held by the company.

2

This does not prevent a deduction for any contribution by the permanent establishment to the costs of creation of an intangible asset.

3

In this section “intangible asset” has the meaning it has for accounting purposes, and includes any intellectual property (as defined in section 712(3)).

32Restriction on deductions: interest or other financing costs

1

No deduction is allowed for payments of interest or other financing costs by the permanent establishment to any other part of the non-UK resident company.

Chapter 16 contains rules that give priority to provisions outside this Part in relation to certain matters that fall within it.

4

This Part needs to be read with Parts 19 (general exemptions) and 20 (general calculation rules).

Chapter 2Income taxed as trade profits

Charge to tax on trade profits

35Charge to tax on trade profits

The charge to corporation tax on income applies to the profits of a trade.

to farming or market gardening (which is dealt with by section 36),

b

if the land is being prepared for forestry purposes,

c

if the land comprises woodlands (which is dealt with by section 37), or

d

to the occupation by an insurance company of land which is an asset of the company’s long-term insurance fund.

39Profits of mines, quarries and other concerns

1

Profits or losses arising out of land in the case of a concern to which this section applies are calculated as if the concern were a trade.

2

Any profits arising out of the land are treated for the purposes of clause 35 as profits of a trade.

3

Any losses arising out of the land are treated for the purposes of Chapters 2 and 4 of Part 10 of ICTA (loss relief and group relief) as losses of a trade carried on in the United Kingdom.

4

The concerns to which this section applies are—

a

mines and quarries (including gravel pits, sand pits and brickfields),

b

ironworks, gasworks, salt springs or works, alum mines or works, waterworks and streams of water,

c

canals, inland navigation, docks and drains or levels,

d

rights of fishing,

e

rights of markets and fairs, tolls, bridges and ferries,

f

railways and other kinds of way, and

g

a concern of the same kind as one specified in paragraph (b), (c), (d) or (e).

5

But this section does not apply to a concern—

a

if it is carried on by an insurance company on land which is an asset of the company’s long-term insurance fund, or

b

if section 38 (commercial occupation of land other than woodlands) applies to the occupation of the land out of which the profits or losses arise.

40Credit unions

1

If a credit union—

a

makes loans to its members, or

b

invests its surplus funds (by placing them on deposit or otherwise),

the activities are, or are part of, a trade, and

c

receipts from, and expenses of, lettings of caravans or pitches for caravans on the site would otherwise be brought into account in calculating the profits of a property business of the trader.

2

The trader may instead bring both the receipts and the expenses into account in calculating the profits of the trade.

3

But if the conditions in subsection (1)(a) and (b) are met for only part of an accounting period of the trader, subsection (2) applies only to the receipts and expenses that would otherwise be brought into account in calculating the profits of the property business for that part of the accounting period.

4

In this section—

“caravan site” means—

land on which a caravan is stationed for the purposes of human habitation, and

land which is used in conjunction with land on which a caravan is so stationed, and

“letting” includes a licence to occupy.

44Surplus business accommodation

1

This section applies if—

a

a company (“the trader”) carrying on a trade obtains receipts from a letting of business accommodation that is temporarily surplus to requirements (see subsections (3) and (4)),

b

the accommodation is not held as trading stock,

c

the receipts are in respect of part of a building of which another part is used to carry on the trade,

d

the receipts are relatively small, and

e

the receipts, and the expenses of the letting, would otherwise be brought into account in calculating the profits of a property business of the trader.

2

The trader may instead bring both the receipts and the expenses into account in calculating the profits of the trade.

3

Accommodation is temporarily surplus to requirements only if—

a

it has been used within the last 3 years to carry on the trade or acquired within the last 3 years,

b

the trader intends to use it to carry on the trade at a later date, and

c

the letting is for a term of not more than 3 years.

4

If accommodation is temporarily surplus to requirements at the beginning of an accounting period, it continues to be temporarily surplus to requirements until the end of that period.

5

If under this section any of the receipts from and expenses of a letting are brought into account in calculating the profits of the trade, all subsequent receipts from and expenses of the letting must be dealt with in the same way (but only so long as this section continues to apply).

6

In this section “letting” includes a licence to occupy.

45Payments for wayleaves

1

This section applies if—

a

a company (“the trader”) carries on a trade on some or all of the land to which a wayleave relates,

b

rent is receivable, or expenses are incurred, by the trader in respect of the wayleave, and

otherwise laying down special rules for the calculation of the profits of a particular description of business.

47Losses calculated on same basis as profits

1

The same rules apply for corporation tax purposes in calculating losses of a trade as apply in calculating profits.

2

This is subject to any express provision to the contrary.

48Receipts and expenses

1

In the Corporation Tax Acts, in the context of the calculation of the profits of a trade, references to receipts and expenses are to any items brought into account as credits or debits in calculating the profits.

2

It follows that references in that context to receipts or expenses do not imply that an amount has actually been received or paid.

3

This section is subject to any express provision to the contrary.

49Items treated as receipts and expenses

iv

section 1304 (crime-related payments).

The steps must be taken by reference to the number of days in the periods concerned.

by way of impairment loss, or

b

so far as the debt is released wholly and exclusively for the purposes of the trade as part of a statutory insolvency arrangement.

3

In this section “non-money debt” means a debt which is not a money debt for the purposes of Part 5 (loan relationships).

56Car or motor cycle hire

1

Subsection (2) applies if, in calculating the profits of a trade, a deduction is allowed for expenses incurred on the hiring of a car or motor cycle—

a

which is not a qualifying hire car or motor cycle (see section 57(2)), and

b

the retail price of which when new exceeds £12,000.

2

The amount of the deduction which would otherwise be allowable is reduced by multiplying the amount by the fraction—

£12,000+RP2×RP math

where RP is the retail price of the car or motor cycle when new.

3

Subsection (4) applies if a deduction is reduced as a result of subsection (2), or a corresponding provision, and subsequently—

a

there is a rebate (however described) of the hire charges, or

b

a debt in respect of any of the hire charges is released otherwise than as part of a statutory insolvency arrangement.

4

The amount that, as a result of the rebate or release—

a

is brought into account as a receipt of the trade, or

b

is treated as a post-cessation receipt under section 193 (debts released after cessation),

is reduced by multiplying it by the fraction in subsection (2).

5

In this section “corresponding provision” means—

a

section 1251(2) (car or motor cycle hire: expenses of management),

b

section 48(2) of ITTOIA 2005 (car or motor cycle hire: trade profits and property income), or

c

section 76ZN(2) of ICTA (car or motor cycle hire: expenses of insurance companies).

6

The power under section 74(4) of CAA 2001 to increase or further increase the sums of money specified in Chapter 8 of Part 2 of CAA 2001 includes the power to increase or further increase the sum of money specified in subsection (1)(b) or (2).

goods are bailed (or in Scotland hired) in return for periodical payments by the person to whom they are bailed or hired, and

b

the property in the goods will pass to that person if the terms of the agreement are complied with and one or more of the following events occurs,

but does not include a conditional sale agreement (see subsection (5)).

4

The events are—

a

the exercise of an option to purchase by that person,

b

the doing of any other specified act by any party to the agreement, and

c

the happening of any other specified event.

5

A “conditional sale agreement” means an agreement for the sale of goods under which—

a

the purchase price or part of it is payable by instalments, and

b

the goods are to remain the property of the seller (even though they are to be in the possession of the buyer) until specified conditions as to the payment of instalments or otherwise are met.

6

In this section and section 56 “new” means unused and not second-hand.

58Hiring cars (but not motor cycles) with low CO2 emissions before 1 April 2013

1

Section 56 does not apply to expenses incurred on the hiring of—

a

a car with low CO2 emissions, or

b

an electrically-propelled car,

if the period of hire began before 1 April 2013 under a contract entered into before that date.

2

For this purpose—

“car with low CO2 emissions” has the meaning given by section 45D of CAA 2001, and

“electrically-propelled car” has the meaning given by that section.

59Patent royalties

In calculating the profits of a trade, no deduction is allowed for royalties or other sums paid for the use of patents.

60Expenditure on integral features

Section 33A(3) of CAA 2001 provides that no deduction is allowed in respect of certain expenditure on an integral feature of a building or structure (within the meaning of that section).

Chapter 5Trade profits: rules allowing deductions

Pre-trading expenses

61Pre-trading expenses

1

This section applies if a company incurs expenses for the purposes of a trade before (but not more than 7 years before) the date on which the company starts to carry on the trade (“the start date”).

2

If, in calculating the profits of the trade—

a

no deduction would otherwise be allowed for the expenses, but

b

a deduction would be allowed for them if they were incurred on the start date,

the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them).

3

This section does not apply to any expenses in relation to which—

a

any debit falls, or

b

any debit would fall but for section 330 (loan relationships: debits in respect of pre-trading expenditure),

to be brought into account for the purposes of Part 5 (loan relationships).

Tenants under taxed leases

62Tenants under taxed leases: introduction

1

Sections 63 to 67 apply if land used in connection with a trade is subject to a taxed lease.

2

Section 63 (tenants occupying land for purposes of trade treated as incurring expenses) applies in calculating the profits of a trade carried on by the tenant under the taxed lease for the purpose of making deductions for the expenses of the trade.

3

But any deduction for an expense under section 63 is subject to the application of any provision of Chapter 4 of this Part.

4

In this section and sections 63 to 67 the following expressions have the same meaning as in Chapter 4 of Part 4 (profits of property businesses: lease premiums etc)—

“receipt period” (see section 228(6)),

“taxed lease” (see section 227(4)),

“taxed receipt” (see section 227(4)), and

“unreduced amount” (see section 230(2)).

5

Section 230(3) and (4) (unreduced amount of taxed receipt under section 217 as a result of section 218) applies for the purposes of sections 63 to 67.

6

In the application of sections 66 and 67 to Scotland—

a

references to a lease being granted out of a taxed lease are to the grant of a sublease of land subject to the taxed lease, and

b

references to the lease so granted are to be read as references to the sublease.

63Tenants occupying land for purposes of trade treated as incurring expenses

1

The tenant under the taxed lease is treated as incurring an expense of a revenue nature in respect of the land subject to the taxed lease for each qualifying day.

2

If there is more than one taxed receipt, this section applies separately in relation to each of them.

3

A day is a “qualifying day”, in relation to a taxed receipt, if it is a day—

a

that falls within the receipt period of the taxed receipt, and

b

on which the tenant occupies the whole or part of the land subject to the taxed lease for the purposes of carrying on a trade.

4

If on the qualifying day the tenant occupies the whole of the land subject to the taxed lease for the purposes of the trade, the amount of the expense for the qualifying day by reference to the taxed receipt is given by the formula—

ATRP math

where—

A is the unreduced amount of the taxed receipt, and

TRP is the number of days in the receipt period of the taxed receipt.

5

If on the qualifying day the tenant occupies part of the land subject to the taxed lease for the purposes of the trade, the amount of the expense for the qualifying day by reference to the taxed receipt is given by the formula—

F×ATRP math

where—

F is the fraction of the land that is so occupied calculated on a just and reasonable basis, and

A and TRP have the same meaning as in subsection (4).

6

This section is subject to section 64 (limit on deductions if tenant entitled to mineral extraction allowance).

64Limit on deductions if tenant entitled to mineral extraction allowance

1

This section applies if the tenant under the taxed lease has become entitled, in respect of expenditure on the acquisition of an interest in the land subject to the taxed lease, to an allowance for an accounting period under Part 5 of CAA 2001 (mineral extraction allowances) in respect of expenditure falling within section 403 of that Act (qualifying expenditure on acquiring a mineral asset).

2

If the allowance is in respect of the whole of the expenditure, no deduction is allowed for expenses under section 63 for a qualifying day falling within that or a later accounting period.

3

If the allowance is in respect of only part of the expenditure (“the allowable part”) the amount of the deduction for expenses under section 63 for a qualifying day falling within that or a later accounting period is calculated by multiplying the amount that, apart from this section, would be the amount of the deduction for the qualifying day by—

WE-APWE math

where—

WE is the whole of the expenditure, and

AP is the allowable part of the expenditure.

65Tenants dealing with land as property employed for purposes of trade

1

This section applies if the tenant under the taxed lease—

a

does not occupy the land subject to the taxed lease, or a part of it, but

b

deals with its interest in the land, or the part of it, as property employed for the purposes of carrying on a trade.

2

Section 63 applies as if the land or the part of it were occupied by the tenant for the purposes of the trade.

3

But the tenant is not treated as incurring an expense in respect of the land for a qualifying day as a result of this section so far as the tenant is treated as incurring an expense under section 232 (tenants under taxed leases treated as incurring expenses) in respect of the land for the day in calculating the profits of the tenant’s property business.

4

This section is subject to sections 66 and 67 (restrictions on section 63 expenses where the additional calculation rule is relevant).

66Restrictions on section 63 expenses: lease premium receipts

1

This section applies if a lease has been granted out of the taxed lease and—

a

in calculating the amount of a receipt of a property business under Chapter 4 of Part 4 (profits of property businesses: lease premiums etc) in respect of the lease, there is a reduction under section 228 (the additional calculation rule) by reference to the taxed receipt, or

b

in calculating the amount of a receipt of a property business under Chapter 4 of Part 3 of ITTOIA 2005 (profits of property businesses: lease premiums etc) in respect of the lease, there is a reduction under section 288 of that Act (the additional calculation rule) by reference to the taxed receipt.

In this section and section 67 the receipt that is so reduced is referred to as a “lease premium receipt”.

2

Subsections (3) to (5) provide for the application of section 63 as a result of section 65 for a qualifying day that falls within the receipt period of the lease premium receipt.

3

The tenant under the taxed lease is treated as incurring an expense under section 63 as a result of section 65 for the qualifying day by reference to the taxed receipt only if the daily amount of the taxed receipt exceeds the daily reduction of the lease premium receipt.

4

If the condition in subsection (3) is met, the amount of that expense for the qualifying day by reference to the taxed receipt is equal to that excess.

5

If the qualifying day falls within the receipt period of more than one lease premium receipt, the reference in subsection (3) to the daily reduction of the lease premium receipt is to be read as a reference to the total of the daily reductions of each of the lease premium receipts whose receipt period includes the qualifying day.

6

In this section—

the “daily amount” of the taxed receipt is given by the formula—

ATRP math

where—

A is the unreduced amount of the taxed receipt, and

TRP is the number of days in the receipt period of the taxed receipt, and

the “daily reduction” of a lease premium receipt is given by the formula—

ARRRP math

where—

AR is the reduction under section 228 below or section 288 of ITTOIA 2005 by reference to the taxed receipt, and

RRP is the number of days in the receipt period of the lease premium receipt.

7

In this section references to a reduction under section 228 below or section 288 of ITTOIA 2005 by reference to a taxed receipt have the same meaning as in Chapter 4 of Part 4 (see section 230(6)).

8

Section 67 explains how this section operates if the lease does not extend to the whole of the premises subject to the taxed lease.

67Restrictions on section 63 expenses: lease of part of premises

1

This section applies if—

a

section 66 applies, and

b

the lease granted out of the taxed lease does not extend to the whole of the premises subject to the taxed lease.

2

Subsections (3) to (5) apply for a qualifying day that falls within the receipt period of the lease premium receipt.

3

Sections 63, 65 and 66 apply separately in relation to the part of the premises subject to the lease and to the remainder of the premises.

4

If—

a

more than one lease that does not extend to the whole of the premises subject to the taxed lease has been granted out of the taxed lease, and

b

the qualifying day falls within the receipt period of two or more lease premium receipts that relate to different leases,

sections 63, 65 and 66 apply separately in relation to each part of the premises subject to a lease to which such a lease premium receipt relates and to the remainder of the premises.

5

Where sections 63, 65 and 66 apply in relation to a part of the premises, A becomes the amount calculated by multiplying the unreduced amount of the taxed receipt by the fraction of the premises constituted by the part.

6

This fraction is calculated on a just and reasonable basis.

Renewals

68Replacement and alteration of trade tools

on a basis that is stated and intended to be temporary.

2

In calculating the profits of the trade, a deduction is allowed for expenses of the employer that are attributable to the employee’s employment during the period of the secondment.

3

In this section—

“educational establishment” means—

in England and Wales, any of the bodies mentioned in section 71(1),

in Scotland, any of the bodies mentioned in section 71(2),

in Northern Ireland, any of the bodies mentioned in section 71(3), and

any other educational body which is for the time being approved for the purposes of this section by the Secretary of State or, in Northern Ireland, the Department of Education, and

“the period of the secondment” means the period for which the employee’s services are made available to the charity or educational establishment.

71Educational establishments

conditions A to D for the purposes of section 310 of ITEPA 2003 (employment income exemptions: counselling and other outplacement services), and

b

in the case of travel expenses, condition E for those purposes.

74Retraining courses

1

In calculating the profits of a trade, a deduction is allowed for retraining course expenses if—

a

the company carrying on the trade (“the employer”) incurs the expenses,

b

they are incurred in relation to a person (“the employee”) who holds or has held an office or employment under the employer for the purposes of the trade, and

c

the relevant conditions are met.

2

In this section—

“retraining course expenses” means expenses incurred in the payment or reimbursement of retraining course expenses within the meaning given by section 311(2) of ITEPA 2003, and

“the relevant conditions” means—

the conditions in subsections (3) and (4) of section 311 of ITEPA 2003 (employment income exemptions: retraining courses), and

Part 12 of the Employment Rights (Northern Ireland) Order 1996 (S.I. 1996/1919 (N.I. 16)).

3

For the purposes of this section and those sections—

“contractual payment” means a payment which, under an agreement, an employer is liable to make to an employee on the termination of the employee’s contract of employment, and

a contractual payment is “approved” if, in respect of that agreement, an order is in force under—

section 157 of the Employment Rights Act 1996, or

Article 192 of the Employment Rights (Northern Ireland) Order 1996.

77Payments in respect of employment wholly in employer’s trade

1

This section applies if—

a

the payment is in respect of the employee’s employment wholly in the employer’s trade, and

b

no deduction would otherwise be allowable for the payment.

2

In calculating the profits of the trade, a deduction is allowed under this section for the payment.

3

The deduction under this section for an approved contractual payment must not exceed the amount which would have been due to the employee if a redundancy payment had been payable.

4

If the payment is made after the employer has permanently ceased to carry on the trade, it is treated as made on the last day on which the employer carried on the trade.

5

If there is a partnership change, subsection (4) does not apply so long as a company carrying on the trade in partnership immediately before the change continues to carry it on in partnership after the change.

6

The reference in subsection (5) to a partnership change is to a change in the persons carrying on the trade in circumstances where the trade is carried on by persons in partnership immediately before or immediately after the change (or at both those times).

7

The deduction under this section is allowed for the accounting period in which the payment is made (or treated under subsection (4) as made).

78Payments in respect of employment in more than one capacity

1

This section applies if the payment is in respect of the employee’s employment with the employer—

a

partly in the employer’s trade, and

b

made by the employer.

Contributions to local enterprise organisations or urban regeneration companies

b

if the contributor has permanently ceased to carry on the trade before the benefit is received, is treated as a post-cessation receipt (see Chapter 15).

7

In this section “disqualifying benefit” means a benefit the expenses of obtaining which, if incurred by the contributor directly in a transaction at arm’s length, would not be allowable as a deduction in calculating the profits of the trade.

83Meaning of “local enterprise organisation”

1

For the purposes of section 82 “local enterprise organisation” means—

a

a local enterprise agency,

b

a training and enterprise council,

c

a Scottish local enterprise company, or

d

a business link organisation.

2

“Local enterprise agency” means a body for the time being approved as a local enterprise agency for the purposes of section 82 by the relevant national authority, that is to say by—

a

the Secretary of State (in relation to England or Northern Ireland),

b

the Scottish Ministers (in relation to Scotland), or

c

the Welsh Ministers (in relation to Wales).

For further provision about approvals by the relevant national authority, see sections 84 and 85.

3

“Training and enterprise council” means a body with which the Secretary of State has an agreement under which the body is to carry out the functions of a training and enterprise council.

4

“Scottish local enterprise company” means a company with which—

a

Scottish Enterprise, or

b

Highlands and Islands Enterprise,

has an agreement under which the company is to carry out the functions of a local enterprise company.

5

“Business link organisation” means a person authorised by or on behalf of the Secretary of State to use a trade mark designated by the Secretary of State for the purposes of this subsection.

reasonable rent for premises,

does not count as a payment or transfer of income or profit for the purposes of subsection (5).

85Supplementary provisions with respect to approvals

1

This section applies for the purposes of section 84.

2

The relevant national authority may give a body approval that is conditional on its compliance with such requirements as to—

a

accounts,

b

provision of information, and

c

other matters,

as the relevant national authority considers appropriate.

3

If the relevant national authority approves a body on the basis that it has or is about to have a separate fund (see section 84(3)(b))—

a

the approval must specify the fund, and

b

section 82 applies only to a contribution to the body made wholly to or for the purposes of the fund.

4

The relevant national authority must withdraw the approval of a body as a local enterprise agency if—

a

condition A or B in section 84 is no longer met, or

b

the body is failing to comply with a requirement imposed as a condition of its approval.

5

The relevant national authority must give notice of withdrawal to the body concerned, specifying the date from which the withdrawal takes effect (which may be earlier than the date on which the notice is given).

86Meaning of “urban regeneration company”

1

For the purposes of section 82 “urban regeneration company” means any body of persons which the Treasury by order designates as an urban regeneration company for the purposes of that section.

2

A body may be so designated only if—

a

its sole or main function is to co-ordinate the regeneration of a specific urban area in the United Kingdom,

b

it is expected to seek to perform that function by creating a plan for the development of that area and trying to secure that the plan is carried into effect, and

c

in co-ordinating the regeneration of that area, it is expected to work together with some or all local or other public authorities which exercise functions in relation to the whole or part of that area.

3

An order under this section may be framed so as to take effect on a date earlier than the making of the order, but not earlier than 3 months before the date on which the order is made.

Scientific research

87Expenses of research and development

1

If a company carrying on a trade incurs expenses of a revenue nature on research and development—

a

related to the trade, and

b

directly undertaken by or on behalf of the company,

a deduction is allowed for the expenses in calculating the profits of the trade.

2

For this purpose expenses incurred on research and development—

a

do not include expenses incurred in the acquisition of rights in, or arising out of, research and development, but

b

subject to that, include all expenses incurred in carrying out, or providing facilities for carrying out, research and development.

3

The reference in this section to research and development related to a trade includes—

a

research and development which may lead to or facilitate an extension of the trade, and

b

research and development of a medical nature which has a special relation to the welfare of workers employed in the trade.

4

The same expenses may not be brought into account under this section in relation to more than one trade.

5

In this section “research and development” has the meaning given by section 837A of ICTA and includes oil and gas exploration and appraisal.

88Payments to research associations, universities etc

1

If a company carrying on a trade—

a

pays any sum to an Association in the case of which exemption may be claimed under section 508 of ICTA and which has as its object the undertaking of research and development which may lead to or facilitate an extension of the appropriate class of trade, or

b

any activities constitute or constituted scientific research, an officer of Revenue and Customs must refer the question for decision to the Secretary of State, whose decision is final.

7

The same expenses may not be brought into account under this section in relation to more than one trade.

Expenses connected with patents, designs and trade marks

89Expenses connected with patents

In calculating the profits of a trade, a deduction is allowed for expenses incurred—

a levy imposed under the Financial Services Compensation Scheme,

c

a payment required under rules made under section 234 of FISMA 2000,

d

a payment required under the rules referred to in paragraph 14(1) of Schedule 17 to FISMA 2000 in accordance with paragraph 15(1) of that Schedule, or

e

a payment required in accordance with the standard terms fixed under paragraph 18 of that Schedule (other than a sum paid as a result of an award of costs under costs rules).

Chapter 6Trade profits: receipts

Capital receipts

93Capital receipts

1

Items of a capital nature must not be brought into account as receipts in calculating the profits of a trade.

2

But this does not apply to items which, as a result of any provision of the Corporation Tax Acts, are brought into account as receipts in calculating the profits of the trade.

Debts released

94Debts incurred and later released

are brought into account in calculating the profits of the transferee’s trade in the accounting period in which they are received.

3

Any sums mentioned in subsection (1)(b) which are received after the transferor has permanently ceased to carry on the trade are not post-cessation receipts (see Chapter 15).

Reverse premiums

96Reverse premiums

1

For the purposes of sections 98 and 99 a payment or other benefit is a reverse premium if—

a

conditions A, B and C are met, and

b

it is not excluded by section 97.

2

Condition A is that a company (“the recipient”) receives the payment or other benefit by way of inducement in connection with a transaction being entered into by—

a

3

A payment or other benefit is not a reverse premium so far as it is consideration for the transfer of an estate or interest in land which constitutes the sale in a sale and leaseback arrangement.

4

A “sale and leaseback arrangement” means any such arrangement as is described in section 779(1) or (2) or 780(1) of ICTA.

98Tax treatment of reverse premiums

1

A reverse premium is treated for corporation tax purposes as a receipt of a revenue nature.

2

If the recipient enters into the property transaction for the purposes of a trade carried on (or to be carried on) by the recipient, the reverse premium is brought into account in calculating the profits of the trade.

3

If subsection (2) does not apply, the reverse premium is charged to corporation tax in accordance with section 250 (reverse premium taxed as property business receipt).

99Arrangements not at arm’s length

1

This section applies if—

a

two or more of the parties to the property arrangements are connected persons, and

b

the terms of those arrangements are not such as would reasonably have been expected if those persons had been dealing at arm’s length.

2

The terms of the property arrangements meet the condition in subsection (1)(b) if they differ to a significant extent from the terms which, at the time the arrangements were entered into, would be regarded as normal and reasonable—

a

in the market conditions then prevailing, and

b

between persons dealing with each other at arm’s length in the open market.

3

The whole amount or value of the reverse premium brought into account under section 98 is brought into account in the first relevant period of account.

4

“The first relevant period of account” means the period of account in which the property transaction is entered into.

5

However if the recipient enters into the property transaction for the purposes of a trade—

a

which is not then carried on by the recipient, but

b

which the recipient subsequently starts to carry on,

is not carrying on the trade at the time the money or money’s worth is received, but

b

was doing so at the time of the payment to the mutual concern,

the amount or value of the money or money’s worth is treated as a post-cessation receipt (see Chapter 15).

4

For the purposes of this section money or money’s worth represents assets of a mutual concern if it—

a

forms part of the assets of the concern,

b

forms part of the consideration for the transfer of the assets of the concern as part of a scheme of amalgamation or reconstruction which involves its winding up, or

c

consists of the consideration for a transfer or surrender of a right to receive anything falling within paragraph (a) or (b) and does not give rise to a charge to corporation tax on the company receiving it otherwise than as a result of this section.

5

If a transfer or surrender of a right to receive anything which—

a

forms part of the assets of a mutual concern, or

b

forms part of the consideration for the transfer of the assets of a mutual concern,

is not at arm’s length, the company making the transfer or surrender is treated as receiving consideration equal to the value of the right.

6

In this section references to a mutual concern are to a body corporate which has at any time carried on a trade which consists of or includes the conduct of mutual business (whether or not confined to the members of the body corporate).

7

For the purposes of this section a trade does not consist of or include the conduct of mutual business if all the profits of the trade are chargeable to corporation or income tax.

102Industrial development grants

1

This section applies if a company carrying on a trade receives a payment by way of a grant under—

a

a

any provision made by virtue of section 136(7) or 214(1)(e) of FISMA 2000, or

b

any provision made by scheme rules for fees to be refunded in specified circumstances.

4

In this section “scheme rules” means the rules referred to in paragraph 14(1) of Schedule 17 to FISMA 2000.

Chapter 7Trade profits: gifts to charities etc

Relief for certain gifts

105Gifts of trading stock to charities etc

1

This section applies if a company carrying on a trade (“the donor”) gives an article for the purposes of—

a

a charity, a registered club or a body listed in subsection (4), or

b

a designated educational establishment (see section 106),

and the article is one manufactured, or of a class or description sold, by the donor in the course of the trade.

2

In calculating the profits of the trade, no amount is required to be brought into account as a receipt in consequence of the disposal of the article.

3

In this section “registered club” has the meaning given by paragraph 1 of Schedule 18 to FA 2002 (relief for community amateur sports clubs).

4

The bodies referred to in subsection (1)(a) are—

a

the Trustees of the National Heritage Memorial Fund,

b

the Historic Buildings and Monuments Commission for England, and

c

the National Endowment for Science, Technology and the Arts.

5

This section needs to be read with section 108 (receipt of benefits by donor or connected person).

are subject to negative resolution within the meaning of section 41(6) of the Interpretation Act (Northern Ireland) 1954 (c. 33 (N.I.)).

107Gifts of medical supplies and equipment

1

This section applies if—

a

a company carrying on a trade makes a gift from trading stock of medical supplies or medical equipment,

b

it makes the gift for humanitarian purposes, and

c

the supplies or equipment are for human use.

2

In calculating the profits of the trade, no amount is required to be brought into account as a receipt in consequence of the gift.

3

In calculating the profits of the trade, a deduction is allowed for any costs of transportation, delivery or distribution incurred by the company in making the gift.

4

The deduction is allowed for the accounting period in which the costs are incurred.

5

The Treasury may by order provide that this section is not to have effect in relation to medical supplies or medical equipment of any description specified in the order.

6

This section needs to be read with section 108 (receipt of benefits by donor or connected person).

Benefits associated with gifts

108Receipt of benefits by donor or connected person

1

This section applies if a company carrying on a trade makes a gift in relation to which relief is given under—

a

section 105,

b

section 107(2), or

c

section 63(2) of CAA 2001 (gifts to charities etc of plant or machinery used in the trade),

and the company, or a person connected with the company, receives a benefit which is in any way attributable to the making of the gift.

2

This section also applies if—

a

relief is given under section 107(3) for costs of transportation, delivery or distribution incurred by a company carrying on a trade, and

b

the company, or a person connected with the company, receives a benefit which is in any way attributable to the company’s incurring of those costs.

3

An amount equal to the value of the benefit—

a

is brought into account in calculating the profits of the trade, as a receipt of the trade arising in the accounting period in which the benefit is received, or

b

if the company has permanently ceased to carry on the trade before the benefit is received, is treated as a post-cessation receipt (see Chapter 15).

Chapter 8Trade profits: herd basis rules

Introduction

109Election for application of herd basis rules

1

A company, or a firm of which a company is a member, which keeps or has kept a production herd for the purposes of a trade may make an election under this Chapter (a “herd basis election”).

2

In calculating the profits of the trade, animals which are part of a production herd in relation to which a herd basis election has effect—

a

are not treated as trading stock (see section 50), but

b

are treated instead in accordance with sections 112 to 121 (“the herd basis rules”).

3

This Chapter is expressed in terms of farmers but applies to any company, or firm of which a company is a member, which keeps or has kept a production herd for the purposes of a trade, whether or not the trade is farming.

4

References in this Chapter to keeping a production herd are to keeping it for the purposes of the trade.

in relation to animals kept singly as it applies in relation to herds, and

b

in relation to shares in animals as it applies in relation to animals themselves.

in any other case, when they produce their first young.

6

20% or more of a herd is a substantial part of the herd, but a lesser percentage than 20% is capable of being a substantial part of the herd depending on the circumstances of the case concerned.

The herd basis rules

112Initial cost of herd and value of herd

1

In calculating the profits of the trade, no deduction is allowed for the initial cost of the herd.

2

In calculating the profits of the trade, the value of the herd is not brought into account.

113Addition of animals to herd

1

This section applies for the purpose of calculating the profits of the trade if an animal is added to the herd, unless it replaces another animal in the herd.

2

No deduction is allowed for the cost of the animal.

3

If, immediately before it was added to the herd, the animal was part of the farmer’s trading stock, the balancing amount is brought into account as a receipt.

4

“The balancing amount” means—

a

in the case of an animal bred by the farmer, the cost of breeding the animal and rearing it to maturity, and

b

in any other case, the sum of the initial cost of acquiring the animal and the cost (if any) incurred by the farmer in rearing the animal to maturity.

114Replacement of animals in herd

1

This section applies for the purpose of calculating the profits of the trade if—

a

an animal (“the old animal”) is sold from the herd or otherwise ceases to be part of the herd, and

b

it is replaced in the herd by another animal (“the new animal”).

2

The sale proceeds (if any) of the old animal are brought into account as a receipt.

3

But this needs to be read with—

a

d

another public authority.

4

If, immediately before it was added to the herd, the new animal was part of the farmer’s trading stock, “the equivalent amount for the new animal” means—

a

in the case of an animal bred by the farmer, the cost of breeding the animal and rearing it to maturity, and

b

in any other case, the sum of the initial cost of acquiring the animal and the cost (if any) incurred by the farmer in rearing the animal to maturity.

5

Otherwise “the equivalent amount for the new animal” means the cost of the new animal.

116Sale of animals from herd

1

This section applies for the purpose of calculating the profits of the trade if an animal is sold from the herd unless—

a

it is replaced in the herd by another animal (see section 114), or

b

it is sold as part of the sale of the whole or a substantial part of the herd that takes place all at once or over a period not longer than 12 months (see section 117).

2

A profit arising from the sale is brought into account as a receipt.

3

A deduction is allowed for a loss arising from the sale.

4

The amount of the profit or loss is the difference between the sale proceeds of the animal and the deductible amount for the animal.

5

“The deductible amount for the animal” means—

a

in the case of an animal bred by the farmer, the cost of breeding the animal and rearing it to maturity,

b

in the case of an animal acquired by the farmer for valuable consideration, the sum of the initial cost to the farmer of acquiring the animal and the cost (if any) incurred by the farmer in rearing the animal to maturity, and

c

in the case of an animal acquired by the farmer but not for valuable consideration, the sum of the market value of the animal when acquired and the cost (if any) incurred by the farmer in rearing the animal to maturity.

117Sale of whole or substantial part of herd

1

This section applies for the purpose of calculating the profits of the trade if, either all at once or over a period not longer than 12 months, the herd or a substantial part of the herd is sold unless—

a

section 118 applies (acquisition of new herd begun within 5 years of sale), or

b

section 120 applies (replacement of part sold begun within 5 years of sale),

but paragraph (a) is subject to subsection (5) of section 118 (so far as that section provides for a case in which this section is to apply).

2

A profit arising from the sale is not brought into account as a receipt.

3

No deduction is allowed for a loss arising from the sale.

118Acquisition of new herd begun within 5 years of sale

1

This section applies for the purpose of calculating the profits of the trade if—

a

either all at once or over a period not longer than 12 months, the herd (“the old herd”) is sold, and

the farmer acquires or starts to acquire animals to replace the part sold within 5 years of the sale.

2

Section 114 (replacement of animals in herd) applies so far as the animals included in the part sold are replaced (but see section 121 (sale for reasons outside farmer’s control)).

3

The sale proceeds of an animal included in the part sold are not brought into account as a receipt until the animal that replaces it in the herd is acquired.

1

This section applies if a farmer—

any trade carried on by the transferee,

the animals transferred are treated as having been sold at the price which they would have fetched if sold in the open market.

Supplementary

126Information if election made

1

An officer of Revenue and Customs may by notice require the person carrying on a trade in relation to which a herd basis election is made to deliver a return of such information about—

a

the animals kept for the purposes of the trade, and

b

the products of those animals,

as may be required by the notice.

2

The return must be delivered to an officer of Revenue and Customs within the time specified in the notice.

127Further assessment etc if herd basis rules apply

1

If the herd basis rules apply in calculating the profits of an accounting period after an assessment for that period has become final and conclusive, any assessment or repayment of tax that is necessary to give effect to the rules must be made.

2

But repayment of tax is due only if a claim for it is made.

Chapter 9Trade profits: other specific trades

Dealers in securities etc

128Taxation of amounts taken to reserves

1

This section applies for the purpose of calculating the profits of a company’s trade if—

a

the company carries on a banking business, an insurance business or a business consisting wholly or partly of dealing in securities, and

b

a profit on the sale of securities held by the company would be brought into account in calculating the trading profits of that business.

2

Profits and losses from the securities that in accordance with generally accepted accounting practice are—

a

calculated by reference to the fair value of the securities, and

b

b

becomes entitled to receive such consideration,

subsection (4) applies as if the references to the original holding were to the proportion of the original holding given by the following fraction.

6

The fraction is—

NHNH+C math

where—

NH is the market value of the new holding at the time of the transaction, and

C is the market value of the consideration at the time of the transaction or (if the consideration is cash) the amount of the consideration.

7

In determining whether subsection (2)(a) applies as a result of section 135 or 136 of TCGA 1992, the reference to capital gains tax in section 137(1) of TCGA 1992 is to be read as a reference to income tax.

8

b

but for section 1305(1) (company’s profits to be computed without any deduction for distributions), a deduction would be allowed for the payment in calculating the profits of the trade.

4

A deduction is allowed for the payment in calculating the profits of the trade (despite section 1305(1)).

5

Subsections (1) to (4) do not apply to receipts, or payments, in the course of insurance business or any category of insurance business.

6

In this section “UK distribution” means a distribution made by a UK resident company.

Building societies

amounts paid or payable to the recipient,

on account of the recipient’s transactions with the society, and

c

those transactions are taken into account in calculating the society’s profits chargeable under this Part.

4

Condition B is that the sum mentioned in subsection (2) is calculated by reference to—

a

the amounts paid or payable by or to the recipient, or

b

the size of the transactions,

and not by reference to the amount of any share or interest in the capital of the society.

5

See also section 230A of ICTA (dividend or bonus to which this section applies is not treated as a distribution).

Credit unions

133Annual payments paid by a credit union

In calculating the profits of a credit union’s trade, no deduction is allowed for annual payments made by the credit union.

Dealers in land etc

134Purchase or sale of woodlands

1

This section applies for the purpose of calculating the profits of a trade of dealing in land.

2

If the company carrying on the trade buys woodlands in the United Kingdom in the course of the trade, the part of the cost of the woodlands which is attributable to trees or saleable underwood growing on the land is ignored.

3

If—

a

the woodlands are subsequently sold in the course of the trade, and

b

any of the trees or underwood are still growing on the land at the time of the sale,

the part of the price that is equal to the amount ignored under subsection (2) for those trees or that underwood is ignored.

135Relief in respect of mineral royalties

1

This section applies for the purpose of calculating the profits of a trade carried on by a UK resident company in an accounting period if the receipts of the trade include mineral royalties—

a

which the company is entitled to receive under a mineral lease or agreement, and

b

which are not chargeable to tax under Chapter 7 of Part 4 (rent receivable in connection with a UK section 39(4) concern) because of the priority rule in section 287.

2

The company is treated as entitled to receive only half of the total of the mineral royalties arising under the lease or agreement in the accounting period.

3

Sections 274 to 276 (meaning of “mineral lease or agreement” and “mineral royalties”) apply for the purposes of this section as they apply for the purposes of Chapter 7 of Part 4.

4

See also section 201 of TCGA 1992 (gains treated as accruing to a company entitled to receive mineral royalties).

136Lease premiums etc: reduction of receipts

1

This section applies for the purpose of calculating the profits of a trade of dealing in land if a receipt of the trade falls within one of the following categories—

a

lease premiums within section 217,

b

sums within section 219 (sums payable instead of rent),

c

sums within section 220 (sums payable for surrender of a lease),

d

sums within section 221 (sums payable for variation or waiver of terms of lease),

e

consideration for the assignment of a lease within section 222 (lease granted at an undervalue), and

f

amounts received on the sale of an estate or interest in land within section 224 (sales with right to reconveyance) or section 225 (sale and leaseback transactions).

2

The receipt is reduced by the relevant amount.

3

The relevant amount is the amount which is treated as a receipt of a property business as a result of any of sections 217 to 225.

4

But if—

a

the company carrying on the trade makes a claim under section 238 or 239, and

b

as a result of the claim a repayment of tax is made to that company,

5

In this section “deemed employment payment” and “intermediary” have the same meaning as in Chapter 8 of Part 2 of ITEPA 2003 (see sections 49 and 50 of that Act).

140Special rules for partnerships

b

any employer’s national insurance contributions paid by the MSC in respect of it,

may be made except in accordance with this section.

6

In this section the following expressions have the same meanings as in Chapter 9 of Part 2 of ITEPA 2003—

“deemed employment payment” (see section 61D(2) of that Act),

“employer’s national insurance contributions” (see section 61J(1) of that Act),

“managed service company” (see section 61B of that Act).

Waste disposal

142Deduction for site preparation expenditure

1

This section applies for the purpose of calculating the profits of a trade of a period of account in which waste materials are deposited on a waste disposal site if—

a

the company carrying on the trade (“the trader”), or a predecessor, has incurred site preparation expenditure in relation to the site in the course of carrying on the trade, and

b

at the time the trader first deposits waste materials on the site, the trader holds a waste disposal licence which is then in force.

2

A deduction is allowed for the amount of the site preparation expenditure allocated to the period of account under section 143.

3

For the purposes of this section “predecessor”, in relation to the trader, means a person who—

a

has ceased to carry on the trade carried on by the trader or ceased to carry on a trade so far as relating to the site, and

b

has transferred the whole of the site to the trader,

and it does not matter for this purpose whether or not the estate or interest in the site transferred to the trader is the same as that held by that person.

4

For the purposes of this section and section 143, if site preparation expenditure has been incurred by a predecessor—

a

the trade carried on by the trader is treated as the same as the trade carried on by the predecessor, and

b

deductions are to be allowed to the trader (and not to the predecessor) as if everything done to or by the predecessor were done to or by the trader.

5

For—

a

the meaning of “site preparation expenditure”, “waste disposal licence” and “waste disposal site”, and

b

a rule about pre-trading expenditure,

see section 144.

143Allocation of site preparation expenditure

1

The amount of site preparation expenditure allocated to a period of account for the purposes of section 142(2) is the amount given by the formula—

RE×WDSV+WD math

where—

RE means residual expenditure (see subsection (2)),

WD means the volume of waste materials deposited on the waste disposal site during the period, and

SV means the volume of the waste disposal site not used up for the deposit of waste materials at the end of the period.

2

“Residual expenditure” means the total of all site preparation expenditure incurred by the trader in relation to the waste disposal site at any time before the end of the period, less—

a

any of that expenditure for which an allowance has been, or may be, made for corporation or income tax purposes under the enactments relating to capital allowances,

b

any of that expenditure for which a deduction has been made in calculating for corporation or income tax purposes the profits of an earlier period of account, and

c

if the trader started to carry on the trade before 6 April 1989, the excluded amount of any unrelieved old expenditure (see subsections (3) and (4)).

3

The excluded amount of unrelieved old expenditure is calculated by multiplying the unrelieved old expenditure (see subsection (4)) by the fraction—

WDSV+WD math

where—

WD means the volume of waste materials deposited on the site before 6 April 1989, and

SV means the volume of the site not used up for the deposit of waste materials immediately before that date.

4

“Unrelieved old expenditure” means site preparation expenditure which—

a

was incurred by the trader in relation to the waste disposal site before 6 April 1989, and

b

does not fall within subsection (2)(a) or (b).

144Site preparation expenditure: supplementary

1

For the purposes of this section and sections 142 and 143 “waste disposal licence” means—

a

a disposal licence under Part 1 of the Control of Pollution Act 1974 (c. 40) or Part 2 of the Pollution Control and Local Government (Northern Ireland) Order 1978 (S.I. 1978/1049 (N.I. 19)),

b

a waste management licence under Part 2 of the Environmental Protection Act 1990 (c. 43) or any corresponding provision for the time being in force in Northern Ireland,

c

a permit under regulations under—

i

section 2 of the Pollution Prevention and Control Act 1999 (c. 24), or

ii

Article 4 of the Environment (Northern Ireland) Order 2002 (S.I. 2002/3153 (N.I. 7)),

d

an authorisation under the Radioactive Substances Act 1960 (c. 34) or the Radioactive Substances Act 1993 (c. 12) for the disposal of radioactive waste, or

e

a nuclear site licence under the Nuclear Installations Act 1965 (c. 57).

2

For the purposes of this section and sections 142 and 143—

“site preparation expenditure”, in relation to a waste disposal site, means expenditure incurred on preparing the site for the deposit of waste materials, and

“waste disposal site” means a site used, or to be used, for the disposal of waste materials by their deposit on the site.

3

For the purposes of sections 142 and 143, expenditure incurred for the purposes of a trade by a company about to carry on the trade is treated as if it were incurred—

a

on the date on which the company starts to carry on the trade, and

b

in the course of carrying it on.

2

References to the sale of land in a cemetery include the sale of a right of interment in land in a cemetery.

3

References to the sale of land in a memorial garden include the appropriation of part of a memorial garden in return for a dedication fee or similar payment.

4

“Ancillary capital expenditure” means capital expenditure incurred for the purposes of the trade by the company carrying on the trade (“the trader”), or a predecessor, on—

a

any building or structure (other than a dwelling-house) which is in the cemetery or memorial garden and is likely to have little or no value when the cemetery or memorial garden is full,

b

the purchase of an interest in, or the preparation of, any land taken up by such a building or structure, or

c

the purchase of an interest in, or the preparation of, any other land in the cemetery or memorial garden which is not suitable or adaptable for use for interments or memorial garden plots and which is likely to have little or no value when the cemetery or memorial garden is full.

5

“Predecessor”, in relation to the trader, means a person who carried on the trade at any time before the trader started to do so.

6

“Preparation”, in relation to land, means levelling or draining the land or making it suitable in some other way for use as a cemetery or memorial garden.

147Deduction for capital expenditure

1

4

Any purchase price paid on a sale in connection with a change in the persons carrying on the trade is ignored in calculating the amount of the deduction.

5

No deduction is allowed for any expenditure which is excluded by section 149 (exclusion of expenditure met by subsidies).

148Allocation of ancillary capital expenditure

1

The amount of ancillary capital expenditure allocated to the relevant period for the purposes of section 147(2)(b) is the amount given by the formula—

RE×PSRPAR+PSR math

where—

RE means residual expenditure (see subsection (2)),

PSR means the number of grave-spaces or memorial garden plots in the cemetery or memorial garden sold in the relevant period, and

PAR means the number of grave-spaces or memorial garden plots in the cemetery or memorial garden which are or could be made available for sale at the end of the relevant period.

2

“Residual expenditure” means the total of all ancillary capital expenditure incurred at any time before the end of the relevant period, less—

a

ancillary capital expenditure incurred on buildings or structures which were destroyed before the beginning of the first sale period,

b

the excluded amount of any remaining old expenditure (see subsection (3)),

c

if, after the beginning of the first sale period and before the end of the relevant period, an asset representing ancillary capital expenditure was sold or destroyed, the net sale proceeds or the compensation, and

d

any amount deducted under section 147(2)(b) above, or under section 170(2)(b) of ITTOIA 2005, for a period of account ending before the relevant period.

3

The excluded amount of remaining old expenditure is calculated by multiplying the remaining old expenditure by the fraction—

PSBPAB+PSB math

where—

PSB means the number of grave-spaces or memorial garden plots in the cemetery or memorial garden sold before the beginning of the basis period for the tax year 1954-55, and

PAB means the number of grave-spaces or memorial garden plots in the cemetery or memorial garden which were or could have been made available for sale immediately before the beginning of the basis period for that tax year.

4

In this section—

“compensation”, in relation to the destruction of an asset, means—

insurance money or other compensation received by the trader, or a predecessor, in respect of the destruction, and

money received for the remains of the asset by the trader or predecessor,

“the first sale period” means—

the period of account in which an interest in land in the cemetery or memorial garden was first sold for the purposes of the trade with a view to the land being used for the purpose of interments or for memorial garden plots, or

if later, the basis period for the tax year 1954-55, and

“remaining old expenditure” means ancillary capital expenditure which—

was incurred before the beginning of the basis period for the tax year 1954-55, and

does not fall within subsection (2)(a).

149Exclusion of expenditure met by subsidies

1

Expenditure is excluded for the purposes of section 147 so far as it has been, or is to be, met (directly or indirectly) by—

a

the Crown,

b

a government or local or other public authority (whether in the United Kingdom or elsewhere), or

c

any person other than the person incurring the expenditure.

2

This is subject to the following exceptions.

3

Expenditure is not excluded for the purposes of section 147 if it is met (directly or indirectly) by a grant—

a

made under Northern Ireland legislation, and

b

declared by the Treasury by an order under section 534 of CAA 2001 to correspond to a grant under Part 2 of the Industrial Development Act 1982 (c. 52).

4

Expenditure is not excluded for the purposes of section 147 if it is met (directly or indirectly) by—

a

insurance money, or

b

other compensation money,

1

i

a period for which accounts of the trade are made up, or

ii

if no accounts of the trade are made up for a period, an accounting period of the company.

2

In subsection (1)(a) “film” is to be read in accordance with section 1181.

Reserves of marketing authorities etc

153Reserves of marketing authorities and certain other statutory bodies

1

This section applies to a statutory body if its object (or one of its objects) is—

a

marketing an agricultural product, or

b

stabilising the price of an agricultural product.

2

Subsections (3) and (4) apply if the body is required, by or under an approved scheme or arrangement (“the scheme”), to pay the whole or part of any trading surplus into a reserve fund meeting the conditions specified in section 154.

3

Any sums which the body is required by or under the scheme to pay into the fund out of the profits of its trade are allowed as deductions in calculating the profits of the trade.

4

Any sums withdrawn by the body from the fund are taken into account as trading receipts, except so far as—

a

they are required, by or under the scheme, to be paid to a Minister or department,

b

they are distributed to producers of the product in question, or

c

they are refunded to persons who pay any levy or duty.

5

In this section—

“approved scheme or arrangement” means a scheme or arrangement approved by, or made with, a Minister or department,

“producers of the product” includes persons producing the product from another product,

“statutory body” means a body established by or under an enactment,

“trading surplus” means a surplus from the body’s trading operations or other trade receipts.

154Conditions to be met by reserve fund

1

These are the conditions to be met by the reserve fund (see section 153(2)).

2

The first condition is that no sum may be withdrawn from the fund without the authority or consent of a Minister or department.

3

d

a Minister within the meaning of the Northern Ireland Act 1998 (c. 47).

2

In sections 153 and 154 “department” means—

a

a government department,

b

a part of the Scottish Administration,

c

a part of the Welsh Assembly Government, or

d

a Northern Ireland department.

Chapter 10Trade profits: changes in trading stock

3

The cost is treated as being incurred on the date it became trading stock of the trade.

Other disposals and acquisitions not made in the course of trade

159Disposals not made in the course of trade

1

This section applies if—

a

trading stock of a trade is disposed of otherwise than in the course of the trade, and

b

section 157 does not apply.

2

In calculating the profits of the trade—

a

the amount which the stock disposed of would have realised if sold in the open market at the time of the disposal is brought into account as a receipt, and

b

any consideration obtained for it is left out of account.

3

The receipt is treated as arising on the date of the disposal.

4

This section is subject to section 161.

160Acquisitions not made in the course of trade

163Meaning of “trading stock”

1

In this Chapter “trading stock” means—

a

any property (whether land or other property) which is sold in the ordinary course of the trade or would be so sold if it were mature or its manufacture, preparation or construction were complete, or

b

materials used in the manufacture, preparation or construction of any property mentioned in paragraph (a).

2

In this Chapter “trading stock” includes also any services performed in the ordinary course of the trade—

a

the performance of which is wholly or partly completed at the time of the cessation, and

b

for which it would be reasonable to expect that a charge would be made if there were no cessation and, in the case of partly completed services, their performance were fully completed,

the buyer is not connected with the seller.

2

The value is taken to be the amount in fact realised on the sale.

3

If the stock is sold together with other assets, so much of the amount realised on the sale as, on a just and reasonable apportionment, is properly attributable to each asset is treated as the amount realised on the sale of that asset.

166Sale basis of valuation: sale to connected person

1

The value of trading stock is determined in accordance with this section if—

a

b

the buyer is connected with the seller, and

c

no election is made under section 167 (election by connected persons).

2

The value is taken to be the amount which would have been realised if the sale had been between independent persons dealing at arm’s length.

167Sale basis of valuation: election by connected persons

1

The value of trading stock is determined in accordance with this section if—

both of them are bodies corporate, or one of them is a firm and the other is a body corporate, and in either case some other person has control over both of them.

169Cost to buyer of stock valued on sale basis of valuation

1

This section applies for the purpose of calculating the profits of the trade carried on by the buyer of trading stock.

2

If the value of the stock is determined in accordance with—

a

section 164(3) or sections 165 to 167 (sale basis of valuation), or

b

section 175(3) or sections 176 to 178 of ITTOIA 2005 (corresponding income tax rules),

the cost of the stock to the buyer is taken to be the value as so determined.

170Meaning of “sale” and related expressions

1

In sections 164 to 167 (except in section 167(5)) references to a sale include a transfer for valuable consideration.

2

In relation to a transfer which is not a sale—

“amount realised on the sale” means the value of the consideration given for the transfer,

“buyer” means the person to whom the transfer is made, and

Section 464(1) (matters to be brought into account in the case of loan relationships) does not prevent any amount from being brought into account in accordance with section 173 or 175.

173Relief for unremittable amounts

1

If—

a

the trader has profits from the trade in a period of account, and

b

an unremittable amount has been brought into account as a receipt for that period,

a deduction of the amount is allowed from those profits (but see subsection (5)).

2

If the trader has profits from the trade in a period of account and the total of—

a

any unremittable amounts brought into account as receipts for that period, and

b

any amount carried forward under this subsection or subsection (3) from the previous period of account,

exceeds the amount of those profits, the excess may be carried forward to the next period of account.

3

If the trader does not have profits from the trade in a period of account and an unremittable amount has been brought into account as a receipt for that period, the total of—

a

any unremittable amounts brought into account as receipts for that period, and

b

any amount carried forward under this subsection or subsection (2) from the previous period of account,

may be carried forward to the next period of account.

4

If an amount is carried forward under this section to a period of account in which the trader has profits from the trade, a deduction of the amount is allowed from those profits (but see subsection (5)).

5

The total amount deducted under this section from the profits from a trade in a period of account must not exceed the amount of the profits.

174Restrictions on relief

1

No deduction is allowed under section 173 in relation to an amount so far as—

a

it is used to finance expenditure or investment outside the United Kingdom, or

b

it is applied outside the United Kingdom in another way.

2

No deduction is allowed under section 173 in relation to an amount owed so far as a payment under a contract of insurance has been received in relation to it.

3

No deduction is allowed under section 173 in relation to an amount brought into account in calculating profits if relief under section 1275 (unremittable income) may be claimed in relation to that amount.

175Withdrawal of relief

a

is given in connection with a disposal of know-how, and

b

restricts, or is designed to restrict, any person’s activities in any way,

is treated as consideration received for the disposal of the know-how.

4

It does not matter whether or not the undertaking is legally enforceable.

5

For the purposes of this Chapter references to a sale of know-how include an exchange of know-how and any provision of this Chapter referring to a sale has effect with the necessary modifications.

6

Those modifications include, in particular, reading references to the proceeds of sale and to the price as including the consideration for the exchange.

177Disposal of know-how if trade continues to be carried on

1

This section applies if—

a

a company carrying on a trade receives consideration for the disposal of know-how which has been used in the trade,

b

the company continues to carry on the trade after the disposal, and

c

neither section 178 (disposal of know-how as part of disposal of all or part of a trade) nor section 179 (seller controlled by buyer etc) applies.

2

The amount or value of the consideration is treated for corporation tax purposes as a trading receipt, except so far as it is brought into account under section 462 of CAA 2001 (disposal values).

3

If the know-how is sold together with other property, the net proceeds of the sale of the know-how are treated as being so much of the net proceeds of the sale of all the property as, on a just and reasonable apportionment, is attributable to the know-how.

4

For this purpose all property sold as a result of one bargain is treated as sold together even though—

a

separate prices are, or purport to be, agreed for separate items of that property, or

b

there are, or purport to be, separate sales of separate items of that property.

5

Any question about the way in which a sum is to be apportioned under this section must be determined in accordance with section 563(2) to (6) of CAA 2001 (procedure for determining certain questions affecting two or more persons) if it materially affects two or more taxpayers.

6

For this purpose a question materially affects two or more taxpayers if, at the time when the question falls to be determined, it appears that the determination is material to the liability to tax (for whatever period) of two or more persons.

178Disposal of know-how as part of disposal of all or part of a trade

1

This section applies if —

a

a person carrying on a trade receives consideration for the disposal of know-how which has been used in the trade, and

the person making the acquisition mentioned in that section is within the charge to corporation tax,

the persons making the election under that section are treated as also making an election under this section (even though the person disposing of the know-how is not within the charge to corporation tax).

179Seller controlled by buyer etc

1

This section applies if a disposal of know-how is by way of sale and—

a

the seller is a body of persons over which the buyer has control,

b

the buyer is a body of persons over which the seller has control, or

c

both the seller and the buyer are bodies of persons and another person has control over both of them.

2

In such a case—

a

section 177 does not apply, and

b

no election may be made under section 178.

3

For the purposes of this section “body of persons” includes a firm.

Chapter 14Adjustment on change of basis

The amount of the adjustment is calculated as follows.

Step 1

Add together any amounts representing the extent to which, comparing the two bases, profits were understated (or losses overstated) on the old basis.

The amounts are—

	Amounts
1	Receipts which on the new basis would have been brought into account in calculating the profits of a period of account before the change, so far as they were not so brought into account.
2	Expenses which on the new basis fall to be brought into account in calculating the profits of a period of account after the change, so far as they were brought into account in calculating the profits of a period of account before the change.
3	Deductions in respect of opening trading stock or opening work in progress in the first period of account on the new basis, so far as they— a are not matched by credits in respect of closing trading stock or closing work in progress in the last period of account before the change, or b are calculated on a different basis that if used to calculate those credits would have given a higher figure.
4	Amounts recognised for accounting purposes in respect of depreciation in the last period of account before the change, so far as they were not the subject of an adjustment for corporation tax purposes, where such an adjustment would be required on the new basis.

Step 2

Then deduct any amounts representing the extent to which, comparing the two bases, profits were overstated (or losses understated) on the old basis.

The amounts are—

	Amounts
1	Receipts which were brought into account in a period of account before the change, so far as they would not have been so brought into account if the profits had been calculated on the new basis.
2	Expenses which were not brought into account in calculating the profits of a period of account before the change, so far as they— a would have been brought into account for a period of account before the change if the profits had been calculated on the new basis, and b would have been brought into account for a period of account after the change if the profits had continued to be calculated on the old basis.
3	Credits in respect of closing trading stock or closing work in progress in the last period of account before the change, so far as they— a are not matched by deductions in respect of opening trading stock or opening work in progress in the first period of account on the new basis, or b are calculated on a different basis that if used to calculate those deductions would have given a lower figure.

Amounts

Receipts which were brought into account in a period of account before the change, so far as they would not have been so brought into account if the profits had been calculated on the new basis.

Expenses which were not brought into account in calculating the profits of a period of account before the change, so far as they—

would have been brought into account for a period of account before the change if the profits had been calculated on the new basis, and

would have been brought into account for a period of account after the change if the profits had continued to be calculated on the old basis.

Credits in respect of closing trading stock or closing work in progress in the last period of account before the change, so far as they—

are not matched by deductions in respect of opening trading stock or opening work in progress in the first period of account on the new basis, or

are calculated on a different basis that if used to calculate those deductions would have given a lower figure.

An amount so deducted may not be deducted again in calculating the profits of a period of account.

Expenses previously brought into account

183No adjustment for certain expenses previously brought into account

1

This section applies if, as a result of a change of basis, expenses brought into account before the change on the old basis would on the new basis be brought into account over more than one period of account after the change.

2

In such a case—

a

no adjustment is made under this Chapter, and

b

in calculating the profits of the trade no deduction is allowed for the expenses for any period of account after the change.

Realising or writing off assets

184Cases where adjustment not required until assets realised or written off

1

This section applies if there is a change of basis resulting from a tax adjustment affecting the calculation of any of the following amounts.

2

The amounts are—

a

any amount brought into account in respect of closing trading stock in the last period of account before the change of basis,

b

any amount brought into account in respect of opening trading stock in the first period of account on the new basis, and

c

any amount brought into account in respect of depreciation.

3

The receipt of the trade or (as the case may be) the expense of the trade is treated as arising only when the asset to which it relates is realised or written off.

Mark to market

185Change from realisation basis to mark to market

1

This section applies if there is a change of basis from—

a

not recognising a profit or loss on an asset until the asset is realised, to

b

bringing assets into account in each period of account at a fair value.

2

So far as—

a

a receipt within item 1 of Step 1 in section 182 represents the fair value of an asset that is trading stock, or

b

an expense within item 2 of that step relates to such an asset,

the receipt of the trade or (as the case may be) the expense of the trade is treated as not arising until the period of account in which the value of the asset is realised.

3

In the case of a receipt of the trade, this is subject to any election under section 186 (election for spreading).

4

In this section “trading stock” has the same meaning as in section 163.

186Election for spreading if section 185 applies

1

If section 185 applies, the company carrying on the trade may elect for any receipt treated as arising under this Chapter to be spread over 6 periods of account.

2

The election must be made within 12 months of the end of the first accounting period to which the new basis applies.

3

If an election is made, an amount equal to one-sixth of the amount of the receipt—

a

is treated as arising, and

b

is brought into account in calculating the profits of the trade,

in each of the 6 periods of account beginning with the first period to which the new basis applies.

4

But if, before the whole of the receipt has been so brought into account, the company permanently ceases to carry on the trade, the whole of the amount so far as not previously brought into account—

a

is treated as arising, and

b

is brought into account in calculating the profits of the trade,

immediately before the cessation.

187Transfer of insurance business

1

This section applies if—

a

an asset to which section 185 or 186 applies is transferred from one insurance company to another,

b

the transfer is made under an insurance business transfer scheme, and

c

immediately after the transfer, the transferee is UK resident or the asset is held for the purposes of a business carried on by the transferee in the United Kingdom through a permanent establishment.

2

For the purposes of section 185, the asset is not to be treated as realised by the transferor merely because of its transfer under the scheme.

3

If the transfer is of the transferor’s whole business, the transferee is responsible under section 185 or 186 for bringing into account any amount required to be brought into account after the transfer.

Chapter 15Post-cessation receipts

Charge to tax on post-cessation receipts

188Charge to tax on post-cessation receipts

The charge to corporation tax on income applies to post-cessation receipts arising from a trade.

189Extent of charge to tax

b

in the case of a trade carried on by a person in partnership, the occurrence of an event treated under section 246(4) of ITTOIA 2005 (basic meaning of “post-cessation receipt”) as the person permanently ceasing to carry on the trade.

191Other rules about what counts as post-cessation receipts

1

The following provisions treat certain amounts as post-cessation receipts for the purposes of this Part—

section 82(6) (contributions to local enterprise organisations or urban regeneration companies),

section 101(3) (distribution of assets of mutual concerns),

section 108(3) (receipt of benefits by donor or connected person),

section 192 (debts paid after cessation),

section 193 (debts released after cessation), as qualified, where appropriate, by section 56(4) (car or motor cycle hire),

section 194 (transfer of rights if transferee does not carry on trade), and

section 1277 (income charged on withdrawal of relief after source ceases: unremittable income).

2

Section 95 (acquisition of trade: receipts from transferor’s trade) and section 194 (transfer of rights if transferee does not carry on trade) treat certain amounts as not being post-cessation receipts for the purposes of this Part.

Sums treated as post-cessation receipts

192Debts paid after cessation

1

This section applies if, in calculating the profits of a trade for corporation or income tax purposes, a deduction is made in respect of a debt under—

a

section 55 (bad debts), or

b

section 35 of ITTOIA 2005 (bad and doubtful debts),

and a person permanently ceases to carry on the trade.

2

A sum received after the cessation is treated as a post-cessation receipt so far as the deduction is made.

193Debts released after cessation

1

This section applies if—

a

in calculating the profits of a trade of any period for corporation or income tax purposes, a deduction is allowed for the expense giving rise to a debt owed by the person who carried on the trade,

b

the person has permanently ceased to carry on the trade at or after the end of that period,

c

after the cessation, all or part of the debt is released, and

d

the release is not part of a statutory insolvency arrangement.

2

The amount released is treated as a post-cessation receipt.

194Transfer of rights if transferee does not carry on trade

1

This section applies if—

b

section 197,

from the amount which would otherwise be chargeable to tax under this Chapter.

2

A deduction is allowed for a loss, expense or debit which, if the person carrying on the trade had not permanently ceased to do so—

a

would have been deducted in calculating the profits of the trade for corporation or income tax purposes, or

b

would have been deducted from or set off against the profits of the trade for corporation or income tax purposes,

but no deduction is allowed if the loss, expense or debit arises directly or indirectly from the cessation itself.

3

No deduction for an amount is allowed under this section if the amount has been allowed under any other provision of the Tax Acts.

197Further rules about allowable deductions

1

An amount may not be deducted more than once under section 196.

2

A deduction under that section of a loss must be made from post-cessation receipts charged for an earlier accounting period in preference to those charged for a later accounting period.

3

But this does not authorise the deduction of a loss from post-cessation receipts charged for an accounting period before the accounting period in which the loss is made.

the amount of tax that would have been chargeable on the company for that period if the election had not been made (“amount B”).

3

If—

a

the company has made, under section 198, one or more other elections for receipts to be treated as received in the period in which the cessation occurred, and

b

effect has been given to those elections,

the effect of those elections is taken into account in determining amounts A and B.

Chapter 16Priority rules

201Provisions which must be given priority over this Part

1

Any receipt or other credit item, so far as it falls within—

a

Chapter 2 of this Part (receipts of trade), and

b

Chapter 3 of Part 4 so far as it relates to a UK property business,

is dealt with under Chapter 3 of Part 4.

2

Any receipt or other credit item, so far as it falls within—

a

this Part, and

b

Chapter 4 of Part 10 (income from holding an office),

is dealt with under Chapter 4 of Part 10.

Part 4Property income

Chapter 1Introduction

202Overview of Part

1

Chapter 2 contains definitions relevant to the application of the Part.

2

Chapter 3 applies the charge to corporation tax on income to the profits of a UK property business or an overseas property business and contains basic rules about the calculation of the profits of such a property business.

3

Chapter 4 provides for certain amounts of a capital nature to be brought into account as receipts in calculating the profits of a property business.

section 207 (which explains what is meant by generating income from land), and

b

section 208 (which provides that certain activities do not count as activities for generating income from land).

3

In the case of a property business carried on by a company as a member of a firm, the basic rules in sections 205 and 206 are explained in section 1270(2) and (3).

4

See also section 432AA of ICTA (which qualifies the basic rules in sections 205 and 206 in the case of an insurance company).

204Meaning of “property business”

1

In this Act “property business” means a UK property business or an overseas property business.

2

References in this Act to a property business are to a property business so far as any profits of the business are chargeable to tax under Chapter 3 (as to which see, in particular, the rules about territorial scope in section 5).

3

Accordingly, nothing in Chapter 4 or 5 is to be read as treating an amount as a receipt of a property business if the profits concerned would not be chargeable to tax under Chapter 3.

Basic meaning of UK and overseas property business

Calculation of profits

210Profits of a property business: application of trading income rules

1

The profits of a property business are calculated in the same way as the profits of a trade.

2

But the provisions of Part 3 (trading income) which apply as a result of subsection (1) are limited to the following—

In Chapter 3 (basic rules)—
section 46	generally accepted accounting practice
section 47	losses calculated on same basis as profits
section 48	receipts and expenses
section 52	apportionment etc of profits and losses to accounting period
In Chapter 4 (rules restricting deductions)—
section 53	capital expenditure
section 54	expenses not wholly and exclusively for trade and unconnected losses
section 55	bad debts
sections 56 to 58	car or motor cycle hire
section 59	patent royalties
In Chapter 5 (rules allowing deductions)—
section 61	pre-trading expenses
section 68	replacement and alteration of trade tools
section 69	payments for restrictive undertakings
sections 70 and 71	seconded employees
section 72	payroll deduction schemes: contributions to agents’ expenses
sections 73 to 75	counselling and retraining expenses
sections 76 to 81	redundancy payments etc
sections 82 to 86	contributions to local enterprise organisations or urban regeneration companies
sections 87 and 88	scientific research
sections 89 and 90	expenses connected with patents, designs and trade marks
section 91	payments to Export Credits Guarantee Department
section 92	levies under FISMA 2000
In Chapter 6 (receipts)—
section 93	capital receipts
section 94	debts incurred and later released
section 101	distribution of assets of mutual concerns
section 102	industrial development grants
section 103	sums recovered under insurance policies etc
section 104	repayments under FISMA 2000
In Chapter 7 (gifts to charities etc)—
section 108	receipt of benefits by donor or connected person
In Chapter 9 (other specific trades)—
section 131	incidental costs of issuing qualifying shares (building societies)
section 133	annual payments paid by a credit union
In Chapter 12 (deductions from profits)—
sections 172 to 175	unremittable amounts

211Loan relationships and derivative contracts

1

The profits of a property business are calculated without regard to items giving rise to—

a

credits or debits within Part 5 (loan relationships), or

b

credits or debits within Part 7 (derivative contracts).

2

iv

section 1304 (crime-related payments).

2

In this section “any relevant permissive rule in this Part” means any provision of this Part (apart from sections 231 to 234) which allows a deduction in calculating the profits of a property business.

3

a

prohibiting or deferring the deduction, or

b

restricting the amount of the deduction.

4

In this section any reference to any provision of this Part includes any provision applied by section 210.

Chapter 4Profits of property businesses: lease premiums etc

Introduction

215Overview of Chapter

1

This Chapter provides for certain amounts (which would otherwise generally be amounts of a capital nature) to be brought into account as receipts in calculating the profits of a property business.

2

The amounts relate to short-term leases in the case of—

section 217 (lease premiums),

section 218 (amount treated as lease premium where work required),

section 220 (sums payable for surrender of lease), and

section 222 (assignments for profit of lease granted at undervalue).

3

The amounts relate to any lease in the case of—

section 219 (sums payable instead of rent), and

section 221 (sums payable for variation or waiver of terms of lease).

4

The amounts relate to the sale of any estate or interest in land in the case of—

section 224 (sales with right to reconveyance), and

section 225 (sale and leaseback transactions).

5

This Chapter also permits certain deductions in calculating the profits of property businesses carried on by tenants under certain leases (see sections 231 and 232).

216Meaning of “short-term lease”

In this Chapter “short-term lease” means a lease whose effective duration is 50 years or less.

Amounts treated as receipts: leases

217Lease premiums

1

This section applies if a premium is required to be paid—

a

under a short-term lease, or

b

otherwise under the terms subject to which a short-term lease is granted.

2

The company to which the premium is due is treated as—

a

entering into a transaction mentioned in section 205 (if the land to which the lease relates is in the United Kingdom) or section 206 (if that land is outside the United Kingdom), and

b

receiving the amount calculated under subsections (4) and (5) as a result of that transaction.

3

That amount is brought into account as a receipt in calculating the profits of the property business which consists of or includes that transaction for the accounting period in which the lease is granted.

4

The amount of the receipt is given by the formula—

P×50-Y50 math

where—

P is the premium, and

Y is the number of complete periods of 12 months (other than the first) comprised in the effective duration of the lease.

5

But, if the rule in section 228 (the additional calculation rule) applies, the amount given by the formula in subsection (4) is reduced by the amount calculated in accordance with section 228.

218Amount treated as lease premium where work required

1

This section applies if the terms subject to which a lease is granted impose on the tenant an obligation to carry out work on the premises.

2

The lease is treated for the purposes of section 217 (lease premiums) as requiring the payment of a premium to the landlord (in addition to any other premium).

3

The amount of the premium is the amount by which the value of the landlord’s estate or interest immediately after the commencement of the lease exceeds what its value would have been at that time if the terms of the lease did not impose the obligation on the tenant.

4

An obligation, or part of an obligation, that requires the carrying out of excepted work is ignored for the purposes of this section.

5

Work is “excepted work” if the payment for carrying it out would, if the landlord and not the tenant were obliged to carry it out, be deductible as an expense in calculating the profits of the landlord’s property business.

219Sums payable instead of rent

1

This section applies if—

a

under the terms subject to which a lease is granted a sum becomes payable by the tenant instead of the whole or a part of the rent for a period, and

b

the period is 50 years or less.

2

The company to which the sum is due is treated as—

a

entering into a transaction mentioned in section 205 (if the land to which the lease relates is in the United Kingdom) or section 206 (if that land is outside the United Kingdom), and

b

receiving the amount calculated under subsections (4) and (5) as a result of that transaction.

3

4

The amount of the receipt is given by the formula—

S×50-Y50 math

where—

S is the sum payable instead of rent, and

Y is the number of complete periods of 12 months (other than the first) comprised in the period in relation to which the sum is payable.

5

But, if the rule in section 228 (the additional calculation rule) applies, the amount given by the formula in subsection (4) is reduced by the amount calculated in accordance with section 228.

6

In determining for the purposes of this Chapter the duration of the period in relation to which the sum is payable, any part of the period that falls after the expiry of the effective duration of the lease is excluded.

220Sums payable for surrender of lease

1

This section applies if, under the terms subject to which a short-term lease is granted, a sum becomes payable by the tenant as consideration for the surrender of the lease.

2

The company to which the sum is due is treated as—

a

entering into a transaction mentioned in section 205 (if the land to which the lease relates is in the United Kingdom) or section 206 (if that land is outside the United Kingdom), and

b

receiving the amount calculated under subsections (4) and (5) as a result of that transaction.

3

4

The amount of the receipt is given by the formula—

S×50-Y50 math

where—

S is the sum payable as consideration for the surrender of the lease, and

Y is the number of complete periods of 12 months (other than the first) comprised in the effective duration of the lease.

5

But, if the rule in section 228 (the additional calculation rule) applies, the amount given by the formula in subsection (4) is reduced by the amount calculated in accordance with section 228.

221Sums payable for variation or waiver of terms of lease

1

This section applies if—

a

a sum becomes payable by the tenant (otherwise than by way of rent) as consideration for the variation or waiver of a term of a lease,

b

the sum is due to the landlord or a company which is connected with the landlord, and

c

the period for which the variation or waiver has effect is 50 years or less.

2

The company to which the sum is due is treated as—

a

entering into a transaction mentioned in section 205 (if the land to which the lease relates is in the United Kingdom) or section 206 (if that land is outside the United Kingdom), and

b

receiving the amount calculated under subsections (4) and (5) as a result of that transaction.

3

4

The amount of the receipt is given by the formula—

S×50-Y50 math

where—

S is the sum payable as consideration for the variation or waiver, and

Y is the number of complete periods of 12 months (other than the first) comprised in the period for which the variation or waiver has effect.

5

But, if the rule in section 228 (the additional calculation rule) applies, the amount given by the formula in subsection (4) is reduced by the amount calculated in accordance with section 228.

6

In determining for the purposes of this Chapter the duration of the period for which the variation or waiver has effect, any part of the period that falls after the expiry of the effective duration of the lease is excluded.

222Assignments for profit of lease granted at undervalue

1

This section applies to an assignment of a short-term lease if—

a

the lease was granted at an undervalue, and

b

a profit is made on the assignment.

2

The company which assigns the lease is treated as—

a

entering into a transaction mentioned in section 205 (if the land to which the lease relates is in the United Kingdom) or section 206 (if that land is outside the United Kingdom), and

b

receiving the amount calculated under subsections (4) and (5) as a result of that transaction.

3

4

The amount of the receipt is given by the formula—

P×50-Y50 math

where—

P is the lesser of—

the profit on the assignment, and

the amount by which the undervalue exceeds the total of the profits (if any) made on previous assignments of the lease, and

Y is the number of complete periods of 12 months (other than the first) comprised in the effective duration of the lease.

5

But, if the rule in section 228 (the additional calculation rule) applies, the amount given by the formula in subsection (4) is reduced by the amount calculated in accordance with section 228.

6

Section 223 explains references in this section to the grant of a lease at an undervalue and the making of a profit on an assignment of a lease.

223Provisions supplementary to section 222

2

The seller is treated as—

a

entering into a transaction mentioned in section 205 (if the land is in the United Kingdom) or section 206 (if the land is outside the United Kingdom), and

b

receiving the amount calculated under subsection (4) as a result of that transaction.

3

4

The amount of the receipt is given by the formula—

E×50-Y50 math

where—

E is the amount by which the price at which the estate or interest is sold exceeds the price at which it is to be reconveyed, and

Y is the number of complete periods of 12 months (other than the first) comprised in the period beginning with the sale and ending with the earliest date on which under the terms of the sale the estate or interest would fall to be reconveyed.

5

See section 226 for some provisions which are supplementary to this section.

225Sale and leaseback transactions

1

This section applies if—

a

an estate or interest in land is sold subject to terms which provide for the grant of a lease directly or indirectly out of the estate or interest to the seller or a person connected with the seller,

b

the period beginning with the sale and ending with the earliest date on which under the terms of the sale the lease would fall to be granted is 50 years or less, and

c

the price at which the estate or interest is sold exceeds the total of—

i

the amount of any premium for the lease, and

ii

the value on the date of the sale of the right to receive a conveyance of the reversion immediately after the lease begins to run.

2

This section does not apply if the lease is granted and begins to run within one month after the sale.

3

The seller is treated as—

a

entering into a transaction mentioned in section 205 (if the land is in the United Kingdom) or section 206 (if the land is outside the United Kingdom), and

b

receiving the amount calculated under subsection (5) as a result of that transaction.

4

5

The amount of the receipt is given by the formula—

E×50-Y50 math

where—

E is the amount by which the price at which the estate or interest is sold exceeds the total of—

the amount of any premium for the lease, and

the value on the date of the sale of the right to receive a conveyance of the reversion immediately after the lease begins to run, and

6

See section 226 for some provisions which are supplementary to this section.

226Provisions supplementary to sections 224 and 225

1

This section operates for the purposes of sections 224 (sales with right to reconveyance) and 225 (sale and leaseback transactions).

2

Subsection (3) explains how to determine for the purposes of section 224 the price at which an estate or interest is to be reconveyed when—

a

the date on which the estate or interest would fall to be reconveyed is not fixed under the terms of the sale, and

b

the price at which it is to be reconveyed varies with the date.

3

The price is taken to be the lowest possible under the terms of the sale.

4

Subsection (5) explains how to determine for the purposes of section 225 the total of—

a

the amount of any premium for the lease, and

b

the value on the date of the sale of the right to receive a conveyance of the reversion immediately after the lease begins to run,

when the date for the grant of the lease is not fixed under the terms of the sale and the total varies with the date.

5

The total is taken to be the lowest possible under the terms of the sale.

6

For the purposes of sections 224(3) and 225(4) (receipts of property business for accounting period in which estate or interest sold) an estate or interest in land is sold when any of the following occurs—

a

an unconditional contract for its sale is entered into,

b

a conditional contract for its sale becomes unconditional, or

c

an option or right of pre-emption is exercised requiring the seller to enter into an unconditional contract for its sale.

Additional calculation rule for reducing certain receipts

227Circumstances in which additional calculation rule applies

1

The rule in section 228 (the additional calculation rule) applies in relation to the calculation of receipts under—

section 217 (lease premiums),

section 219 (sums payable instead of rent),

section 220 (sums payable for surrender of lease),

section 221 (sums payable for variation or waiver of terms of lease), or

section 222 (assignments for profit of lease granted at undervalue).

2

It applies if conditions A and B are met.

3

Condition A is that—

a

in the case of a receipt under section 217, 219 or 220, the lease is granted out of a taxed lease,

b

in the case of a receipt under section 221, the lease was granted out of a taxed lease, and

c

in the case of a receipt under section 222, the assignment is of a taxed lease.

4

A lease is a “taxed lease” for the purposes of this Chapter if—

a

there is a receipt under any of sections 217 to 222 in respect of the lease,

b

there would be such a receipt, but for the operation of the rule in section 228 (the additional calculation rule) in the calculation of its amount,

c

there is a receipt under any of sections 277 to 282 of ITTOIA 2005 (receipts in respect of lease premiums, sums payable instead of rent, for surrender of lease and for variation or waiver of terms of lease and assignments) in respect of the lease, or

d

there would be such a receipt, but for the operation of the rule in section 288 of that Act (the additional calculation rule) in the calculation of its amount.

In this Chapter a receipt falling within paragraph (a), (b), (c) or (d) is referred to as a “taxed receipt”.

5

Condition B is that the taxed receipt, or if there is more than one, at least one of them, has an unused amount.

6

See section 230 for an explanation of when a taxed receipt has an “unused amount”.

228The additional calculation rule

1

The rule in this section applies if the conditions mentioned in section 227(2) are met.

2

The additional calculation rule is that the amount given by the formula in section 217, 219, 220, 221 or 222 must be reduced by the amount calculated in accordance with this section in order to give the amount of the receipt under calculation.

3

The amount of the reduction is—

a

if there is one taxed receipt which has an unused amount, the basic relieving amount by reference to that receipt, and

b

if there is more than one taxed receipt which has an unused amount, the total of the basic relieving amounts by reference to each receipt,

adjusted, if necessary, in the light of section 229(5) (reduction not to exceed amount being reduced).

4

The basic relieving amount by reference to a taxed receipt is given by the formula—

A×LRPTRP math

where—

A is the unreduced amount of the taxed receipt (which is, generally, the amount given by the formula in section 217, 219, 220, 221 or 222, or in section 277, 279, 280, 281 or 282 of ITTOIA 2005, but see section 230(2) to (4) of this Act),

LRP is the receipt period of the receipt under calculation, and

TRP is the receipt period of the taxed receipt.

5

But the basic relieving amount is different if section 229(2) or (4) applies (certain special cases).

6

For the purposes of this Chapter, the “receipt period” of a receipt is—

a

in the case of a receipt under section 217 or 220, the effective duration of the lease,

b

in the case of a receipt under section 219, the period in relation to which the sum payable instead of rent is payable,

c

in the case of a receipt under section 221, the period for which the variation or waiver has effect,

d

in the case of a receipt under section 222, the effective duration of the lease remaining at the date of the assignment, and

e

in the case of a receipt under Chapter 4 of Part 3 of ITTOIA 2005 (profits of property businesses: lease premiums etc), its receipt period within the meaning of that Chapter (see section 288(6) of that Act).

229The additional calculation rule: special cases

1

This section explains how section 228 operates in some special cases.

2

If—

a

the receipt under calculation is under any of sections 217 to 221, and

b

the lease does not extend to the whole of the premises subject to the taxed lease,

the basic relieving amount by reference to a taxed receipt is calculated by multiplying the amount given by the formula in subsection (4) of section 228 by the fraction of those premises which is subject to the lease.

3

This fraction is calculated on a just and reasonable basis.

4

If the basic relieving amount given by section 228(4) or subsection (2) above by reference to a taxed receipt would otherwise exceed the unused amount of the taxed receipt, the basic relieving amount is the unused amount.

5

If the amount of the reduction under section 228 would otherwise exceed the amount given, in respect of the receipt under calculation, by the formula in section 217, 219, 220, 221 or 222, the amount of the reduction is equal to the amount given by the formula.

230Meaning of “unused amount” and “unreduced amount”

5

For the meaning of expressions used in this section, see in particular—

section 227(4) (“taxed lease”), and

Section 227(4) (“taxed receipt”).

232Tenants under taxed leases treated as incurring expenses

1

The tenant under a taxed lease is treated as incurring an expense of a revenue nature in respect of the premises subject to the taxed lease for each qualifying day.

2

If there is more than one taxed receipt, this section applies separately in relation to each of them.

3

A day is a “qualifying day”, in relation to a taxed receipt, if it falls within the receipt period of the taxed receipt.

4

The amount of the expense for the qualifying day by reference to the taxed receipt is given by the formula—

ATRP math

where—

A is the unreduced amount of the taxed receipt, and

TRP is the number of days in the receipt period of the taxed receipt.

5

This section is subject to sections 233 and 234 (restrictions on expenses where the additional calculation rule is relevant).

6

For the meaning of expressions used in this section, see in particular—

section 228(6) (“receipt period”), and

section 230(2) to (4) (“unreduced amount”).

233Restrictions on section 232 expenses: the additional calculation rule

1

This section applies if—

a

in calculating the amount of a receipt under this Chapter there is a reduction under section 228 (the additional calculation rule) by reference to a taxed receipt, or

b

in calculating the amount of a receipt under Chapter 4 of Part 3 of ITTOIA 2005 (profits of a property business: lease premiums etc) there is a reduction under section 288 of that Act (the additional calculation rule) by reference to a taxed receipt.

The receipt that is so reduced is referred to in this section as the “lease premium receipt”.

2

Subsections (3) to (5) provide for the application of section 232 for a qualifying day that falls within the receipt period of the lease premium receipt.

3

The tenant under the taxed lease is treated as incurring an expense under section 232 for the qualifying day by reference to the taxed receipt only if the daily amount of the taxed receipt exceeds the daily reduction of the lease premium receipt.

4

If the condition in subsection (3) is met, the amount of the expense under section 232 for the qualifying day by reference to the taxed receipt is equal to that excess.

5

If the qualifying day falls within the receipt periods of more than one lease premium receipt, the reference in subsection (3) to the daily reduction of the lease premium receipt is to be read as a reference to the total of the daily reductions of each of the lease premium receipts whose receipt period includes the qualifying day.

6

In this section—

the “daily amount” of the taxed receipt is given by the formula—

ATRP math

where—

A is the unreduced amount of the taxed receipt (see section 230(2) to (4)), and

TRP is the number of days in the receipt period of the taxed receipt, and

the “daily reduction” of a lease premium receipt is given by the formula—

ARRRP math

where—

AR is the reduction under section 228 above or section 288 of ITTOIA 2005 by reference to the taxed receipt (see section 230(6)), and

RRP is the number of days in the receipt period of the lease premium receipt.

7

Section 234 explains how this section operates if the lease premium receipt is in respect of a lease that has been granted out of the taxed lease and does not extend to the whole of the premises subject to the taxed lease.

234Restrictions on section 232 expenses: lease of part of premises

1

This section applies if—

a

b

the deductions allowed in calculating the profits of a property business for expenses under section 232 (tenant under taxed lease which uses premises for purposes of property business treated as incurring expenses) by reference to the taxed receipt,

must not exceed the amount referred to in subsection (2).

2

The amount mentioned in subsection (1) is the difference between—

a

the unreduced amount of the taxed receipt, and

b

the total of the amounts mentioned in subsection (3).

3

Those amounts are—

a

the reductions under section 288 of ITTOIA 2005 (the additional calculation rule) by reference to the taxed receipt,

b

the deductions made in calculating the profits of a property business for expenses under section 292 of ITTOIA 2005 (tenant under taxed lease who uses premises for purposes of property business treated as incurring expenses) by reference to the taxed receipt, and

c

Certain administrative provisions

236Payment of tax by instalments

1

This section applies if—

a

there is a receipt under section 217 (lease premiums) in respect of a premium which is payable by instalments, or

b

there is a receipt under any of sections 219 to 221 (sums payable instead of rent, for surrender of lease or for variation or waiver of terms of lease) in respect of a sum which is payable by instalments.

2

The company which is liable to pay tax by reference to the receipt may choose to pay the tax by such instalments as an officer of Revenue and Customs may allow.

3

The period over which the instalments of tax must be paid—

a

must be 8 years or less, and

b

must end before, or at the same time as, the time when the last of the instalments mentioned in subsection (1)(a) or (b) is payable.

237Statement of accuracy for purposes of section 222

1

This section applies if any of the persons mentioned in subsection (3) provides an officer of Revenue and Customs with a statement showing—

a

whether or not there is, or may be, a receipt under section 222 (assignments for profit of lease granted at undervalue), and

a determination must be made by the officer as proposed in the provisional notices, and

b

the determination is not to be called in question in any proceedings.

241Section 240: supplementary

1

A provisional notice of determination under section 240(2) may include a statement of the grounds on which the officer proposes to make the determination.

2

Subsection (1) applies despite any obligation as to secrecy or other restriction on the disclosure of information.

3

An officer of Revenue and Customs may by notice (a “preliminary notice”) require any person to give any information that appears to the officer to be needed for deciding whether to give any person a provisional notice of determination under section 240(2).

4

The preliminary notice must state the time within which the information is to be given.

242Determination by tribunal

1

If a notice of objection is given under section 240(3), the amount mentioned in section 240(1) must be determined in the same way as an appeal.

2

All persons to whom provisional notices of determination have been given under section 240(2) may take part—

a

in any proceedings under subsection (1), and

b

in any appeal arising out of those proceedings.

3

Those persons are bound by the determination made in the proceedings or on appeal, whether or not they have taken part in the proceedings.

4

Their successors in title are bound in the same way.

Effective duration of lease

243Rules for determining effective duration of lease

1

The following rules apply for determining the effective duration of a lease for the purposes of this Chapter.

Rule 1: If—

the terms of the lease or any other circumstances make it unlikely that the lease will continue beyond a date before the end of the term for which the lease was granted, and

the premium was not substantially greater than it would have been had the term been one ending on that date,

the lease is treated as ending on that date (or the earliest such date).

Rule 2: If the terms of the lease include provision for the extension of the lease beyond a given date by notice given by the tenant, account may be taken of any circumstances making it likely that the lease will be so extended.

Rule 3: If the tenant or a person connected with the tenant is, or may become, entitled to a further lease or the grant of a further lease (whenever commencing)—

of the same premises, or

of premises including the whole or part of the same premises,

the term of the lease may be treated as continuing until the end of the term of the further lease.

2

The rules are to be applied in accordance with section 244.

3

In Rule 1, “premium” includes—

a

an amount treated as a premium under section 218 (amount treated as lease premium where work required),

b

a sum payable by the tenant under the terms subject to which the lease is granted instead of the whole or a part of the rent for a period,

c

a sum payable by the tenant under the terms subject to which the lease is granted as consideration for the surrender of the lease, and

d

a sum payable by the tenant (otherwise than by way of rent) as consideration for the variation or waiver of a term of the lease.

4

In this section and section 244, in relation to Scotland, “term”, where referring to the duration of a lease, means period.

1

This section applies if an officer of Revenue and Customs has reason to believe that a person has information relevant to the determination of the effective duration of a lease.

2

The officer may by notice require the person to provide such information on the matters specified in the notice as is in the person’s possession.

3

The information must be provided within a time specified in the notice.

4

In relation to anything done by a solicitor on behalf of a client, the solicitor is required only to—

a

state that the solicitor was acting on behalf of a client, and

b

provide the name and address of the client.

Other interpretative provisions

246Provisions about premiums

1

For the purposes of this Chapter, the presumption is that a sum paid on or in connection with the granting of a tenancy has been paid by way of premium.

2

This does not apply if the sum is rent.

3

This also does not apply so far as other sufficient consideration for the payment can be shown to have been given.

4

In this section “sum” includes the value of any consideration.

5

Where Rule 3 in section 243 (rules for determining effective duration of lease) applies, the premium, or an appropriate part of it, payable for or in connection with either lease mentioned in that rule may be treated for the purposes of this Chapter as having been required under the other.

247Interpretation

1

In this Chapter “premium” includes any similar sum payable to the immediate or a superior landlord or to a person connected with such a person.

2

In subsection (1) “sum” includes the value of any consideration.

3

In the application of this Chapter to Scotland—

“premium” includes, in particular, a grassum payable to the landlord under the lease in respect of which the grassum is payable or the landlord under any other lease of the property, and

“reversion” means the interest of the landlord in the property subject to the lease.

4

In the application of this Chapter to Scotland—

a

references to a lease being granted out of a taxed lease are to the grant of a sublease of land subject to the taxed lease, and

b

references to the lease so granted are to be read as references to the sublease.

Chapter 5Profits of property businesses: other rules about receipts and deductions

Furnished accommodation: receipts and deductions

248Furnished lettings

are brought into account in calculating the profits of the transferee’s UK property business in the accounting period in which they are received.

3

Any sums mentioned in subsection (1)(b) which are received after the cessation of the transferor’s property business are not post-cessation receipts (see Chapter 9).

Reverse premiums as receipts

250Reverse premiums

the regulations.

7

The conditions may include conditions imposed by reference to information or documents issued by any body, person or organisation.

8

In this section—

“the capital prohibition rule” means the rule in section 53 (capital expenditure), as applied by section 210, and

“the wholly and exclusively rule” means the rule in section 54 (expenses not wholly and exclusively for trade and unconnected losses), as applied by section 210.

252Restrictions on relief

1

This section restricts deductions that would otherwise be allowable under section 251.

2

No deduction is allowed if, when the energy-saving item is installed, the dwelling-house—

a

is in the course of construction, or

b

is comprised in land in which the company does not have an interest or is in the course of acquiring an interest or further interest.

3

No deduction is allowed in respect of expenditure in an accounting period if—

a

the business consists of or includes the commercial letting of furnished holiday accommodation (see Chapter 6), and

b

the dwelling-house constitutes some or all of that accommodation for the accounting period.

4

No deduction is allowed in respect of expenditure treated by section 61 (as applied by section 210) as incurred on the date on which the company starts to carry on the business unless the expenditure was incurred not more than 6 months before that date.

5

No deduction is allowed in respect of expenditure incurred in acquiring and installing the energy-saving item in a building containing the dwelling-house in so far as the expenditure is not for the benefit of the dwelling-house.

253Regulations

This section applies if, during the deduction period, the whole of the person’s interest in the premises or in any part of them is transferred, whether by operation of law or otherwise.

2

For the tax year in which the transfer takes place—

a

the transferor and the transferee are entitled to a part of any deduction under section 254, and

b

the amount of the deduction is determined by what is just and reasonable.

3

For subsequent tax years in the deduction period, the entitlement to any deduction under section 254 depends on whether the interest transferred is in the whole of the premises or in part of them.

4

If the interest transferred is in the whole of the premises, the transferee (but not the transferor) is entitled to any deduction under section 254.

5

If the interest transferred is in part of the premises—

a

the transferor and the transferee are entitled to a part of any deduction under section 254, and

b

the amount of the deduction is determined by reference to what is properly referable to the part of the premises.

6

This section is supplemented by sections 256 (ending of lease of premises) and 257 (transfer involving person within the charge to income tax).

256Ending of lease of premises

1

If a person’s interest in the premises is a lease that comes to an end before the end of the deduction period, the interest is treated as if transferred to the following persons.

2

If a new lease of the premises is granted and the new tenant makes a payment in respect of the embankment in question to the old tenant, the transferee is the new tenant.

3

Otherwise the transferee is the owner of the interest in immediate reversion on the lease (or, in Scotland, the landlord).

the amount of any such deduction,

is ignored if the person is within the charge to income tax.

4

For any entitlement of a person within the charge to income tax to a deduction for any of the expenditure, see sections 316 to 318 of ITTOIA 2005 (corresponding income tax provisions).

Mineral royalties

258Relief in respect of mineral royalties

262Giving effect to positive and negative adjustments

1

An amount by way of adjustment must be calculated in accordance with section 182, which applies in relation to a UK property business as it applies in relation to a trade.

2

If the amount produced by the calculation is positive—

a

the amount is brought into account as a receipt in calculating the profits of the UK property business, and

b

the receipt is treated as arising on the first day of the first period of account for which the new basis is adopted.

3

But if there is a change of basis resulting from a tax adjustment affecting the calculation of any amount brought into account in respect of depreciation, the receipt is treated as arising only when the asset to which it relates is realised or written off.

4

If the amount produced by the calculation is negative—

a

a deduction is allowed for the amount as an expense of the UK property business in calculating the profits of that business, and

b

the expense is treated as arising on the first day of the first period of account for which the new basis is adopted.

5

But if there is a change of basis resulting from a tax adjustment affecting the calculation of any amount brought into account in respect of depreciation, the expense is treated as arising only when the asset to which it relates is realised or written off.

6

This section is subject to section 183 (no adjustment for certain expenses previously brought into account) which applies in relation to a UK property business as it applies in relation to a trade.

Integral features

263Expenditure on integral features

Section 33A(3) of CAA 2001 provides that no deduction is allowed in respect of certain expenditure on an integral feature of a building or structure (within the meaning of that section).

Chapter 6Commercial letting of furnished holiday accommodation

Introduction

264Overview of Chapter

266Meaning of “relevant period” in sections 267 and 268

1

For the purposes of sections 267 and 268 “the relevant period” for accommodation let by a company in an accounting period is determined as follows.

2

If the accommodation was not let by the company as furnished accommodation in the 12 months immediately before the accounting period, “the relevant period” is 12 months beginning with the first day in the accounting period on which it is let by the company as furnished accommodation.

3

If the accommodation—

a

was let by the company as furnished accommodation in the 12 months immediately before the accounting period, but

b

is not let by the company as furnished accommodation in the 12 months immediately after the accounting period,

“the relevant period” is 12 months ending with the last day in the accounting period on which it is let by the company as furnished accommodation.

4

Otherwise “the relevant period” is the period of 12 months ending with the last day of the accounting period.

267Meaning of “qualifying holiday accommodation”

1

Accommodation which is let by a company during an accounting period is “qualifying holiday accommodation” for the accounting period if the availability, letting and pattern of occupation conditions are met.

2

The availability condition is that, during the relevant period, the accommodation is available for commercial letting as holiday accommodation to the public generally for at least 140 days.

3

The letting condition is that, during the relevant period, the accommodation is commercially let as holiday accommodation to members of the public for at least 70 days.

4

For the purposes of the letting condition, a letting of accommodation for a period of longer-term occupation (see subsection (6)) is not a letting of it as holiday accommodation.

5

The pattern of occupation condition is that, during the relevant period, not more than 155 days fall during periods of longer-term occupation.

6

For the purposes of this section a “period of longer-term occupation” is a continuous period of more than 31 days during which the accommodation is in the same occupation otherwise than because of circumstances that are not normal.

268Under-used holiday accommodation: averaging elections

1

This section applies if during an accounting period a company lets both—

a

qualifying holiday accommodation, and

b

accommodation that would be qualifying holiday accommodation if the letting condition (see section 267(3)) were met in relation to it (“under-used accommodation”).

2

The company may make an election for the accounting period specifying—

a

the qualifying holiday accommodation, and

b

any or all of the under-used accommodation.

3

The under-used accommodation so specified is treated as qualifying holiday accommodation for the accounting period if the average of the number of let days for the accounting period of all the accommodation specified in the election is at least 70.

4

“The number of let days” for an accounting period of any accommodation is the number of days during the relevant period for which it is commercially let by the company as holiday accommodation to members of the public.

5

Qualifying holiday accommodation may not be specified in more than one election for an accounting period.

6

An election for an accounting period must be made within the period of two years beginning at the end of the accounting period.

Separate profit calculations

269Capital allowances and loss relief

1

If a UK property business consists of both—

a

the commercial letting of furnished holiday accommodation (“the furnished holiday lettings part”), and

b

other businesses or transactions (“the other part”),

this section requires separate calculations to be made of the profits of the furnished holiday lettings part and the other part.

2

The calculations must be made if—

a

section 248 or 249 of CAA 2001 (giving effect to allowances and charges) applies to the furnished holiday lettings part or the other part, or

b

any provision of Chapter 2 of Part 10 of ICTA (loss relief) applies in relation to a loss made in either of those parts.

3

If there is a letting of accommodation only part of which is holiday accommodation, such apportionments are to be made for the purposes of this section as are just and reasonable.

Chapter 7Rent receivable in connection with a UK section 39(4) concern

Charge to tax on rent receivable in connection with a UK section 39(4) concern

270Charge to tax on rent receivable in connection with a UK section 39(4) concern

The charge to corporation tax on income applies to rent receivable in connection with a UK section 39(4) concern.

271Meaning of “rent receivable in connection with a UK section 39(4) concern”

274Meaning of “mineral lease or agreement” and “mineral royalties”

1

Charge to tax on rent receivable for UK electric-line wayleaves

277Charge to tax on rent receivable for a UK electric-line wayleave

The charge to corporation tax on income applies to rent receivable for a UK electric-line wayleave.

any other receipt in the nature of rent.

279Extent of charge to tax

1

Rent receivable for a UK electric-line wayleave is not chargeable to tax under this Chapter for an accounting period if—

a

a company carries on a UK property business in relation to some or all of the land to which the wayleave relates, and

b

receipts (other than rents receivable for UK electric-line wayleaves) in respect of some or all of that land are brought into account in calculating the profits of the business of the accounting period.

2

In such a case, the rent receivable for the UK electric-line wayleave is brought into account in calculating the profits of the company’s UK property business.

3

The rules for determining whether an amount is chargeable to tax under this Chapter also need to be read with section 45(2) (payments for wayleaves if company carries on a trade).

4

That subsection secures that an amount which would otherwise be chargeable to tax under this Chapter may be brought into account instead in calculating the profits of a trade.

Chapter 9Post-cessation receipts

Charge to tax on post-cessation receipts

280Charge to tax on post-cessation receipts

The charge to corporation tax on income applies to post-cessation receipts arising from a UK property business.

281Extent of charge to tax

1

A post-cessation receipt is chargeable to tax under this Chapter only so far as the receipt is not otherwise chargeable to corporation or income tax.

2

Accordingly, a post-cessation receipt arising from a UK property business is not chargeable to tax under this Chapter so far as it is brought into account in calculating the profits of the business of any period.

Meaning of “post-cessation receipts”

282Basic meaning of “post-cessation receipt”

1

In this Chapter “post-cessation receipt” means a sum—

a

which is received after a person permanently ceases to carry on a UK property business, and

b

which arises from the carrying on of the business before the cessation.

2

In this Chapter, except in section 284, references to a UK property business include one within the charge to income tax and references to a person permanently ceasing to carry on a UK property business include—

a

in the case of a company, the occurrence of an event treated under section 362 of ITTOIA 2005 (company starting or ceasing to be within charge to income tax) as the company permanently ceasing to carry on the business, and

b

in the case of a UK property business carried on by a person in partnership, the occurrence of an event treated under section 353(3) of ITTOIA 2005 (basic meaning of “post-cessation receipt”) as the person permanently ceasing to carry on the business.

283Other rules about what counts as a “post-cessation receipt”

1

Section 284 (transfer of rights if transferee does not carry on UK property business) treats certain amounts as being, or not being, post-cessation receipts for the purposes of this Chapter.

2

The following provisions (which treat certain amounts as post-cessation receipts) apply for the purposes of this Chapter as they apply for the purposes of Chapter 15 of Part 3 (but as if any reference to a trade were to a UK property business)—

section 82(6) (contributions to local enterprise organisations or urban regeneration companies),

section 101(3) (distribution of assets of mutual concerns),

section 108(3) (receipt of benefits by donor or connected person),

section 192 (debts paid after cessation), and

section 193 (debts released after cessation), as qualified, where appropriate, by section 56(4) (car or motor cycle hire).

3

This Chapter also needs to be read with—

a

section 249(3) (which treats certain amounts as not being post-cessation receipts), and

b

section 1277 (which treats certain income as a post-cessation receipt: unremittable income).

284Transfer of rights if transferee does not carry on UK property business

1

This section applies if—

a

a company (“the transferor”) permanently ceases to carry on a UK property business,

b

the transferor transfers to another person (“the transferee”) for value the right to receive sums arising from the carrying on of any business (“the transferred business”) comprised in the transferor’s UK property business, and

c

the transferee does not subsequently carry on the transferred business.

2

The transferor is treated as receiving a post-cessation receipt.

3

The amount of the receipt is—

a

the amount or value of the consideration for the transfer, if the transfer is at arm’s length, or

b

the value of the rights transferred as between parties at arm’s length, if the transfer is not at arm’s length.

4

Any sums mentioned in subsection (1)(b) which are received after the cessation of the property business are not post-cessation receipts.

Deductions

285Allowable deductions

Sections 196 and 197 apply for the purposes of this Chapter as they apply for the purposes of Chapter 15 of Part 3 (but as if any reference to a trade were to a UK property business).

Election to carry back

286Election to carry back

Sections 198 to 200 apply for the purposes of this Chapter as they apply for the purposes of Chapter 15 of Part 3 (but as if any reference to a trade were to a UK property business).

Chapter 10Supplementary

Priority rules

287Provisions which must be given priority over this Part

Any receipt or other credit item, so far as it falls within—

a

Chapter 3 of this Part so far as it relates to an overseas property business or Chapter 7 or 8 of this Part (rent receivable in connection with a UK section 39(4) concern or for UK electric-line wayleaves), and

b

Chapter 2 of Part 3 (receipts of a trade),

is dealt with under Part 3.

288Priority between Chapters within this Part

1

Any receipt, so far as it falls within—

a

Chapter 3 so far as it relates to a UK property business, and

b

Chapter 7 (rent receivable in connection with a UK section 39(4) concern),

is dealt with under Chapter 7.

2

Any receipt, so far as it falls within—

a

Chapter 3 so far as it relates to a UK property business, and

b

Chapter 8 (rent receivable for UK electric-line wayleaves),

is dealt with under Chapter 8.

3

Any receipt, so far as it falls within Chapter 7 (rent receivable in connection with a UK section 39(4) concern) and Chapter 8 (rent receivable for UK electric-line wayleaves), is dealt with under Chapter 8.

Other supplementary provisions

289Effect of company starting or ceasing to be within charge to corporation tax

1

This section applies if a company starts or ceases to be within the charge to corporation tax in respect of a property business.

2

The company is treated for the purposes of this Part—

a

as starting to carry on the business when it starts to be within the charge, or

b

as ceasing to carry on the business when it ceases to be within the charge.

290Overseas property businesses and overseas land: adaptation of rules

1

This section applies if a provision of this Part—

a

applies to an overseas property business or land outside the United Kingdom, but

b

is expressed by reference to a domestic concept of law.

2

In relation to that business or land, the provision is to be read so as to produce the result most closely corresponding with that produced by the provision in relation to a UK property business or land in the United Kingdom.

291Meaning of “lease” and “premises”

1

In this Part “lease” includes—

a

an agreement for a lease (so far as the context permits), and

b

any tenancy,

but does not include a mortgage.

2

In this Part “premises” includes land.

Part 5Loan Relationships

Chapter 1Introduction

Introduction

292Overview of Part

1

This Part sets out how profits and deficits arising to a company from its loan relationships are brought into account for corporation tax purposes.

2

For the meaning of “loan relationship” see section 302 and Part 6 (relationships treated as loan relationships etc).

3

For how such profits and deficits are calculated and brought into account, see—

a

section 296 (profits and deficits to be calculated using credits and debits given by this Part),

b

section 297 (trading credits and debits to be brought into account under Part 3),

c

section 299 (charge to tax on non-trading profits),

d

section 300 (method of bringing non-trading deficits into account),

e

section 301 (calculation of non-trading profits and deficits from loan relationships: non-trading credits and debits), and

f

Chapter 16 (non-trading deficits).

4

For the priority of this Part for corporation tax purposes, see Chapter 17.

5

This Part also contains the following Chapters (which mainly relate to the amounts to be brought into account for the purposes of this Part)—

a

Chapter 3 (the credits and debits to be brought into account: general),

b

Chapter 4 (continuity of treatment on transfers within groups or on reorganisations),

c

Chapter 5 (connected companies relationships: introduction and general),

d

Chapter 6 (connected companies relationships: impairment losses and releases of debts),

e

Chapter 7 (group relief claims involving impaired or released consortium debts),

f

Chapter 8 (connected parties relationships: late interest),

g

Chapter 9 (partnerships involving companies),

h

Chapter 10 (insurance companies),

i

Chapter 11 (other special kinds of company),

j

Chapter 12 (special rules for particular kinds of securities),

k

Chapter 13 (European cross-border transfers of business),

l

Chapter 14 (European cross-border mergers),

The general rule for corporation tax purposes is that all profits arising to a company from its loan relationships are chargeable to tax as income in accordance with this Part.

2

But see section 465 (exclusion of distributions except in tax avoidance cases).

296Profits and deficits to be calculated using credits and debits given by this Part

Profits and deficits arising to a company from its loan relationships are to be calculated using the credits and debits given by this Part.

297Trading credits and debits to be brought into account under Part 3

1

This section applies so far as in any accounting period a company is a party to a loan relationship for the purposes of a trade it carries on.

2

The credits in respect of the relationship for the period are treated as receipts of the trade which are to be brought into account in calculating its profits for that period.

3

The debits in respect of the relationship for the period are treated as expenses of the trade which are deductible in calculating those profits.

4

So far as subsection (3) provides for any amount to be deductible, it has effect despite anything in—

a

section 53 (capital expenditure),

b

section 54 (expenses not wholly and exclusively for trade and unconnected losses), or

c

section 59 (patent royalties).

5

This section is subject to—

a

section 330 (debits in respect of pre-trading expenditure),

b

section 482(1) (under which credits or debits to be brought into account under Chapter 2 of Part 6 (relevant non-lending relationships) are treated as non-trading credits or debits), and

c

section 494(2A) of ICTA (under which some credits and debits affecting ring-fence profits from petroleum extraction activities are treated as non-trading credits and debits).

298Meaning of trade and purposes of trade

1

For the purposes of this Part a company is taken to be a party to a creditor relationship for the purposes of a trade it carries on only if it is a party to the relationship in the course of activities forming an integral part of the trade.

2

For the meaning of “creditor relationship”, see section 302(5).

3

For the purposes of this Part activities carried on by a company in the course of—

a

any mutual trading,

b

any mutual insurance or other mutual business which is not life assurance business, or

c

any basic life assurance and general annuity business,

are treated as not constituting the whole or any part of a trade.

4

Subsection (3) applies for the purposes of any other relevant enactment as it applies for the purposes of this Part.

5

In subsection (4) “relevant enactment” means so much of any enactment as contains provision by reference to which amounts are to be brought into account for the purposes of this Part.

299Charge to tax on non-trading profits

1

The charge to corporation tax on income applies to any non-trading profits which a company has in respect of its loan relationships.

2

For the meaning of a company having such profits and how they are calculated, see section 301.

300Method of bringing non-trading deficits into account

1

Any non-trading deficit which a company has from its loan relationships must be brought into account in accordance with Chapter 16 (non-trading deficits).

2

For the meaning of a company having such a deficit and how it is calculated, see section 301.

3

This section and Chapter 16 apply even if none of the company’s loan relationships is regarded as a source of income as a result of this Part.

6

For the meaning of “share” see section 476(1).

304“Related transaction”

1

In this Part “related transaction”, in relation to a loan relationship, means any disposal or acquisition (in whole or in part) of rights or liabilities under the relationship.

2

For this purpose the cases where there is taken to be such a disposal and acquisition include those where rights or liabilities under the loan relationship are transferred or extinguished by any sale, gift, exchange, surrender, redemption or release.

305Payments, interest, rights and liabilities under a loan relationship

1

For the purposes of this Part references to payments or interest under a loan relationship are references to payments or interest paid or payable in pursuance of any of the rights or liabilities under that relationship.

2

For the purposes of this Part references to rights or liabilities under a loan relationship are references to any of the rights or liabilities under the arrangements as a result of which that relationship subsists.

3

For the purposes of this Part rights or liabilities under a loan relationship are taken to include the rights or liabilities attached to any security that is issued in relation to the money debt in question (and so is a security representing that relationship).

4

But for the treatment of funding bonds see—

a

section 413 (issue of funding bonds), and

b

section 414 (redemption of funding bonds).

Chapter 3The credits and debits to be brought into account: general

Introduction

306Overview of Chapter

2

If, in accordance with generally accepted accounting practice, an amount is shown as a prior period adjustment in any statement within subsection (1), it must be brought into account for the purposes of this Part in calculating the company’s profits and losses for the period to which the statement relates.

3

Subsection (2) does not apply to an amount recognised for accounting purposes by way of correction of a fundamental error.

309Companies without GAAP-compliant accounts

1

If a company—

a

draws up accounts which are not GAAP-compliant accounts, or

b

does not draw up accounts at all,

this Part applies as if GAAP-compliant accounts had been drawn up.

2

Accordingly, references in this Part to amounts recognised for accounting purposes are references to the amounts that would have been recognised if GAAP-compliant accounts had been drawn up for the period of account in question and any relevant earlier period.

3

For this purpose a period of account is relevant to a later period if the accounts for the later period rely to any extent on amounts derived from the earlier period.

4

In this section “GAAP-compliant accounts” means accounts drawn up in accordance with generally accepted accounting practice.

310Power to make regulations about recognised amounts

1

The Treasury may by regulations—

a

make provision excluding from section 308(1) or (2) amounts of a specified description, and

b

make provision for or in connection with bringing into account in specified circumstances amounts in relation to which section 308(1) or (2) does not have effect as a result of regulations under paragraph (a).

2

The regulations may provide that section 308(1) or (2) does not apply to specified amounts in a period of account so far as they derive from or otherwise relate to amounts brought into account in a specified way in a previous period of account.

3

The regulations may—

a

make different provision for different cases, and

b

make provision subject to an election or to other specified conditions.

4

The regulations may apply to periods of account beginning before they are made, but not earlier than the beginning of the calendar year in which they are made.

5

The power to make regulations under this section does not apply to exchange gains or losses (but see section 328(4) to (7)).

an amount is so recognised in respect of only part of the relationship or contribution.

312Determination of credits and debits where amounts not fully recognised

1

In determining the credits and debits which a company is to bring into account for the period referred to in section 311(1) for the purposes of this Part in respect of—

a

the creditor relationship mentioned in section 311(2), or

b

in a case where condition A in section 311(3) is met, the debtor relationship by reference to which that condition is met,

the assumption in subsection (2) is to be made.

2

The assumption is that an amount in respect of the whole of the relationship in question is recognised in determining the company’s profit or loss for the period.

3

But the amount of any debits to be brought into account by the company for a period as a result of this section applying in respect of its debtor relationships must not exceed the amount of any credits to be brought into account by it for the period as a result of this section applying in respect of its creditor relationships.

4

Subsection (5) applies in any case where—

a

apart from this section any credits or debits are brought into account for a period for the purposes of this Part by the company in respect of a loan relationship, and

b

the relationship is a creditor relationship within subsection (1)(a) or a debtor relationship within subsection (1)(b).

5

The credits and debits which are to be so brought into account as a result of this section are to be determined on the same basis of accounting as that on which the credits or debits mentioned in subsection (4)(a) are determined.

6

In any other case, the credits and debits which are to be so brought into account as a result of this section are to be determined on an amortised cost basis of accounting.

Accounting bases

313Basis of accounting: “amortised cost basis”, “fair value accounting” and “fair value”

1

The general rule is that the amounts to be brought into account by a company as credits and debits for any period of account for the purposes of this Part may be determined on any basis of accounting that is in accordance with generally accepted accounting practice and, in particular, an amortised cost basis of accounting or fair value accounting.

2

But subsection (1) is subject to sections 307(3) and (4) and the following provisions (which require a particular accounting basis to be used)—

a

section 312(5) and (6) (determination of credits and debits where amounts not fully recognised for accounting purposes),

b

section 349(2) (application of amortised cost basis to connected companies relationships),

c

section 382(2) (company partners using fair value accounting),

d

section 399(2) (index-linked gilt-edged securities: application of fair value accounting),

e

section 453(2) (application of fair value accounting where connected parties derive benefit from creditor relationships),

f

section 454(4) (application of fair value accounting: reset bonds etc),

g

section 482(2) (application of amortised cost basis of accounting to discounts arising from a money debt under a relevant non-lending relationship),

h

section 490(3) (holdings in OEICs, unit trusts and offshore funds: application of fair value accounting), and

i

section 534(1) (application of fair value accounting where section 523 applies).

3

4

In this Part “amortised cost basis of accounting”, in relation to a company’s loan relationship, means a basis of accounting under which an asset or liability representing the loan relationship is shown in the company’s accounts at cost adjusted for cumulative amortisation and any impairment, repayment or release.

5

In this Part “fair value accounting” means a basis of accounting under which assets and liabilities are shown in the company’s balance sheet at their fair value.

6

In this Part “fair value”, in relation to a loan relationship of a company, means the amount which, at the time as at which the value is to be determined, is the amount which the company would obtain from or, as the case may be, would have to pay to a knowledgeable and willing person dealing at arm’s length for—

a

the transfer of all the company’s rights under the relationship, and

b

the release of all the company’s liabilities under it.

a credit equal to the decrease must be brought into account for the purposes of this Part for the later period.

5

This section does not apply so far as such a credit or debit as is mentioned in this section falls to be brought into account apart from this section.

317Carrying value

1

In section 316 “carrying value” means the carrying value of the asset or liability recognised for accounting purposes, except as provided in subsection (4).

2

For the purposes of this section the “carrying value” of an asset or liability includes amounts recognised for accounting purposes in relation to the loan relationship in respect of—

a

accrued amounts,

b

amounts paid or received in advance, or

c

impairment losses (including provisions for bad or doubtful debts).

3

For the meaning of “impairment loss” see section 476(1).

4

In determining the profits and losses to be recognised in determining the carrying value of the asset or liability for the purposes of this section, the provisions specified in subsection (5) apply as they apply for the purposes of determining the credits and debits to be brought into account under this Part.

5

Those provisions are—

a

sections 340 and 341 (continuity of treatment on group transfers and transfers of insurance business),

b

section 349(2) (application of amortised cost basis of accounting to connected companies relationships),

c

section 354 (exclusion of debits for impaired or released connected companies debts),

d

section 360 (exclusion of credits on reversal of impairments of connected companies debts),

e

sections 361 to 363 (deemed debt releases on impaired debts becoming held by connected company),

f

Chapter 8 (connected parties relationships: late interest),

g

sections 399 and 400 (treatment of index-linked gilt-edged securities),

h

section 404 (restriction on deductions etc relating to FOTRA securities),

i

sections 409 to 412 (deeply discounted securities of close companies),

j

section 415(2) (loan relationships with embedded derivatives),

k

sections 422 and 423 (transfer of loan relationships on European cross-border transfers of business),

l

sections 433 and 434 (transfer of loan relationships on European cross-border mergers),

m

section 454(4) (accounting method where rate of interest is reset),

n

section 465 (exclusion of distributions except in tax avoidance cases),

o

paragraph 62 of Schedule 2 (disregard of pre-2005 disallowed debits), and

p

paragraph 69 of Schedule 2 (5½% Treasury Stock 2008-2012 not redeemed before 6 April 2009).

if the company was the debtor under the loan relationship, it must bring into account for the later period a credit equal to the decrease for the purposes of this Part.

4

Subsections (2) and (3) do not apply so far as the credit or debit falls to be brought into account apart from this section.

5

In this section “the amount outstanding in respect of the loan relationship” means so much of the recognised deferred income or recognised deferred loss from the loan relationship as has not been represented by credits or debits brought into account under this Part in respect of the relationship.

6

In subsection (5)—

“recognised deferred income”, in relation to a loan relationship, means the amount recognised in the company’s balance sheet in accordance with generally accepted accounting practice as deferred income in respect of the profits which arose from the relationship or a related transaction in the cessation period, and

“recognised deferred loss”, in relation to a loan relationship, means the amount so recognised as deferred loss in respect of the losses which so arose.

319General power to make regulations about changes in accounting policy

This section applies if in accordance with generally accepted accounting practice a credit or debit for a period in respect of a company’s loan relationship—

a

is recognised in equity or shareholders’ funds, and

b

is not recognised in any of the statements mentioned in section 308(1).

2

The credit or debit is to be brought into account for the period for the purposes of this Part in the same way as a credit or debit which is brought into account in determining the company’s profit or loss for the period in accordance with generally accepted accounting practice.

section 358 (exclusion of credits on release of connected companies debts: general), and

b

section 359 (exclusion of credits on release of connected companies debts during creditor’s insolvency).

Schedule B1 to the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)),

at a time when its assets were insufficient for the payment of its debts and other liabilities and the expenses of the administration.

4

For the purposes of section 322(6) a company is in insolvent administrative receivership if—

a

an appointment of an administrative receiver is in force in relation to the company, and

b

the company was put into administrative receivership at a time when its assets were insufficient for the payment of its debts and other liabilities and the expenses of administrative receivership.

5

In subsection (4) “administrative receiver” has the same meaning as in—

a

Chapter 1 or 2 of Part 3 of the Insolvency Act 1986 (c. 45), or

b

Part 4 of the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)),

and “administrative receivership” is to be read accordingly.

324Restriction on debits resulting from revaluation

1

No debit is to be brought into account for the purposes of this Part as a result of the revaluation of an asset representing a creditor relationship of a company except—

a

an impairment loss, or

b

a debit resulting from a release by the company of any liability under the relationship.

2

For the meaning of “impairment loss” see section 476(1).

3

The reference in subsection (1) to revaluation of an asset includes any case where a provision or allowance is made by the company reducing the carrying value of the asset or of a group of assets including the asset in question.

4

This section does not affect the debits to be brought into account in respect of exchange gains or losses.

5

This section does not apply if fair value accounting is used.

325Restriction on credits resulting from reversal of disallowed debits

1

No credit is to be brought into account for the purposes of this Part in respect of the reversal of a debit disallowed by section 324(1).

2

This section does not apply if fair value accounting is used.

3

See also paragraph 61 of Schedule 2 (restriction on bringing into account credits resulting from reversal of debits disallowed in a period of account beginning before 1 January 2005).

326Writing off government investments

1

This section applies if a government investment in a company is written off by the release of a liability to pay any amount under a debtor relationship of the company.

2

The company is not required to bring into account a credit for the purposes of this Part in respect of the release.

3

Section 400(7) and (8) of ICTA (write-off of government investment) applies for interpreting the reference in subsection (1) to a government investment in a company being written off as it applies for the purposes of section 400(1) of that Act.

327Disallowance of imported losses etc

c

had the company entered into the relationship or transaction, the expenses would be expenses within section 307(3)(c).

2

The expenses are treated as expenses in relation to which debits may be brought into account in accordance with section 307(3) to the same extent as if the company had entered into the relationship or transaction.

The question is to be determined by reference to the circumstances in the cessation period instead of the circumstances in the post-cessation period.

332Repo, stock lending and other transactions

b

it ceases to be UK resident at the same time as it ceases to be a member of the relevant group.

4

In subsection (3) “the relevant group” has the meaning given in section 344(4).

334Non-UK resident company ceasing to hold loan relationship for UK permanent establishment

1

This section applies if an asset or liability representing a loan relationship of a company which is not UK resident ceases to be held or owed for the purposes of a permanent establishment of the company in the United Kingdom in circumstances not involving a related transaction (but see subsection (3)).

2

This Part applies as if—

a

immediately before the asset or liability so ceases the company had assigned it, so far as so ceasing, for consideration of an amount equal to its fair value at that time, and

b

the company had immediately reacquired it for consideration of the same amount.

3

This section does not apply if—

a

the conditions in section 344(1)(a) to (c) are met in relation to the company (transferee leaving group after replacing transferor as party to loan relationship), and

b

the asset or liability mentioned in subsection (1) ceases to be held or owed for the purposes of the permanent establishment at the same time as the company ceases to be a member of the relevant group.

4

In subsection (3) “the relevant group” has the meaning given in section 344(4).

Chapter 4Continuity of treatment on transfers within groups or on reorganisations

Application of this Chapter

335Introduction to Chapter

1

This Chapter applies in the cases mentioned in—

a

section 336 (transfers of loans on group transactions),

b

section 337 (transfers of loans on insurance business transfers), and

c

section 339 (issues of new securities on certain cross-border reorganisations).

2

The following sections make provision about how the credits and debits to be brought into account under this Part in those cases are determined—

a

sections 340 and 341 (which apply in the cases mentioned in sections 336 and 337), and

b

sections 342 and 343 (which apply in the case mentioned in section 339).

3

Sections 344 to 346 provide for the treatment of a loan relationship in respect of which section 336 has applied where the company replacing another as a party to a loan relationship later leaves the group of companies of which they were members.

4

Section 347 (disapplication of Chapter where transferor party to avoidance involving subsequent transfer by transferee) disapplies this Chapter in some circumstances in the cases mentioned in 336 and 337.

5

For the meaning of references in this Chapter to a company replacing another as a party to a loan relationship, see section 338.

6

In this Chapter references to a company being a member of a group of companies are to be read in accordance with section 170 of TCGA 1992 (interpretation of sections 171 to 181 of that Act: groups).

a transfer of rights under, or an interest in, an asset,

as a result of a transaction within subsection (2) or a series of transactions within subsection (3) if immediately before or after the transfer the asset is within one of the categories set out in section 440(4)(a), (d) and (e) of ICTA (assets held for certain categories of long-term business).

5

In this Chapter, in relation to a case within subsection (1), “the transferee” and “the transferor” have the same meaning as in that subsection.

In this Chapter, in relation to a case within subsection (1), “the transferee” and “the transferor” have the same meaning as in that subsection.

This section applies instead of section 340 if, in a case where that section would otherwise apply, the transferor is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship (see subsection (5)).

2

The amount which is to be brought into account by the transferor in respect of the transaction or the series of transactions referred to in section 340(3) (“the transferor’s amount”) is—

a

if an asset is to be brought into account, its fair value as at the date when the transferee becomes party to the loan relationship, or the fair value of the rights under or interest in it as at that date, and

b

if a liability is to be brought into account, its fair value as at that date.

Sections 345 and 346 apply if—

a

this Chapter applies in the case mentioned in section 336 (transfers of loans on group transactions),

b

section 341 (transferor using fair value accounting) does not apply, and

c

before the end of the relevant 6 year period and while still a party to the relevant loan relationship, the transferee ceases to be a member of the relevant group.

2

But the transferee is not treated for the purposes of this section and sections 345 and 346 as having left the relevant group if—

a

an asset or liability which represents a loan relationship is transferred in the course of a transfer or merger in relation to which Chapter 13 (European cross-border transfers of business) or Chapter 14 (European cross-border mergers) applies, and

b

the transferee ceases to be a member of the relevant group in consequence of the transfer or merger.

3

In a case where subsection (2) applies, if the transferee becomes a member of another group in consequence of the transfer or merger, it is treated for the purposes of this section and sections 345 and 346 as if the relevant group and the other group were the same.

4

In this section and sections 345 and 346—

“the relevant 6 year period” means the period of 6 years following—

in a case where section 340 applies because of a transaction within section 336(2) (“case A”), that transaction, or

in a case where section 340 applies because of a series of transactions within section 336(3) (“case B”), the last transaction of that series,

“the relevant group” means—

in case A, the group mentioned in section 336(2), and

in case B, the group mentioned in section 336(3), and

“the relevant loan relationship” means the loan relationship mentioned in section 336(1)(b).

Section 707 (meaning of “hedging relationship”) applies for the purposes of this section.

2

Condition A is that the transferor is a party to arrangements in accordance with which there is likely to be a transfer of rights or liabilities under the loan relationship by the transferee to another person in circumstances in which section 336 or 337 would not apply.

3

Condition B is that the purpose or one of the main purposes of the arrangements is to secure a tax advantage for the transferor or a person connected with it.

4

This Chapter does not apply in relation to a disposal in the cases mentioned in subsection (1) if section 455 (disposals for consideration not fully recognised by accounting practice) applies in relation to the disposal.

5

In this section—

“arrangements” includes any scheme, agreement, understanding, transaction or series of transactions, and

“transfer” includes any arrangement which equates in substance to a transfer (including any acquisition or disposal of, or increase or decrease in, a share of the profits or assets of a partnership).

Chapter 5Connected companies relationships: introduction and general

348Introduction: meaning of “connected companies relationship”

1

This Chapter contains some general rules relating to connected companies relationships.

2

For the purposes of this Part a debtor relationship of a company is a connected companies relationship if there is a connection between—

a

the company, and

b

another company standing in the position of a creditor as respects the debt in question.

3

For the purposes of subsection (2) a company is treated as standing in the position of a creditor if it indirectly stands in that position by reference to a series of loan relationships or relevant money debts.

4

For the purposes of this Part a creditor relationship of a company is a connected companies relationship if there is a connection between—

a

the company, and

b

another company standing in the position of a debtor as respects the debt in question.

5

For the purposes of subsection (4) a company is treated as standing in the position of a debtor if it indirectly stands in that position by reference to a series of loan relationships or relevant money debts.

6

For the purposes of this Part, if a loan relationship is a connected companies relationship at any time in an accounting period, it is treated as being such a relationship for the period.

7

In this section “relevant money debt” means a money debt which would be a loan relationship if a company directly stood in the position of creditor or debtor.

8

Section 466 (companies connected for an accounting period) applies for the purposes of this section.

349Application of amortised cost basis to connected companies relationships

1

This section applies if a loan relationship is a connected companies relationship for an accounting period.

2

The credits and debits which are to be brought into account for the purposes of this Part in respect of the relationship for the period are determined on an amortised cost basis of accounting.

3

Subsection (2) does not apply if section 454(4) (which requires fair value accounting to be applied to reset bonds etc) applies.

4

See also section 534(8) (which disapplies this section where the requirement to apply fair value accounting under section 534(1) applies).

350Companies beginning to be connected

1

This section applies if—

a

a company’s loan relationship becomes a connected companies relationship, and

b

as a result of the application of section 349 the company—

i

brings into account credits or debits determined in accordance with fair value accounting for one accounting period (“the earlier period”), and

ii

brings into account credits or debits determined in accordance with an amortised cost basis of accounting for the next accounting period (“the later period”).

2

If—

a

the fair value of a relevant asset at the end of the earlier period (“FVA”), exceeds

b

the cost of the asset which would be given at that time on an amortised cost basis of accounting (“ACA”),

the excess must be brought into account for the later period as a debit for the purposes of this Part.

3

If ACA exceeds FVA, the excess must be brought into account for the later period as a credit for the purposes of this Part.

4

If—

a

the fair value of a relevant liability at the end of the earlier period (“FVL”), exceeds

b

the cost of the liability which would be given at that time on an amortised cost basis of accounting (“ACL”),

the excess must to be brought into account for the later period as a credit for the purposes of this Part.

5

If ACL exceeds FVL, the excess must to be brought into account for the later period as a debit for the purposes of this Part.

351Companies ceasing to be connected

1

This section applies if—

a

a company’s loan relationship ceases to be a connected companies relationship, and

b

as a result of section 349 ceasing to apply the company—

i

brings into account credits or debits determined in accordance with an amortised cost basis of accounting for one accounting period (“the earlier period”), and

ii

brings into account credits or debits determined in accordance with a fair value basis of accounting for the next accounting period (“the later period”).

2

If—

a

the fair value of a relevant asset at the end of the earlier period (“FVA”), exceeds

b

the cost of the asset which would be given at that time on an amortised cost basis of accounting (“ACA”),

the excess must be brought into account for the later period as a credit for the purposes of this Part.

3

If ACA exceeds FVA, the excess must be brought into account for the later period as a debit for the purposes of this Part.

4

If—

a

the fair value of a relevant liability at the end of the earlier period (“FVL”), exceeds

b

the cost of the liability which would be given at that time on an amortised cost basis of accounting (“ACL”),

the excess must be brought into account for the later period as a debit for the purposes of this Part.

5

If ACL exceeds FVL, the excess must be brought into account for the later period as a credit for the purposes of this Part.

352Disregard of related transactions

1

This section applies in an accounting period if—

a

section 349 applies in respect of a creditor relationship of a company for the period, and

b

a related transaction takes place in relation to the relationship in the period.

2

The credits brought into account in respect of the relationship for the period for the purposes of this Part must not be less than they would have been if—

a

the transaction had not taken place, and

b

no amounts had accrued after the transaction took place.

3

The debits brought into account in respect of the loan relationship for the period for the purposes of this Part must not be more than they would have been in that case.

4

Nothing in this section affects the credits or debits to be brought into account for the purposes of this Part in respect of exchange gains or losses arising from a debt.

Chapter 6Connected companies relationships: impairment losses and releases of debts

Introduction

353Introduction to Chapter

1

This Chapter contains rules about impairment losses and releases of debts in the case of companies connected with other companies.

2

In particular, see—

a

sections 354 to 357 (which prevent debits in respect of impairment losses and release debits from being brought into account in the case of connected companies relationships, subject to some exceptions),

b

sections 358 to 360 (which exclude credits in respect of the release of debts or the reversal of impairments from being brought into account in that case, except where the release is a deemed release under section 361 or 362), and

c

sections 361 to 363 (which treat debt releases as occurring when impaired debts become held by companies which might otherwise benefit from the exclusion under section 358).

3

In this Chapter “release debit” means a debit in respect of a release by a company of liability under a creditor relationship of the company.

4

Section 466 (companies connected for an accounting period) applies for the purposes of sections 354 to 360.

5

For the circumstances in which companies are connected for sections 361 and 362, see section 363.

6

For the meaning of “impairment loss” see section 476(1).

acquired possession of the shares, or

b

acquired any entitlement to them.

357Exception to section 354: insolvent creditors

b

section 362 (parties becoming connected where creditor’s rights subject to impairment adjustment).

359Exclusion of credits on release of connected companies debts during creditor’s insolvency

1

This section applies if—

a

a liability to pay an amount under a company’s debtor relationship is released,

b

the release takes place in an accounting period for which an amortised cost basis of accounting is used in respect of that relationship,

c

condition A, B, C, D or E in section 357 is met in relation to the company releasing the amount,

d

immediately before the time when the condition in question was first met the relationship was a connected companies relationship, and

e

immediately after that time it was not such a relationship.

2

The company is not required to bring into account a credit in respect of the release for the purposes of this Part.

360Exclusion of credits on reversal of impairments of connected companies debts

b

amounts paid or received in advance.

362Parties becoming connected where creditor’s rights subject to impairment adjustment

1

This section applies if—

a

a company (“D”) is a party to a loan relationship as debtor,

b

another company (“C”) which—

i

is a party to the loan relationship as creditor, and

ii

is not connected with D,

becomes connected with D, and

c

the pre-connection carrying value would have been adjusted for impairment if a period of account had ended immediately before the companies became connected.

2

C is treated as releasing its rights under the loan relationship when C and D become connected.

3

The amount treated as released is the amount of the impairment adjustment referred to in subsection (1)(c).

4

In subsection (1)(c) “the pre-connection carrying value” means the amount that would be the carrying value of the asset representing the loan relationship in C’s accounts if a period of account had ended immediately before the companies became connected.

5

For the purposes of subsection (4) the carrying value is determined taking no account of—

a

accrued amounts,

b

amounts paid or received in advance, or

c

impairment losses.

363Companies connected for sections 361 and 362

This section applies for any group accounting period for which there is a net consortium debit.

2

For the purposes of this Chapter there is a net consortium debit for a group accounting period if—

a

the total of the impairment losses and release debits brought into account for that period in respect of relevant consortium creditor relationships by—

i

the member company, and

ii

every group member,

exceeds

b

the total credits so brought into account by them in connection with debts owed by the companies which are the debtor consortium companies in respect of those relationships.

3

The net consortium debit is equal to that excess.

4

If there is a claim for that group accounting period by the member company or a group member for group relief in respect of an amount which may be surrendered as group relief by the debtor consortium companies, the debits brought into account in respect of the impairment losses and the release debits mentioned in subsection (2)(a) are reduced.

5

The amount of reduction in the case of each of the debits referred to in subsection (4) (“the relevant debits”) is calculated as follows.

Step 1

Find the total amount which—

may be surrendered as group relief by the debtor consortium companies, and

is claimed as group relief for the group accounting period by the member company or any group member.

Step 2

If the amount found at Step 1 does not exceed the net consortium debit, apportion the amount found at Step 1 between the relevant debits in proportion to their respective amounts.

If the amount found at Step 1 exceeds the net consortium debit, apportion so much of the amount found at Step 1 as does not exceed it between the relevant debits in proportion to their respective amounts.

6

This section is subject to section 366.

366Effect where credit for release brought into account on amortised cost basis

1

This section applies if—

a

a company releases liability under a relevant consortium creditor relationship of the company (“the release amount”), and

b

the debtor consortium company brings into account an amount in respect of the release for any accounting period in accordance with an amortised cost basis of accounting.

2

An amount equal to the release amount is treated for the purposes of this Chapter as not being a debit brought into account for that period in relation to the relevant consortium creditor relationship.

367Reduction of credits exceeding impairment losses

1

This section applies if, apart from this section, for any group accounting period—

a

the total of the impairment losses and release debits brought into account for that period in respect of relevant consortium creditor relationships by—

i

the member company, and

ii

every group member,

is less than

b

the total credits so brought into account by them in connection with debts owed by the companies which are the debtor consortium companies in respect of those relationships.

2

Those credits are reduced (but not below nil) in accordance with subsection (3).

3

The amount of reduction in the case of each credit is calculated as follows.

Step 1

Find the total amount by which the debits in respect of the relationships for previous group accounting periods have been reduced under section 365(4).

Step 2

Deduct the total amount by which credits have previously been reduced under this section from the amount found at Step 1.

Step 3

Apportion the amount found at Step 2 between the credits in proportion to their respective amounts.

368Reduction of claims where there are earlier net consortium debits

1

This section applies if—

a

for any group accounting period there is a claim by the member company or a group member for group relief in respect of an amount which may be surrendered as group relief by debtor consortium companies, and

b

the total amount of the net consortium debits for earlier group accounting periods in respect of the relevant consortium creditor relationships exceeds any reductions in respect of those debits falling to be made under section 365(4).

2

In this section that excess is referred to as “the unreduced debits amount”.

3

If—

a

the claim is the only claim for that period, and

b

it exceeds the unreduced debits amount,

the claim is reduced by the unreduced debits amount.

4

If—

a

the claim is not the only claim for that period, and

b

the total of the claims exceeds the unreduced debits amount,

the claim is reduced by the same proportion of the unreduced debits amount as the claim bears to that total.

5

In any other case, the claim is reduced to nil.

369Carry forward of claims where there are no net consortium debits

1

This section applies if for any group accounting period there is—

a

a claim by the member company or a group member for group relief in respect of an amount which may be surrendered as group relief by debtor consortium companies (as reduced under section 368, if it applies), and

b

no net consortium debit in respect of the relevant consortium creditor relationships.

2

The claim (as so reduced) is carried forward and treated for the purposes of section 365—

a

as increasing any such claim for group relief made by the claimant company for its next accounting period, or

b

if apart from this subsection there would be no such claim, as being such a claim.

370Group accounting periods

1

In this Chapter “group accounting period” means—

a

any accounting period of the member company beginning on or after 1 October 2002, or

b

any accounting period of a group member which—

i

begins on or after that date, and

ii

corresponds to such an accounting period of the member company.

2

Any such accounting period of the member company and any such corresponding accounting periods of group members are treated for the purposes of this Chapter as being the same accounting period.

3

For the purposes of this Chapter an accounting period of a group member corresponds to an accounting period of the member company if condition A, B or C is met.

4

Condition A is that the periods coincide.

5

Condition B is that the accounting period of the member company includes more than half of the accounting period of the group member.

6

Condition C is that—

a

the accounting period of the member company includes part of the accounting period of the group member, and

b

the remainder of that period is not within any accounting period of the member company.

371Interpretation

1

In this Chapter—

“consortium company” means a company within section 402(3)(a), (b) or (c) of ICTA (surrender of relief between members of consortia),

“debtor consortium company” has the same meaning as in section 364 (see section 364(2)),

“group accounting period” is to be read in accordance with section 370,

“group member” has the same meaning as in section 364 (see section 364(2)),

“group relief” has the meaning given by section 402(1) of ICTA,

“holding company” means a company within section 402(3)(c) of ICTA,

“member”, in relation to a consortium, has the same meaning as in Chapter 4 of Part 10 of ICTA (group relief),

“member company” has the same meaning as in section 364 (see section 364(2)),

“net consortium debit” is to be read in accordance with section 365(2) and (3),

“relevant consortium creditor relationship” is to be read in accordance with section 364(2), and

“subsidiary”, in relation to a company which is a holding company, means a company which is within section 402(3)(b) of ICTA by reference to that holding company.

2

Any reference in this Chapter to a company being owned by a consortium is to be read in accordance with section 413(6) of ICTA.

3

Any reference in this Chapter to two companies being members of the same group of companies is a reference to those companies being members of the same group of companies for the purposes of Chapter 4 of Part 10 of ICTA (group relief) (see section 413(3)(a) of that Act).

Chapter 8Connected parties relationships: late interest

372Introduction to Chapter

1

This Chapter makes provision about the debits to be brought into account for the purposes of this Part in cases where certain conditions relating to interest that is not paid or is paid late are met and there is a connection between the parties to the loan relationship.

2

For those conditions and the rule that applies in those cases, see section 373 (late interest treated as not accruing until paid in some cases).

3

For the kinds of connections where the rule applies, see—

a

section 374 (connection between debtor and person standing in position of creditor),

b

section 375 (loans to close companies by participators etc),

c

section 377 (party to loan relationship having major interest in other party), and

d

section 378 (loans by trustees of occupational pension schemes).

4

For the meaning of “standing in the position of a creditor” in this Chapter, see section 379(1) (persons indirectly standing in the position of creditor).

373Late interest treated as not accruing until paid in some cases

1

Debits relating to interest payable under a company’s debtor relationship are to be brought into account for the purposes of this Part on the assumption that the interest does not accrue until it is paid if—

a

conditions A and B are met, and

b

5

Section 376 applies for the interpretation of this section.

376Interpretation of section 375

1

For the purposes of section 375 and this section, section 414 of ICTA (meaning of “close company” in the Tax Acts) applies with the omission of section 414(1)(a) (exclusion of non-UK resident companies).

2

A person who is a participator in a company which controls another company is treated for the purposes of section 375 and this section as being a participator in that other company also.

3

Subject to that, in section 375 and this section “participator”, in relation to a company, means a person who is a participator in the company for the purposes of Part 11 of ICTA because of section 417 of that Act, but not a person who is a participator for those purposes just because of being a loan creditor of the company.

4

Section 472 (meaning of “control”) applies for the purposes of section 375 and this section.

5

In section 375—

“CIS-based close company” means a company which would not be a close company apart from the rights and powers of one or more partners in a CIS limited partnership being attributed to another of the partners under section 416(6) of ICTA because of section 417(3)(a) of that Act,

“CIS limited partnership” means a limited partnership—

which is a collective investment scheme, or

which would be a collective investment scheme if it were not a body corporate,

“non-qualifying territory” has the meaning given by paragraph 5E of Schedule 28AA to ICTA,

“resident” has the meaning given by paragraph 5B(6) of that Schedule, and

“small or medium-sized enterprise” has the meaning given by paragraph 5D of that Schedule.

377Party to loan relationship having major interest in other party

The case to which this section applies is where—

a

a person (“C”) standing in the position of a creditor as respects the loan relationship is a company, and

b

there is a time in the actual accrual period when—

i

the company which has the debtor relationship (“D”) has a major interest in C, or

ii

C has a major interest in D.

378Loans by trustees of occupational pension schemes

1

The case to which this section applies is where—

a

the loan is one made by trustees of an occupational pension scheme, and

b

condition A, B or C is met.

2

Condition A is that there is a time in the actual accrual period when the company which has the debtor relationship (“D”) is the employer of employees to whom the scheme relates.

3

Condition B is that there is a connection between D and such an employer for the actual accrual period.

4

b

any of the partners in the firm is a company (a “company partner”), and

c

a money debt is owed by or to the firm.

2

In calculating the profits and losses of the trade or business for corporation tax purposes under section 1259 (calculation of firm’s profits or losses), no credits or debits may be brought into account under this Part—

a

in relation to the money debt, or

b

in relation to any loan relationship that would fall to be treated for the purposes of the calculation as arising from the money debt.

3

Instead, each company partner must bring credits and debits into account under this Part in relation to the debt or relationship for each of its accounting periods in which the conditions in subsection (1) are met.

4

The following provisions of this Chapter contain special rules about the credits and debits to be brought into account under subsection (3)—

a

section 381 (determinations of credits and debits by company partners: general),

b

section 382 (company partners using fair value accounting),

c

section 383 (lending between partners and the partnership),

d

section 384 (treatment of exchange gains and losses), and

e

section 385 (company partners’ shares where firm owns deeply discounted securities).

5

In those provisions “company partner” has the same meaning as in this section.

381Determinations of credits and debits by company partners: general

1

The credits and debits to be brought into account under section 380(3) are to be determined separately for each company partner as follows.

2

The money debt owed by or to the firm is treated as if—

a

it were owed by or, as the case may be, to the company partner, and

b

it were so owed for the purposes of the trade or business which the company partner carries on.

3

If the money debt arises from a transaction for the lending of money—

a

it continues to be treated as so arising, and

b

accordingly the company partner is treated as having a loan relationship.

4

Anything done by or in relation to the firm in connection with the money debt is treated as done by or in relation to the company partner.

5

The credits and debits in the case of each company partner are the partner’s appropriate share of the total credits and debits determined in accordance with subsections (2) to (4) (without any reduction for the fact that the debt is treated as owed by or to each company partner).

6

A company partner’s “appropriate share” is the share that would be apportioned to it on the assumption in subsection (7).

7

The assumption is that the total credits and debits determined in accordance with subsections (2) to (4) are apportioned between the partners in the shares in which any profit or loss would be apportioned between them in accordance with the firm’s profit-sharing arrangements.

382Company partners using fair value accounting

1

This section applies if a company partner uses fair value accounting in relation to its interest in the firm.

2

The credits and debits to be brought into account by the company partner under section 380(3) are to be determined on the basis of fair value accounting.

the security were apportioned in the shares in which any profit or loss would be apportioned between them in accordance with the firm’s profit-sharing arrangements.

4

In this section “deeply discounted security” has the same meaning as in Chapter 8 of Part 4 of ITTOIA 2005 (profits from deeply discounted securities) (see section 430 of that Act).

Chapter 10Insurance companies

Introduction

386Overview of Chapter

1

This Chapter contains special rules about the treatment of the loan relationships of insurance companies.

2

In particular, it—

a

provides for special rules to apply in relation to an insurance company’s non-trading deficits referable to BLAGAB instead of those in Chapter 16 (see sections 387 to 391),

b

excludes some loan relationships of corporate members of Lloyd’s from this Part (see section 392), and

c

provides for the determination of questions concerning how far certain matters are referable to any particular category of a company’s long-term business (see sections 393 and 394).

3

For further special rules affecting insurance companies, see—

a

section 298(3) (under which activities carried on by a company in the course of mutual insurance business which is not life assurance business or of BLAGAB are treated as not constituting a trade or part of a trade),

b

Chapter 4 (continuity of treatment on transfers within groups or on reorganisations), and, in particular, sections 335(1) and (2), 336(4) and 337,

c

section 405 (certain non-UK residents with interest on 3½% War Loan 1952 Or After),

d

sections 468 and 471 (connection between creditor and debtor companies to be ignored in some cases where creditor is insurance company carrying on BLAGAB),

e

section 483(6) (treatment of deferred acquisition costs and provision for unearned premiums or for unexpired risks as a money debt for the purposes of Chapter 2 of Part 6 in the case of companies carrying on insurance business), and

f

section 486(4) (no exchange gains or losses to arise for the purposes of that Chapter where relevant debts prevented from being deductible as expenses of insurance companies at Step 1 of section 76(7) of ICTA).

4

In this Chapter “BLAGAB” means basic life assurance and general annuity business.

The claim amount reduces the company’s available profits in the most recent accounting period of the company, before any remainder reduces those in the next most recent accounting period and then those in the next most recent accounting period.

3

For the meaning of “available profits”, see section 390.

4

In this section and that section “permitted period” means the period of 12 months immediately before the deficit period.

5

A claim under this section must be made—

a

within the period of 2 years after the end of the deficit period, or

b

within such further period as an officer of Revenue and Customs allows.

390Meaning of “available profits”

1

For the purposes of section 389 the available profits of the company for an accounting period are its BLAGAB non-trading loan relationships profits for the period (see subsection (4)), less the unused part of the relevant deductions for the period (see subsection (5)).

2

If an accounting period ending within the permitted period begins before it, only a part of the amount which would otherwise be the available profit for that accounting period is available profit.

3

That part is so much as is proportionate to the part of the accounting period in the permitted period.

4

References in this section to a company’s BLAGAB non-trading loan relationships profits for an accounting period are references to the amount (if any) which is chargeable to tax for that period under section 299 (charge to tax on non-trading profits) for the company’s BLAGAB.

5

The unused part of the relevant deductions for an accounting period is found as follows.

Step 1

Add together—

so much of the expenses deduction for the period given by Step 8 in section 76(7) of ICTA (expenses of insurance companies) as is referable to BLAGAB, and

so much of the sum of the deductions made in the case of the company in respect of charges on income for that period as is so referable.

Step 2

Add together—

the total amounts so referable which could be applied for the period in making deductions as a result of section 76 of ICTA if the company’s BLAGAB non-trading loan relationships profits for the period were disregarded, and

the total amounts so referable which could be applied for the period in making deductions in respect of charges on income if those profits were disregarded.

Step 3

Subtract the amount found at Step 2 from the amount found at Step 1.

The result is the unused part of the relevant deductions for the accounting period.

6

In the case of any claim under section 389, the reference in Step 1(a) in subsection (5) to the expenses deduction for an accounting period given by Step 8 in section 76(7) of ICTA and the reference in Step 2(a) in subsection (5) to the deduction for expenses as a result of section 76 of ICTA for an accounting period are references to the deduction for expenses that would have been made as a result of that section for that period on the assumptions in subsections (7) and (8).

7

The first assumption is that no account is taken of—

a

that claim, or

b

any other claim under section 389 relating to a deficit for an accounting period after the deficit period.

8

The second assumption is that all such adjustments are made as are required as a result of any sum having been carried back under the Corporation Tax Acts to the accounting period mentioned in subsection (5), otherwise than as a result of—

a

the claim mentioned in subsection (6), or

b

any such other claim as is mentioned in subsection (7)(b).

liabilities attached to that fund.

3

In this section “corporate member” and “premium trust fund” have the same meaning as in Chapter 5 of Part 4 of FA 1994 (Lloyd’s underwriters: corporations etc) (see section 230(1) of that Act).

Determination of questions requiring apportionments

393General rules for some debtor relationships

1

This section applies if a debtor relationship of an insurance company is represented by a liability which is a liability of its long-term insurance fund.

2

Any question arising for the purposes of the Corporation Tax Acts as to how far any credits or debits given for the purposes of this Part in respect of the liability are referable to any particular category of the company’s long-term business is determined as follows.

3

In the case of credits and debits within the rules in section 394, that section applies.

4

In the case of other credits and debits, the relevant fraction of the credits or debits is referable to a category of long-term business.

5

That fraction is determined by applying section 432A(6) to (6B) and (8) of ICTA (apportionment of income and gains) as if—

a

the credits or debits were income not directly referable to any category of business, and

b

the references in section 432A(6) to assets directly referable to a category of business were references to assets linked to that category.

394Special rules for some debtor relationships

1

This section sets out the rules referred to in section 393(3) as to how far certain credits or debits given for the purposes of this Part in respect of liabilities representing a debtor relationship of an insurance company which are liabilities of its long-term insurance fund are referable to any particular category of its long-term business.

2

If the liabilities are liabilities of an internal linked fund of the company relating to one category of long-term business, the credits or debits are referable to that category.

the proportion of all the reinsured liabilities that are liabilities relating to that category at the end of that period.

7

Debits relating to interest payable in respect of the late payment of any benefits are referable to the category of long-term business that comprises the effecting and carrying out of the policies or contracts under which the benefits are payable.

Chapter 11Other special kinds of company

3 months after the end of the period, or

ii

such longer period as an officer of Revenue and Customs allows.

3

No debit is to be brought into account for the purposes of this Part in respect of a loan relationship of a credit union if a member of the union stands in the position of creditor in relation to the debt in question.

Chapter 12Special rules for particular kinds of securities

Introduction

398Overview of Chapter

401Gilt strips

1

This section applies if a loan relationship is represented by—

a

a strip of a gilt-edged security, or

b

any other gilt-edged security.

2

Subsections (3) and (4) apply if a person exchanges a gilt-edged security for strips of that security.

3

The security is treated as having been redeemed at the time of the exchange by the payment to that person of its market value.

4

The person is treated as having acquired each strip for an amount equal to—

A×BC math

where—

A is the market value of the security at the time of the exchange,

B is the market value of the strip at that time, and

C is the total of the market values at that time of all the strips received in the exchange.

5

Subsections (6) and (7) apply if strips of a gilt-edged security are consolidated into a single gilt-edged security by being exchanged by any person for that security.

6

Each strip is treated as having been redeemed at the time of the exchange by the payment to that person of the amount equal to its market value.

7

The person is treated as having acquired the security for the amount equal to the total of the market values of all the strips given in the exchange.

8

For the meaning of “market value” and “strip” in relation to securities, see section 402 and section 403 respectively.

402Market value of securities

1

References in section 401 to the market value of a security given or received in exchange for another are references to its market value at the time of the exchange.

2

The Treasury may by regulations make provision for the purposes of section 401 and this section as to the way of determining the market value at any time of—

a

any strip, or

b

any other gilt-edged security.

3

The regulations may make—

a

different provision for different cases, and

b

incidental, supplemental, consequential and transitional provision and savings.

403Meaning of “strip”

1

In sections 401 and 402 “strip”, in relation to a gilt-edged security, means a security issued under the National Loans Act 1968 (c. 13) which meets conditions A, B and C.

2

Condition A is that the security is issued for the purpose of representing the right to or of securing—

a

a payment corresponding to a payment of interest or principal remaining to be made under the gilt-edged security, or

b

two or more payments each corresponding to a payment to be so made.

3

Condition B is that the security is issued in conjunction with the issue of one or more other securities which, together with that security—

a

represent the right to, or

b

secure,

payments corresponding to every payment remaining to be made under the gilt-edged security.

4

Condition C is that the security is not itself a security that—

a

represents the right to, or

b

secures,

payments corresponding to a part of every payment remaining to be made under the gilt-edged security.

5

After the balance has been struck for a dividend on a gilt-edged security, a payment to be made in respect of that dividend is treated for the purposes of conditions A, B and C as not being a payment remaining to be made under that security.

404Restriction on deductions etc relating to FOTRA securities

1

A company which meets conditions A and B is not to bring into account for the purposes of this Part—

a

any amount relating to changes in the value of a FOTRA security, or

b

any debit in respect of the loan relationship represented by the security, including any expenses related to holding the security or any transaction concerning it.

2

Condition A is that the company is the beneficial owner of the security.

3

Condition B is that the company is a company which would be exempt from corporation tax on the security under section 1279 (exemption of profits from FOTRA securities).

4

In this section “FOTRA security” has the same meaning as in that section (see section 1280(1)).

405Certain non-UK residents with interest on 3½% War Loan 1952 Or After

1

This section applies if—

a

in any accounting period a non-UK resident company carries on a business in the United Kingdom—

i

consisting of banking or insurance, or

ii

consisting wholly or partly of dealing in securities, and

b

in calculating the profits of the business for the period any amount is disregarded as a result of section 1279 (exemption of profits from FOTRA securities) because of a condition subject to which any 3½% War Loan 1952 Or After was issued.

2

Interest on money borrowed for the purposes of the business is to be brought into account as a debit for the purposes of this Part for that period only so far as it exceeds the ineligible amount.

3

The ineligible amount is found as follows—

Step 1

Add together all sums borrowed for the purposes of the business and still owing in the accounting period.

Step 2

Deduct any sums carrying interest that is not brought into account as a debit under this Part (otherwise than because of subsection (2)).

Step 3

If the amount found at Step 2 exceeds the total cost of the 3½% War Loan 1952 Or After held for the purposes of the business in the accounting period, deduct the excess from that amount.

Step 4

Calculate the average rate of interest in the accounting period on money borrowed for the purposes of the business.

Step 5

Calculate the amount of interest payable on the amount found at Step 3 at the rate found at Step 4 for the accounting period.

The result is the ineligible amount.

4

If the company’s holding of 3½% War Loan 1952 Or After has fluctuated during the accounting period, the total cost for the purposes of Step 3 is taken to be—

C×AHTH math

where—

C is the cost of acquisition of the initial holding (if any) and any holdings acquired during the accounting period,

AH is the average holding in that period, and

TH is the total of the initial holding (if any) and any holdings acquired during the accounting period.

5

In subsection (4) “initial holding” means the holding held by the company at the beginning of the accounting period.

Deeply discounted securities: connected companies and close companies

406Introduction

1

The following sections deal with deeply discounted securities—

a

sections 407 and 408 (deeply discounted securities where companies have a connection),

b

sections 409 to 411 (deeply discounted securities of close companies), and

c

section 412 (persons indirectly standing in the position of creditor).

2

In this section and sections 407 to 412 “deeply discounted security” has the same meaning as in Chapter 8 of Part 4 of ITTOIA 2005 (profits from deeply discounted securities) (see section 430 of that Act).

3

In sections 407 to 412 “the discount” means the difference between—

a

the issue price of the security, and

b

the amount payable on redemption.

4

The provisions of Chapter 8 of Part 4 of ITTOIA 2005 apply for the purposes of this section and sections 407 to 412 for determining the difference between the issue price of a security and the amount payable on redemption as they apply for the purposes of section 430 of that Act.

407Postponement until redemption of debits for connected companies’ deeply discounted securities

1

This section applies as respects any accounting period (“the relevant period”) if—

a

a debtor relationship of a company (“the issuing company”) is represented by a deeply discounted security issued by it,

b

at any time in the relevant period another company stands in the position of a creditor as respects the security,

c

there is a connection between those companies for the relevant period,

d

the period is not the accounting period in which the security is redeemed, and

e

credits representing the full amount of the discount which is referable to the relevant period are not brought into account for the purposes of this Part in respect of the corresponding creditor relationship for any accounting period (see section 412(2)).

2

The debits to be brought into account for the purposes of this Part in respect of the loan relationship by the issuing company are to be adjusted so that any debit relating to the amount of the discount which is referable to the relevant period—

a

is not brought into account for the relevant period, but

b

is brought into account for the accounting period in which the security is redeemed.

3

The amount of the discount which is referable to the relevant period is the amount of it which would be brought into account for that period apart from this section.

4

For the meaning of “standing in the position of a creditor” and the meaning of “corresponding creditor relationship” where a company indirectly stands in that position, see section 412.

5

Whether there is a connection between companies for the purposes of this section is determined in accordance with section 408.

408Companies connected for section 407

1

For the purposes of section 407 there is a connection between two companies for an accounting period if condition A or B is met.

2

Condition A is that there is a time in the period when one of the companies has control of, or a major interest in, the other.

3

Condition B is that there is a time in the period when both companies are under the control of the same person.

4

Section 472 (meaning of “control”) applies for the purposes of this section.

5

For the meaning of “major interest”, see section 473.

the issuing company is a small or medium-sized enterprise for the relevant period.

5

In this section—

“CIS-based close company” means a company that would not be a close company apart from the rights and powers of one or more partners in a CIS limited partnership being attributed to another of the partners under section 416(6) of ICTA because of section 417(3)(a) of that Act,

“CIS limited partnership” means a limited partnership—

which is a collective investment scheme, or

which would be a collective investment scheme if it were not a body corporate,

“issuing company” has the same meaning as in section 409 (see subsection (1)(a) of that section),

“non-qualifying territory” has the meaning given by paragraph 5E of Schedule 28AA to ICTA (provision not at arm’s length),

“resident” has the meaning given by paragraph 5B(6) of that Schedule, and

“small or medium-sized enterprise” has the meaning given by paragraph 5D of that Schedule.

6

For the meaning of “corresponding creditor relationship”, see section 412 (persons indirectly standing in the position of creditor).

411Interpretation of section 409

1

Section 472 (meaning of “control”) applies for the purposes of section 409 and this section.

2

A person who is a participator in a company which controls another company is treated for the purposes of section 409 as being a participator in that other company also.

3

Subject to that, in section 409 and this section “participator”, in relation to a company, means a person who is a participator in the company for the purposes of Part 11 of ICTA because of section 417 of that Act, but not a person who is a participator for those purposes just because of being a loan creditor of the company.

4

In determining whether a person who carries on the trade of banking is a participator in a company for the purposes of section 409 and this section, securities of the company acquired by the person in the ordinary course of the person’s business are ignored.

412Persons indirectly standing in the position of creditor

The redemption of funding bonds is not treated as the payment of interest on a debt for the purposes of the Corporation Tax Acts if their issue was treated as the payment of interest on the debt under—

a

section 413, or

b

section 380 of ITTOIA 2005 (which makes provision corresponding to section 413 for income tax purposes).

2

In this section “funding bonds” includes any bonds, stocks, shares, securities or certificates of indebtedness.

Derivatives

415Loan relationships with embedded derivatives

1

This section applies if in accordance with generally accepted accounting practice a company treats the rights and liabilities under a loan relationship to which it is a party as divided between—

a

rights and liabilities under a loan relationship (“the host contract”), and

b

rights and liabilities under one or more derivative financial instruments or equity instruments.

2

The company is treated for the purposes of this Part as a party to a loan relationship whose rights and liabilities consist only of those of the host contract.

3

For the corresponding treatment of the rights and liabilities within subsection (1)(b), see section 585 (loan relationships with embedded derivatives).

416Election for application of sections 415 and 585

1

This section applies if—

a

a company is subject to old UK GAAP for a period of account,

b

at the beginning of its first relevant period of account the company did not hold any assets (“relevant assets”) which it is not permitted under old UK GAAP to treat as mentioned in section 415(1),

c

the company subsequently acquires one or more relevant assets (to which sections 415 and 585 do not apply because of the company being subject to old UK GAAP), and

d

the company would have been permitted to treat the relevant assets as mentioned in section 415(1) if it had been subject to—

i

international accounting standards, or

ii

new UK GAAP.

2

The company may elect that this Part and Part 7 (derivative contracts) should apply as if sections 415 and 585 did apply.

3

The election has effect in relation to all relevant assets held by the company including those subsequently acquired, except as provided in subsection (4).

4

An election made on or after 12 March 2008 does not have effect in relation to any relevant assets in the case of which section 418 (loan relationships treated differently by connected debtor and creditor) applies.

5

If an election is made under this section, sections 315 to 318 (adjustments on change of accounting policy) apply as if there were a change of accounting policy consisting of the company treating its relevant assets as mentioned in section 415(1) as from the date the election has effect.

6

See also section 613(4) (which makes provision corresponding to subsection (5) for the purposes of Part 7).

7

In this section—

“first relevant period of account”, in relation to a company, means the first period of account of the company beginning on or after 1 January 2005 (the first period in relation to which section 94A of FA 1996 (which is rewritten in section 415) had effect),

“old UK GAAP” means UK generally accepted accounting practice as it applied for periods of account beginning before 1 January 2005, and

“new UK GAAP” means UK generally accepted accounting practice as it applies for periods of account beginning on or after that date.

8

Section 417 makes further provision about elections under this section.

417Further provisions about elections under section 416

1

An election under section 416 must be made not later than 90 days after the acquisition of the relevant assets or, if there is more than one acquisition, the first of them.

2

The election is irrevocable.

3

The election has effect from the beginning of the period of account in which the first relevant asset is acquired.

4

In this section “relevant assets” has the same meaning as in section 416.

But if the creditor is a party to the loan relationship as creditor during only part of the corresponding accounting period (or any of the corresponding periods), it is treated for the purposes of this Part as bringing into account for the period only such part of the excess as is just and reasonable.

7

Section 419 supplements this section.

Introduction

421Introduction to Chapter

1

This Chapter applies if—

a

condition A or B is met, and

b

b

the part of the transferor’s business which is transferred to the transferees was carried on immediately before the transfer in a member State other than the United Kingdom through a permanent establishment, and

c

the conditions in subsection (4)(d), (e) and (g) are met.

6

In this Chapter—

“the transfer of business” means the transfer of business mentioned in subsection (3)(a), (4)(a) or (5)(a),

“transferee” has the same meaning as in subsection (3), (4) or (5), and

“the transferor” has the same meaning as in subsection (3), (4) or (5).

7

For the meaning of “company” and “resident in a member State”, see section 430.

Transfers of loan relationships at notional carrying value

422Transfer of loan relationship at notional carrying value

1

This section applies if in the course of the transfer of business the transferor transfers an asset or liability representing a loan relationship to a transferee.

2

For the purpose of determining the credits and debits to be brought into account in respect of the loan relationship for the purposes of this Part, the transferor and the transferee are treated as having entered into the transfer of that asset or liability for consideration of an amount equal to the notional carrying value of the asset or liability.

3

For the purposes of this section—

a

“carrying value” has the same meaning as it has for the purposes of section 316 (see section 317), and

b

4

This section is subject to section 423 (transferor using fair value accounting).

423Transferor using fair value accounting

1

This section applies instead of section 422 if, in a case where that section would otherwise apply, the transferor is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship (see subsection (4)).

2

The amount which is to be brought into account by the transferor in respect of the transfer of the asset or liability mentioned in section 422(1) (“the transferor’s amount”) is—

a

if an asset is to be brought into account, its fair value as at the date when the transferee becomes a party to the loan relationship, or the fair value of the rights under or interest in it as at that date, and

b

if a liability is to be brought into account, its fair value as at that date.

3

For any accounting period in which the transferee is a party to the loan relationship, for the purpose of determining the credits and debits to be brought into account in respect of it for the purposes of this Part, the transferee is treated as if it had acquired the asset or liability representing the relationship for consideration of an amount equal to the transferor’s amount.

4

5

It does not matter for the purposes of subsection (4) if the transferor does not otherwise use fair value accounting in respect of the loan relationship.

424Reorganisations involving loan relationships

1

This section applies if—

a

sections 127 to 130 of TCGA 1992 (reorganisations: equation of original shares and new holding)—

i

apply in relation to a reorganisation, or

ii

would so apply but for section 116(5) of that Act (which disapplies those sections where the original shares or the new holding consists of or includes a qualifying corporate bond),

b

the original shares consist of or include an asset representing a loan relationship, and

c

either—

i

section 422 or 423 applies as a result of condition B in section 421 being met in relation to the transfer in the course of which the reorganisation occurs, or

ii

condition C in section 421 is met in relation to that transfer.

2

For the purposes of this Part such debits and credits are to be brought into account as would be brought into account if the reorganisation were a disposal of the asset representing the loan relationship for consideration of an amount equal to its notional carrying value.

3

For the purposes of this section, the notional carrying value of that asset is the amount which would have been its carrying value in the accounts of the original holder if a period of account had ended immediately before the date when the reorganisation occurred.

4

In this section—

“carrying value” has the same meaning as it has for the purposes of section 316 (see section 317),

“original holder” means a person holding the original shares immediately before the reorganisation,

“original shares” has the meaning given by section 126(1) of TCGA 1992 (application of sections 126 to 131 of that Act), and

“reorganisation” includes anything to which sections 127 to 130 of that Act apply as if it were a reorganisation.

5

This section is subject to—

a

section 425 (original holder using fair value accounting), and

b

section 429 (disapplication of Chapter where transparent entities involved).

425Original holder using fair value accounting

1

This section applies instead of section 424 if, in a case where that section would otherwise apply, the original holder is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship constituting or included in the original shares.

2

The amount which is to be brought into account by the original holder in respect of the reorganisation (“the disposal amount”) is the fair value of the asset representing the loan relationship as at the date when the reorganisation occurred, or of the rights under or interest in that relationship as at that date.

3

For any accounting period in which a successor creditor company is a party to the loan relationship, for the purpose of determining the credits and debits to be brought into account in respect of the relationship for the purposes of this Part, the successor creditor company is treated as if it had acquired the asset representing the loan relationship for consideration of an amount equal to the disposal amount.

4

Subsections (4) and (5) of section 423 apply for the purposes of this section as they apply for the purposes of that section, but taking the references in that section to the transferor as references to the original holder.

5

In this section—

“successor creditor company” means a company in relation to which the loan relationship constituting or included in the original shares is a creditor relationship immediately after the reorganisation, and

“original holder” and “original shares” have the same meaning as in section 424.

6

This section is subject to section 429 (disapplication of Chapter where transparent entities involved).

Exception for tax avoidance cases

426Tax avoidance etc

1

This Chapter does not apply in relation to the transfer of business if—

a

section 432 for the meaning of “the transferee” and “transferor”, and

b

section 439 for the meaning of “company”, “co-operative society” and “resident in a member State”.

432Meaning of “the transferee” and “transferor”

1

In this Chapter, “the transferee” means—

a

in relation to a merger within section 431(3)(a), the SE,

b

in relation to a merger within section 431(3)(b), the SCE, and

c

in relation to a merger within section 431(3)(c) or (d), the company to which assets and liabilities are transferred.

2

In this Chapter “transferor” means—

a

in relation to a merger within section 431(3)(a), a company merging to form the SE,

b

in relation to a merger within section 431(3)(b), a co-operative society merging to form the SCE, and

c

in relation to a merger within section 431(3)(c) or (d), a company transferring all its assets and liabilities.

Transfers of loan relationships at notional carrying value

433Transfer of loan relationship at notional carrying value

1

This section applies if in the course of the merger a transferor transfers an asset or liability representing a loan relationship to the transferee.

2

For the purpose of determining the credits and debits to be brought into account in respect of the loan relationship in accordance with this Part, the transferor and the transferee are treated as having entered into the transfer of that asset or liability for consideration of an amount equal to the notional carrying value of the asset or liability.

3

For the purposes of this section—

a

“carrying value” has the same meaning as it has for the purposes of section 316 (see section 317), and

b

4

This section is subject to section 434.

434Transferor using fair value accounting

1

This section applies instead of section 433 if, in a case where that section would otherwise apply, the transferor is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship (see subsection (4)).

2

The amount which is to be brought into account by the transferor in respect of the transfer of the asset or liability mentioned in section 433(1) (“the transferor’s amount”) is—

a

b

if a liability is to be brought into account, its fair value as at that date.

3

For any accounting period in which the transferee is a party to the loan relationship, for the purpose of determining the credits and debits to be brought into account in respect of it for the purposes of this Part, the transferee is treated as if it had acquired the asset or liability representing the relationship for consideration of an amount equal to the transferor’s amount.

4

5

It does not matter for the purposes of subsection (4) if the transferor does not otherwise use fair value accounting in respect of the loan relationship.

435Reorganisations involving loan relationships

1

This section applies if—

a

sections 127 to 130 of TCGA 1992 (reorganisations: equation of original shares and new holding)—

i

apply in relation to a reorganisation, or

ii

would so apply but for section 116(5) of that Act (which disapplies those sections where the original shares or the new holding consists of or includes a qualifying corporate bond),

b

the original shares consist of or include an asset representing a loan relationship, and

c

section 433 or 434 applies in relation to a transfer in the course of the merger in which the reorganisation occurs or, in a case where those sections would apply apart from condition D in section 431 not being met, condition G in that section is met in relation to such a transfer.

2

3

4

In this section—

“carrying value” has the same meaning as it has for the purposes of section 316 (see section 317),

“original holder” means a person holding the original shares immediately before the reorganisation,

“original shares” has the meaning given by section 126(1) of TCGA 1992 (application of sections 126 to 131 of that Act), and

“reorganisation” includes anything to which sections 127 to 130 of that Act apply as if it were a reorganisation.

5

This section is subject to—

a

section 436 (original holder using fair value accounting), and

b

section 438 (disapplication of Chapter where transparent entities involved).

436Original holder using fair value accounting

1

This section applies instead of section 435 if, in a case where that section would otherwise apply, the original holder is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship constituting or included in the original shares.

2

3

4

Subsections (4) and (5) of section 434 apply for the purposes of this section as they apply for the purposes of that section, but taking the references in that section to the transferor as references to the original holder.

5

In this section—

“original holder” and “original shares” have the same meaning as in section 435.

6

This section is subject to section 438 (disapplication of Chapter where transparent entities involved).

Exception for tax avoidance cases

437Tax avoidance etc

1

This Chapter does not apply in relation to the merger if—

a

the merger is not effected for genuine commercial reasons, or

440Overview of Chapter

1

This Chapter contains rules connected with tax avoidance.

2

In particular—

a

for rules about unallowable purposes and tax relief schemes and arrangements, see sections 441 to 443,

b

for rules relating to credits and debits where transactions are not at arm’s length (other than credits and debits relating to exchange gains and losses), see sections 444 to 446,

c

for rules relating to credits and debits relating to exchange gains and losses where transactions are not at arm’s length, see sections 447 to 452,

d

for rules about connected parties deriving benefit from creditor relationships, see section 453,

e

for rules dealing with tax advantages from resetting interest rates, see section 454, and

f

for rules dealing with disposals of rights under creditor relationships for consideration not fully recognised for accounting purposes, see section 455.

Unallowable purposes and tax relief schemes

441Loan relationships for unallowable purposes

1

This section applies if in any accounting period a loan relationship of a company has an unallowable purpose.

2

The company may not bring into account for that period for the purposes of this Part so much of any credit in respect of exchange gains from that relationship as on a just and reasonable apportionment is attributable to the unallowable purpose.

3

The company may not bring into account for that period for the purposes of this Part so much of any debit in respect of that relationship as on a just and reasonable apportionment is attributable to the unallowable purpose.

4

An amount which would be brought into account for the purposes of this Part as respects any matter apart from this section is treated for the purposes of section 464(1) (amounts brought into account under this Part excluded from being otherwise brought into account) as if it were so brought into account.

5

Accordingly, that amount is not to be brought into account for corporation tax purposes as respects that matter either under this Part or otherwise.

6

For the meaning of “has an unallowable purpose” and “the unallowable purpose” in this section, see section 442.

442Meaning of “unallowable purpose”

1

For the purposes of section 441 a loan relationship of a company has an unallowable purpose in an accounting period if, at times during that period, the purposes for which the company—

a

is a party to the relationship, or

b

enters into transactions which are related transactions by reference to it,

include a purpose (“the unallowable purpose”) which is not amongst the business or other commercial purposes of the company.

2

If a company is not within the charge to corporation tax in respect of a part of its activities, for the purposes of this section the business and other commercial purposes of the company do not include the purposes of that part.

3

Subsection (4) applies if a tax avoidance purpose is one of the purposes for which a company—

a

is a party to a loan relationship at any time, or

b

enters into a transaction which is a related transaction by reference to a loan relationship of the company.

4

For the purposes of subsection (1) the tax avoidance purpose is only regarded as a business or other commercial purpose of the company if it is not—

a

the main purpose for which the company is a party to the loan relationship or, as the case may be, enters into the related transaction, or

b

one of the main purposes for which it is or does so.

5

The references in subsections (3) and (4) to a tax avoidance purpose are references to any purpose which consists of securing a tax advantage for the company or any other person.

443Restriction of relief for interest where tax relief schemes involved

1

A company may not bring a debit into account for the purposes of this Part in respect of interest if a tax relief scheme has been effected or tax relief arrangements have been made in relation to the transaction as a result of which the interest would be taken into account.

2

Subsection (1) applies whether the tax relief scheme is effected or the tax relief arrangements are made before or after the transaction.

3

A scheme is a tax relief scheme in relation to a transaction for the purposes of subsection (1) if it is such that the sole or main benefit that might be expected to accrue to the company from the transaction is the obtaining of a reduction in tax liability by bringing the debit into account.

4

Arrangements are tax relief arrangements in relation to a transaction for the purposes of subsection (1) if they are such that the sole or main benefit which might be expected to accrue to the company from the transaction is the obtaining of a reduction in tax liability by bringing the debit into account.

5

Subsection (6) applies if relief is claimed as a result of section 403 of ICTA (amounts which may be surrendered by way of group relief)—

a

in respect of trading losses in a case where, in calculating those losses, debits in respect of loan relationships are treated under section 297(3) as expenses of the trade, or

b

in respect of a deficit to which Chapter 16 (non-trading deficits) applies.

6

Any question arising under this section as to what benefit might be expected to accrue from a transaction is to be determined by reference to the claimant company and the surrendering company taken together.

7

In this section “the claimant company” and “the surrendering company” have the same meaning as in section 402 of ICTA (see subsection (1) of that section).

Transactions not at arm’s length: general

444Transactions not at arm’s length: general

1

If—

a

credits or debits in respect of a loan relationship of a company are to be brought into account for the purposes of this Part in respect of a related transaction, and

b

that transaction is not a transaction at arm’s length,

those credits or debits are to be determined for the purposes of this Part in accordance with the independent terms assumption.

2

The independent terms assumption is that the transaction was entered into on the terms on which it would have been entered into between knowledgeable and willing parties dealing at arm’s length.

3

This section is subject to section 445 (disapplication of this section where Schedule 28AA to ICTA applies).

4

Subsection (1) does not apply to debits arising from the acquisition of rights under a loan relationship if those rights are acquired for less than market value.

5

In a case where the related tran