Part 3: Companies with small profits
Overview
70.The profits of a company are charged to tax at a lower rate than the main corporation tax rate if the profits of the company are within certain limits.
71.A lower rate is used if the company’s profits (for a full year) are no more than the “lower limit”. In making this comparison, there may be two adjustments.
72.First, some franked investment income is added to the profits of the company.
73.Second, the amount of the “lower limit” is split between companies that are under common control.
Section 18: Profits charged at the small profits rate
74.This section sets out the three conditions for the small profits rate to apply. It is based on section 13 of ICTA.
75.The first condition is that the company is resident in the United Kingdomin the accounting period. If a company becomes, or ceases to be, resident in the United Kingdom an accounting period ends (see the rules about accounting periods in section 10 of CTA 2009). So the effect of this condition is that the company must be resident in the United Kingdomthroughout the accounting period.
76.Some non-resident companies trading in the United Kingdom through a permanent establishment may be entitled to the small profits rate as a result of a provision of a DTA.
77.The second condition is that the company is not a “close investment-holding company”. That expression is defined in section 34.
78.The third condition is that the “augmented profits” (defined in section 32) of the company do not exceed the lower limit. If the profits fall between that limit and the upper limit, marginal relief may be due in accordance with section 19.
79.This section does not include a requirement that the company should make a claim for the relief. See Change 1 in Annex 1.
Section 19: Marginal relief
80.This section is the first of five that set out the rules for marginal relief. It is based on section 13 of ICTA.
81.Two conditions for the reliefare the same as the first two conditions for entitlement to the small profits rate (see the commentary on section 18). But for the purposes of this relief there are two further conditions. The “augmented profits” (defined in section 32) of the company need to fall between:
the “lower limit” (in ICTA, the “lower relevant maximum amount”); and
the “upper limit” (in ICTA, the “upper relevant maximum amount”).
82.The limits are set out in section 24.
83.Finally, if this section is to apply, the company must have no ring fence profits.
84.This section does not include a requirement that the company should make a claim for the relief. See Change 1 in Annex 1.
Section 20: Company with only ring fence profits
85.This section is the second of five that set out the rules for marginal relief. It is based on section 13 of ICTA, section 3 of FA 2007 and section 7 of FA 2008.
86.Three conditions for the reliefare the same as those for entitlement to marginal relief (see the commentary on section 19). But for the purposes of this section the augmented profits must include only ring fence profits.
87.Subsection (2) applies the “ring fence fraction” instead of the standard fraction (see section 19(2)).
Section 21: Company with ring fence profits and other profits
88.This section is the third of five that set out the rules for marginal relief. It is based on section 3 of FA 2007 and section 7 of FA 2008.
89.Three conditions for the reliefare the same as those for entitlement to marginal relief (see the commentary on section 19). But for the purposes of this section the augmented profits include both ring fence and other profits.
90.Subsection (2) gives a deduction in two parts: one relating to the ring fence amount (see section 22); the other relating to the remaining amount (see section 23).
Section 22: The ring fence amount
91.This section is the fourth of five that set out the rules for marginal relief. It is based on section 3 of FA 2007 and section 7 of FA 2008.
92.The section calculates the marginal relief available on the ring fence amount. It uses the appropriate part (“UR”) of the upper limit.
Section 23: The remaining amount
93.This section is the fifth of five that set out the rules for marginal relief. It is based on section 3 of FA 2007 and section 7 of FA 2008.
94.The section calculates the marginal relief available on the remaining (non-ring fence) amount. It uses the appropriate part (“UZ”) of the upper limit.
Section 24: The lower limit and the upper limit
95.This section sets the limits for small profits rate and marginal relief. It is based on section 13 of ICTA.
96.Subsection (2) deals with the straightforward case where there are no associated companies.
97.Subsection (3) deals with the case where there are associated companies. The limits are divided equally between the companies.
98.Subsection (4) reduces the limits if the company’s accounting period is less than 12 months long.
Section 25: Associated companies
99.This section defines “associated company” for the purpose of section 24. It is based on section 13 of ICTA.
100.Subsection (1) sets out the position if a company is an associated company for any part of an accounting period. It counts as an associated company for the whole of the accounting period.
101.Subsection (2) clarifies the position if more than one company is an associated company for different parts of an accounting period.
Example
Company A claims small profits rate for its accounting period from 1 January2009 to 31 December 2009.
A is associated with B in the period 1 January 2009 to 31 March 2009.
A is associated with C in the period 1 October 2009 to 31 December 2009.
A has two associated companies in its accounting period ending on 31 December2009, even though it never has more than one at any time.
102.Subsection (3) is the rule that associated companies that carry on no business are ignored. The rule is modified by subsection (6).
103.Subsection (4) is the main rule for determining whether or not companies are “associated”, based on “control”.The rule is modified by subsection (6).
104.Subsection (5) defines “control” for the purpose of subsection (4). The definition is based on section 450 but is modified by subsection (6).
105.Subsection (6) introduces the special rules for associated companies in the next five sections.
Section 26: Section 25(3): treatment of certain non-trading companies
106.This section is the rule that passive non-trading companies are ignored as associated companies. It is new. See Change 2 in Annex 1.
107.Subsection (1) sets out the three conditions for the treatment in the section. The first two conditions reproduce the main words of SP5/94. The third condition introduces the concept of a “passive company”, defined in subsection (3).
108.Subsection (2) is the result if the conditions are met: the company is treated as being within section 25(3) and is ignored for the purposes of claims for small profits rate by any company with which it is associated.
109.Subsection (3) reproduces the conditions in SP5/94 for a company to qualify as a passive company.See Change 2 in Annex 1 for a fuller discussion of the conditions.
110.Subsection (4) sets out the condition that any dividends received from subsidiaries are distributed in full by the holding company.
111.Subsection (5) makes clear that a company that receives, or is due to receive, a dividend is not treated on that ground alone as having assets.
Section 27: Attribution to persons of rights and powers of their partners
112.This section modifies the rule in section 25(4) and (5) about “control”. It is based on section 13(4), (4A), (4B) and (4C) of ICTA.
113.Section 451 attributes to a person rights that belong to any associate of that person. In accordance with section 448, “associate” includes a (business) partner.
114.This section relaxes the rule about attributing a partner’s rights unless tax planning arrangements are in place.
Section 28: Associated companies: fixed-rate preference shares
115.This section is the rule that some fixed-rate preference shares are ignored in determining whether one company controls another. It is new. See Change 3 in Annex1.
116.Subsection (1) sets out the three conditions for the special treatment. The second condition includes a reference to the company which holds the shares taking part in the management or conduct of the issuing company’s business. It is unlikely that a company (rather than an individual) would do this but the section retains this part of the condition for the relaxation to apply.
117.Subsection (2) sets out a definition of “fixed-rate preference shares”. ESC C9 refers to the definition in Schedule 28B to ICTA, which deals with venture capital trusts. The definition here reproduces the rewritten version in section 313(7) of ITA.
Section 29: Association through a loan creditor
118.This section is the rule that some loan creditors are ignored in determining whether one company controls another. It is new. See Change 3 in Annex 1.
119.Subsection (1) deals with the simple case of a loan creditor which would otherwise be associated with the company to which it has lent money. The subsection sets out the three conditions that have to be met if the loan creditor is to be ignored. The second condition (“no connection”) is amplified in subsection (5).
120.Subsections (2) and (3) deal with the more complex case of two companies which would otherwise be associated with each other because they are controlled by the same loan creditor. The condition in subsection (2)(b) is amplified in subsection(5).
121.Subsection (4) defines “control” for the purpose of subsection (2)(a). The definition is based on section 450 but is modified by subsection (1) of this section (to eliminate some loan creditors) and sections 27 (to prevent attribution of some partners’ rights), 28 (to eliminate some fixed-rate preference shares) and 30 (to eliminate some trustee companies).
122.Subsection (5) sets out the condition in ESC C9 that there is “no past or present connection” between the company and the loan creditor. It reflects the strict interpretation that is used in practice in applying the concession.
123.Subsection (6) imports the definition of “loan creditor” from section 453. Section 453(4) prevents a bank from being treated as a loan creditor just because of an ordinary bank loan.
Section 30: Association through a trustee
124.This section deals with some holdings by trustees. It is new. See Change 3 in Annex 1.
125.Subsections (1) and (2) deal with the case of two companies which would otherwise be associated with each other because they are controlled by the same trustees. If the trustees controlling each companyare treated as different “distinct” persons by section 474(1) of ITA the companies are not controlled by the same person and this section does not apply.
126.If this section applies,the rights or powers of the trustees are to be ignored in determining whether the companies are associated with each other. This treatment applies only if there is no other connection between the companies (see subsection (1)(b)).
127.Subsection (3)(b) means that subsection (1)(b) restatesthe condition in ESC C9 that there is “no past or present connection” between the companies. It reflects the strict interpretation that is used in practice in applying the concession.
Section 31: Power to obtain information
128.This section allows an officer of HMRC to require information for the purposes of this Part. It is based on Schedule 12 to FA 1989.
129.Subsection (1) is an information power about shareholders.
130.Subsections (3) and (4) are information powers about bearer securities.
Section 32: Meaning of “augmented profits”
131.This section defines the augmented profits which are compared with the limits in sections 19 and 24 to determine whether or not small profits rate is due. It is based on section 13 of ICTA.
132.In section 13 of ICTA the word “profits” is used in a special sense to mean the total of what are usually referred to as profits and some franked investment income. This may lead to confusion. So this section uses “taxable total profits” (see section 4(2)) to mean the amount on which corporation tax is charged and introduces a new term “augmented profits” which is used only in this Part.
133.Subsection (1) is the basic definition of “augmented profits”. In determining whether a company’s profits are “small” for the purposes of this Part, dividends receivedare taken into account, even though those dividends are not charged to corporation tax.
134.Subsection (2) excludes what is usually known as “group income”. This comprises:
distributions from companies in the same group as the receiving company; and
distributions from trading companies (“quasi-subsidiaries” – defined in subsection (3)) which are owned by a consortium of which the receiving company is a member.
135.The meanings of “trading company” and “relevant holding company” in subsection (2)(b) are set out in section 33(4).
Section 33: Interpretation of section 32(2) and (3)
136.This section expands the meaning of “51% subsidiary”. It is based on section 13ZA of ICTA.
137.Subsection (1) is similar to the group relief rule (see section 151). It ensures that the tax relationship between companies is not based simply on share-holding if the share-holding does not represent the true economic relationship. So the subsection looks also at the equity holders’ entitlement to profits and assets. “Equity holders” are defined in subsection(7) by reference to the group relief rules (see Chapter 6 of Part 5 of this Act).
138.Subsection (2) makes clear that the basic test for being a 51% subsidiary in section 1154(2) of this Act still applies.
139.Subsection (3) is similar to the group relief rule (see section 151). Shares held by a share dealer are ignored.
140.Subsection (4) provides the meaning of “trading company” for the quasi-subsidiaries in section 32(2)(b).
141.Subsections (5) and (6) are similar to the group relief rule (see section 153). But subsection (5)(b) and (c) includes an economic test for the 5% ownership requirement in a consortium.
Section 34: Close investment-holding companies
142.This section defines the close investment-holding companies which are excluded from small profits rate by sections 18(b) and 19(1)(b). It is based on sections 13A and 839(8) of ICTA.
143.The rule about close investment-holding companies is an anti-avoidance rule. Without it, a wealthy individual could transfer investments to a company where undistributed income would bear tax at a rate lower than the individual’s marginal rate.
144.The section uses the expression “candidate company” to describe the company which is being considered to determine whether or not it is a close investment-holding company.
145.Subsection (1) defines close investment-holding companies by exclusion. All close companies are close investment-holding companies unless they exist for “permitted purposes”.
146.Subsection (2) sets out the permitted purposes. The first two purposes (paragraphs (a) and (b)) are concerned with the activities (broadly, trades and property businesses) of the candidate company itself. The last four purposes (paragraphs (c) to (f)) allow a candidate company to qualify as having a permitted purpose by reference to “qualifying companies” (and some others) with which it is closely connected.
147.Subsection (3) excludes from the property businesses in subsection (2)(b) letting to individuals who have a close connection with the candidate company.
148.Subsection (4) extends the purpose in subsection (2)(c) so that it covers not only investment in a qualifying company but also investment in another company which itself invests in a qualifying company.
149.Subsection (5) ensures that a company which exists for a permitted purpose does not become a close investment-holding company simply because it is wound up. But this special treatment lasts for only one accounting period.
150.Subsection (6) defines “qualifying company” by reference to the same purposes of trades and property businesses as apply to the candidate company in subsection (2)(a) and (b).
151.Subsection (7) provides two definitions for the section. In this section some permitted purposes depend on control of the candidate company. ESC C9 would operate against taxpayer companies in this context and so does not apply. It follows that the relaxations in sections 28 to 30 do not apply here and the meaning of “control” is different from that in section 25(4).
