Corporation Tax Act 2010

Part 5: Group relief

Overview

331.This Part sets out the rules for group relief.

332.In the diagrams to the right of the text of this commentary, surrendering companies are shown in black; claimant companies are shown in white; and other companies are shown in grey.

Groups

333.The basic idea of group relief is to allow an enterprise to be taxed as a single unit even if it is carried on by more than one company. So, in the simplest case, a loss made by a parent company (P) may be set off against the profits of a wholly-owned subsidiary (S). Similarly, a loss made by the subsidiary may be set off against the parent’s profits.

334.If one company is to surrender its losses to another, the two companies must be in the same group. In the case of a simple parent/subsidiary relationship, the definition in section 152 specifies that one company must be a “75% subsidiary” of the other.

335.In a less simple case, more than two companies may be involved. The group comprises all the companies that are 75% subsidiaries of a parent company, and the parent itself. For this purpose Chapter 3 of Part 24 of this Act makes clear that the necessary degree of ownership may be indirect. So, for instance, if P owns 75% of the shares in S and S owns all the shares in T, T is a 75% subsidiary of P and all three companies are members of a group.

Consortiums

336.If the shares in a single company (C) are held by other companies (M1, M2 etc), C may be a “company owned by a consortium”. In that case, losses of C may be set off against the profits of M1, M2 etc. And the losses of M1, M2 etc may be set off against the profits of C.

337.If C is also a member of a group (with its subsidiary S) it may be possible for losses to flow between members of the group and M1, M2 etc. And if M1 is a member of a group (with its parent P) it may be possible for losses to flow between members of that group and C.

International

338.In the simplest case, all the companies involved are resident in the United Kingdom and carry on their businesses wholly in the United Kingdom. But the relief is extended to includethe losses of:

• some companies not resident in the United Kingdom that carry on a trade through a permanent establishment in the United Kingdom; and

• some companies resident in the EEA (or carrying on a trade through a permanent establishment there).

339.And the relief is restricted in some cases if a UK resident company’s business is not carried on wholly in the United Kingdom.

Other reliefs

340.In addition to trading losses, some other reliefs may be surrendered by one company to another. The other reliefs are listed in section 99(1).

Equity holders

341.In some cases a simple test of shareholding does not accurately reflect the economic reality of the relationship between companies. So there are rules in Chapter 6 of this Part to establish the true economic relationship.

Chapter 1: Introduction

Overview

342.This Chapter introduces the Part.

Section 97: Introduction to Part

343.This section sets out the structure of the Part and introduces the expression “group relief”. It is based on section 402(1) of ICTA.

Chapter 2: Surrender of company’s losses etc for an accounting period

Overview

344.This Chapter sets out what relief is available and the main restrictions on relief.

Section 98: Overview of Chapter

345.This section sets out the structure of the Chapter. It is new.

Section 99: Surrendering of losses and other amounts

346.This section lists the losses and other amounts that may be surrendered as group relief. It is based on sections 402, 403, 403ZC and 403ZD of ICTA.

347.In ICTA the amounts are referred to as “trading losses and other amounts eligible for relief”. The trading losses are explained in section 403ZA of ICTA. The “other amounts” are explained in sections 403ZB (excess capital allowances), 403ZC (non-trading deficit on loan relationships) and 403ZD (charges, Schedule A losses, management expenses and non-trading loss on intangible fixed assets).

348.This section adopts a similar approach by specifying the losses and other amounts that may be subject to a group relief claim. There is a more detailed explanation of each of those losses and other amounts in sections 100 to 104.

349.Subsection (2) uses a test of whether the losses and other amounts are “eligible for corporation tax relief”.

350.Subsections (3) and (4) contrast the treatments of:

• amounts within paragraphs (a) to (c) of subsection (1), which may be surrendered whatever the profits of the surrendering company; and

• amounts within paragraphs (d) to (g) of subsection (1), which may be surrendered only to the extent that they exceed the surrendering company’s total profits (see section 105(3)).

351.Subsection (5) refers to the other restrictions on amounts that may be surrendered in sections 106 to 110. It also refers to the restrictions (mentioned in section 403(4) of ICTA) that operate by making amounts not available for set off.

352.Subsection (6) cross-refers the requirement (in Schedule 18 to FA 1998) that the surrendering company must consent to the surrender.Section 130(2) requires that there is also a claim.

353.Subsection (7) introduces the label “surrenderable amounts” to refer to the losses and other amounts that may be surrendered.

Section 100: Meaning of “trading loss”

354.This section explains which trading losses are available for relief. It is based on section 403ZA of ICTA.

355.Subsection (1) is the link to the basic rule in section 99(1)(a).

356.Subsection (2) excludes from the available losses:

• losses made in a trade carried on wholly outside the United Kingdom (the profits of which were historically charged to tax under Schedule D Case V); and

• non-commercial losses for which relief would not be available to the surrendering company under the loss relief rules (see Part 4).

357.This section does not rewrite the requirement in section 403ZA(1) of ICTA that a trading loss is calculated in the same way as a loss within section 393A of ICTA. This is because the requirement is already rewritten in section 47 of CTA 2009.

Section 101: Meaning of “capital allowance excess”

358.This section explains which capital allowances are available for relief. It is based on section 403ZB of ICTA.

359.Subsection (1) is the link to the basic rule in section 99(1)(b). It identifies the capital allowances as those to be given in a qualifying activity of “special leasing”.

360.A company may surrender the allowances which would otherwise be available for relief against its total profits under section 260 of CAA.

361.Subsections (3) and (4) set out how to deal with “special leasing” allowances that are brought forward:

• the amount to be surrendered is limited to the allowances for the current period, without regard to any allowances brought forward; and

• in calculating the excess of allowances over the leasing income of the current period, the amount of the income is not reduced by allowances brought forward.

Section 102: Meaning of “UK property business loss”

362.This section explains which property income losses are available for relief. It is based on section 403ZD(3) of ICTA.

363.Subsection (1) is the link to the basic rule in section 99(1)(e).

364.Subsection (2) makes clear that a loss brought forward under the loss relief rules (see Part 4) is not available even though those rules treat the loss as made in the surrender period.

365.A non-commercial property loss is not eligible for relief under the loss relief rules (see Part 4). So it is not “eligible for corporation tax relief (apart from this Part)” – see section 99(2). It follows that such a loss may not be surrendered as group relief and there is no need to rewrite section 403ZD(3)(b) of ICTA.

Section 103: Meaning of “management expenses”

366.This section explains which management expenses are available for relief. It is based on section 403ZD(4) of ICTA.

367.Subsection (1) is the link to the basic rule in section 99(1)(f).

368.Subsection (2) excludes from the available management expenses amounts brought forward from an earlier period under:

• section 1223 of CTA 2009 (management expenses carried forward); or

• the property loss rules (see Chapter 4 of Part 4 of this Act).

Section 104: Meaning of “non-trading loss on intangible fixed assets”

369.This section explains that a non-trading loss that is available for relief is one calculated under Part 8 of CTA 2009. It is based on section 403ZD(6) of ICTA.

370.Subsection (1) is the link to the basic rule in section 99(1)(g).

371.Subsection (2) excludes from the available loss amounts brought forward from an earlier period.

Section 105: Restriction on surrender of losses etc within section 99(1)(d) to (g)

372.This section sets out a special rule which applies only to “relevant amounts”. They are:

• qualifying charitable donations;

• a UK property business loss;

• management expenses; and

• a non-trading loss on intangible assets.

373.The section is based on sections 403 and 403ZE of ICTA.

374.Subsection (1) introduces the “relevant amounts” to which the section applies.The “relevant amounts” do not include the main reliefs (trading losses, excess capital allowances and non-trading loan relationships deficits), which may be surrendered even if the surrendering company has profits against which the main reliefs may be set.

375.Subsections (2) and (3) are the main rule: the relevant amounts are available only to the extent that they cannot be deducted from the surrendering company’s own profits.

376.Subsection (4) deals with the case where the reliefs are restricted. In that case, the subsection determines the make-up of the relief that is surrendered.

377.The rule in this section compares the amounts within section 99(1)(d) to (g) with the “surrendering company’s gross profits”. Subsection (5) defines “gross profits” for the purposes of this section.

378.Subsection (6) refers to one of the restrictions mentioned in section 403(4) of ICTA. The other restrictions are in sections 99(5) and 137(3)(e).

Section 106: Restriction on losses etc surrenderable by UK resident

379.This section eliminates from group relief some amounts that are attributable to a foreign permanent establishment. It is based on section 403E of ICTA.

380.In most cases the profits of a foreign permanent establishment are taxed in the country where the permanent establishment is. The profits remain chargeable to United Kingdom tax but credit is given for foreign tax on the profits. If the permanent establishment is not profitable relief may be available for the loss etc in the foreign country. This section prevents relief being given for the same loss etc both in the foreign country and in the United Kingdom.

381.Subsection (1) restricts the operation of the section to companies resident in the United Kingdom.

382.Subsection (2) sets out the basic rule: a loss or other amount attributable to a foreign permanent establishment is not available for group relief if it qualifies for relief from non-UK tax.

383.Subsections (3) and (4) set out how to calculate the loss etc of a foreign permanent establishment. The calculation is done on the same basis as that for the calculation of the losses etc of a United Kingdom permanent establishment.

384.Subsection (5) explains the sort of relief from non-UK tax with which the section is concerned: it is relief from tax in the country where the permanent establishment is; and the relief is against the non-UK profits (defined in section 108) of any person other than the surrendering company. In other words, the section is concerned with foreign group relief.

385.Subsections (6) and (7) resolve a potential circularity in the rules. Foreign tax rules may deny relief for an amount if it qualifies for relief from United Kingdom tax. In that case, it would not be clear how the rule in subsection (5) operates.

386.The circularity is resolved by giving relief where the company is resident (that is, in the United Kingdom). But there is an exception to this rule if the company is also resident in the country where the permanent establishment is. In that case, United Kingdom relief is denied.

Section 107: Restriction on losses etc surrenderable by non-UK resident

387.This section eliminates from group relief amounts that arise from activities that are not within the United Kingdom tax net, or are relieved abroad. It is based on section 403D of ICTA.

388.Subsection (1) restricts the operation of the section to companies not resident in the United Kingdom that carry on a trade through a permanent establishment in the United Kingdom.

389.Subsection (2) introduces the three conditions (A, B and C) that have to be met if the non-UK resident company is to be able to surrender group relief.

390.Subsection (3) sets out condition A. The activities of the company must bring it within the charge to corporation tax. So its business must be a trade carried on through a permanent establishment in the United Kingdom (see section 19 of CTA 2009).

391.Subsection (4) sets out condition B. A company may be within the charge to corporation tax because it carries on its business through a permanent establishment in the United Kingdom but those activities (for instance, those of an airline) may be exempt from United Kingdom tax as a result of a DTA. In that case, any losses arising from the exempt activities may not be surrendered as group relief.

392.Subsections (5) and (6) set out condition C. A loss or other amount attributable to a United Kingdom permanent establishment is not available for group relief if it qualifies for relief from non-UK tax.

393.Subsection (7) explains how Condition C works if a foreign tax system (such as those of France and Australia) operates by exempting foreign (in this case, United Kingdom) profits from tax in the foreign country. Such a system may need to calculate the United Kingdom profits in order to exempt them. But that calculation does not mean that the profits in question are the subject of foreign tax relief.

394.Subsections (8) and (9) resolve a potential circularity in the rules. Foreign tax rules may deny relief for an amount if it qualifies for relief from United Kingdom tax. In that case, it would not be clear how condition C operates.

395.The section changes the approach of section 403D(6) of ICTA. Instead of ignoring the condition in foreign tax law the section sets out the result. That is that the loss etc is treated as allowable for foreign tax.

396.Section 403D(11) of ICTA serves only to clarify the interface between relief under that section and relief under the EEA rules in sections 403F and 403G of ICTA. In this Act it is clear that relief under Chapter 2 of this Part is separate from, and (potentially) in addition to, relief under Chapter 3 of this Part. So section 403D(11) is not rewritten.

Section 108: Meaning of “non-UK profits”

397.This section defines “non-UK profits”for sections 106 and 107. It is based on sections 403D and 403E of ICTA.

398.Subsections (1) and (2) set out the basic rule. The profits are those that are charged to “non-UK tax” (see section 187). The definition includes amounts that are taken into account in calculating those profits. But it does not include any profits that are taken into account in calculating the profits of any person for United Kingdom tax purposes.

399.Subsection (3) deals with profits that are exempted from United Kingdom tax by a DTA. Such profits may be non-UK profits. Subsection (2) refers to the “total profits” of any person. Section 4(3) defines that expression to include only amounts charged to corporation tax. So there is no need to exclude non-chargeable profits and section 403D(2)(a) of ICTA is not rewritten in this section.

Section 109: Restriction on losses etc surrenderable by dual resident

400.This section restricts the relief available to dual resident investing companies. It is based on section 404 of ICTA.

401.Subsections (1) and (2) are the basic rule. A company that is resident both in the United Kingdom and in another country may not surrender losses etc as group relief. But the rule applies only to investing companies, a concept that is defined in the following subsections.

402.Subsection (3) defines the first sort of company to which the section applies. It is a company that does not carry on a trade.

403.Subsection (4) defines the second sort of company to which the section applies. It is a trading company whose activities are of a sort more usually associated with an investment business.

404.Subsection (5) defines the third sort of company to which the section applies. The rule prevents an investing company being “dressed up” as a trading company.

Section 110: Restriction on surrender of losses etc from alternative finance arrangements

405.This section denies group relief if a deduction is disallowed by section 520 of CTA 2009. It is based on section 411ZA of ICTA.

Chapter 3: Surrendersmade by non-UK resident company resident or trading in the EEA

Overview

406.This Chapter makes the United Kingdom group relief rules compatible with European Community law following the judgment in Marks and Spencer plc v Halsey, C446/03(1). That case decided that in some circumstances it is contrary to the provisions of the EC Treaty on freedom of establishment to deny group relief to a UK resident parent for the losses of a non-UK resident subsidiary.

407.So this Chapter allows relief for foreign losses. But there are two main restrictions:

• the surrendering company must be resident in (or otherwise “related” to) an EEA territory; and

• the losses must not qualify for relief in the EEA territory.

Section 111: Overview of Chapter

408.This section sets out the structure of the Chapter. It is new.

Section 112: EEA related definitions

409.This section defines the expressions that are used in the Chapter to describe the connection of companies and their profits to the EEA. It is based on section 402 of, and Schedule 18A to, ICTA. The EEA comprises:

Section 113: Steps to determine extent to which loss etc can be surrendered

410.This section sets out how to calculate how much of an “EEA amount” may be surrendered. It is based on section 403F of, and paragraph 11 of Schedule 18A to, ICTA.

411.Subsection (2) is a method statement.

412.Step 1 eliminates any amount that is within the United Kingdom tax net and available for surrender under the rules in Chapter 2.

413.Step 2 sets out the conditions that the EEA amount has to meet. The detail of the conditions is set out in sections 114 to 121. To the extent that the EEA amount meets these conditions it is the “qualifying part of the EEA amount”.

414.Step 3 requires the EEA amount to be recalculated using United Kingdom tax rules and the assumptions set out in sections 123 to 126.

415.In paragraph 11(4) of Schedule 18A to ICTA the assumptions are made in relation to “the provisions of this Chapter” (that is, Chapter 4 of Part 10 of ICTA). In fact the assumptions are used only for the purpose of recalculating the EEA amount. So in this Act they apply only for that restricted purpose.

416.Step 4 compares the qualifying part of the EEA amount with the same proportion of the EEA amount recalculated in Step 3. The lower amount is the amount that may be surrendered.

417.Step 5 requires a restriction for any amount excluded from relief by section 127 (arrangements).

418.Subsection (3) deals with the possibility that the accounting period assumed by section 125 does not coincide with the accounting period of the surrendering company. The subsection makes clear that the total of the recalculated amounts is compared with the qualifying part of the EEA amount. See Change 23 in Annex 1.

419.Subsection (4) cross-refers to the need for consent to the surrender. This rule corresponds to the rule in section 99(6) for UK related companies.

Section 114: The equivalence condition

420.This section requires the EEA amount to correspond to an amount that would qualify for United Kingdom group relief. It is based on paragraph 2 of Schedule 18A to ICTA.

Section 115: The EEA tax loss condition: companies resident in EEA territory

421.This section identifies the EEA amount as one calculated in accordance with the relevant foreign tax law. It is based on paragraph 3 of Schedule 18A to ICTA.

422.Subsection (1) applies the section to companies resident in the EEA. The other sort of EEA related companies (those with an EEA permanent establishment) are dealt with in section 116.

423.Subsection (2) sets out the main condition: it establishes that the Chapter is concerned with an amount that has arisen for tax purposes in an EEA territory.

424.Subsection (3) excludes an amount that is attributable to a permanent establishment in the United Kingdom. Such an amount may qualify for relief under the rules in Chapter 2.

Section 116: The EEA tax loss condition: companies not resident in EEA territory

425.This section identifies the EEA amount in the case of a company with a permanent establishment in the EEA. It is based on paragraph 4 of Schedule 18A to ICTA.

426.Subsection (1) applies the section to companies not resident in the EEA. The other sort of EEA related companies (thoseresident in the EEA) are dealt with in section 115.

427.Subsection (2) sets out the main condition: it establishes that the Chapter is concerned with an amount that has arisen for tax purposes in an EEA territory.

428.Subsection (3) excludes an amount that arises from activities the profits of which would be exempt under a DTA.

429.Subsection (4) introduces subsections (5) and (6), which explain the sort of arrangements with which subsection (3) is concerned.

430.Subsection (5) sets out the relevant arrangements. They are arrangements between the EEA territory where the permanent establishment is and:

• the United Kingdom (paragraph (b)); or

• any other territory (paragraph (a)).

431.Subsection (6) identifies the effect of the DTA: it is that any profits from the activities in question would be exempt from tax in the EEA territory.

Section 117: The qualifying loss condition: general

432.This section introduces the rules which exclude from the EEA amount any amount that qualifies for relief abroad. It is based on paragraphs 5 to 7 of Schedule 18A to ICTA.

433.Subsection (1) makes clear that the EEA amount must meet the conditions in all of sections 118 to 120. Those conditions are expressed in the negative. So the conditions are met if foreign relief is not available.

434.Subsection (3) identifies the “relevant non-UK tax” as any foreign tax charged in the relevant EEA territory or in any territory where the surrendering company is resident.

435.Subsection (4) identifies the “resident territory” as any territory in which the surrendering company is resident, apart from the EEA territory to which the EEA company is related.

Section 118: The qualifying loss condition: relief for current and previous periods

436.This section sets out the condition that relief is not available for the current period or for a previous period. It is based on paragraph 6 of Schedule 18A to ICTA.

437.Subsection (1) introduces the section.

438.Subsection (2) deals with any part of the EEA amount that is deductible in calculating profits. The profits are those of any person (not just the surrendering company). And, for the purpose of this section, one looks at the current period and any previous period.

439.Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.

440.Subsection (4) makes clear that the section is concerned with whether the relief is available, not with whether it is actually given: the condition cannot be met simply by failing to make any necessary claim for relief.

Section 119: The qualifying loss condition: relief for future periods

441.This section sets out the condition that relief is not available for subsequent periods. It is based on paragraph 7 of Schedule 18A to ICTA.

442.Subsection (1) introduces the section.

443.Subsection (2) deals with any part of the EEA amount that may be deductible in calculating profits in any future period. The profits are those of any person (not just the surrendering company).

444.Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.

445.Subsection (4) determines that the possibility of foreign tax relief is to be considered as at the end of the period in which the EEA amount arises.

Section 120: The qualifying loss condition: non-UK tax relief in another territory

446.This section sets out the condition that relief is not available in any territory. It is based on paragraph 8 of Schedule 18A to ICTA.

447.Subsection (1) introduces the section.

448.Subsection (2) deals with any part of the EEA amount that may be deductible in calculating profits. The profits are those of any person (not just the surrendering company). Unlike sections 118 and 119, this section deals with tax relief in a territory which is neither the EEA territory where the EEA amount arises nor the territory where the surrendering company is resident. And it is concerned only with relief that has been given, not with relief that may be given.

449.Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.

Section 121: The precedence condition

450.This section deals with the possibility that relief is available in more than one territory. It is based on paragraph 9 of Schedule 18A to ICTA.

451.Suppose there is a chain of companies with a “top” holding company, a “bottom” trading company and a series of other companies each of which is both a subsidiary and a holding company. If the companies are resident in a variety of territories, where there are rules equivalent to those in this Chapter of the Act, it is possible for the losses of the “bottom” trading company to be relievable in several territories.

452.The section resolves the problem by providing that relief is assumed to be given at the lowest possible level in the chain. If the company at that level is UK resident, group relief is available.

453.Subsection (1) introduces the idea that relief may be available in a territory that is neither the United Kingdom nor the territory where the EEA amount arises.

454.Subsection (2) describes the chain of companies. Paragraph (a) establishes that the company in question is in the chain. Paragraph (b) establishes that higher in the chain there is a UK resident company. Paragraph (c) establishes that the surrendering company is a 75% subsidiary of that UK resident company. Paragraph (d) establishes that there is no other UK resident company in the chain between the surrendering company and the company in question.

455.If relief is available to the company in question it is excluded from the EEA amount.

456.Subsection (3) sets out the sorts of relief with which the section is concerned: they are the same as those in section 118(2) (a direct deduction) and (3) (other relief).

Example

A UK resident company U1 owns all the share capital in N, a company resident in the Netherlands.

N owns all the share capital in U2, a UK resident company.

U2 owns all the share capital in G, a company resident in Germany.

G owns all the share capital in F, a company resident in France.

U1 claims group relief for F’s losses.

Subsection (2) of the section applies to G because:

So Germany is a territory within subsection (2). If relief for F’s loss is available in Germany no United Kingdom group relief is available. G’s potential claim takes precedence over U1’s claim because G is lower in the chain.

But, in relation to N:

So the Netherlands is not a territory within subsection (2). Even if relief for F’s loss is available in the Netherlands, United Kingdom group relief may be available to U2. U2’s potential claim takes precedence over N’s because U2 is lower in the chain.

Section 122: Assumptions to be made in recalculating EEA amount

457.This section introduces sections 123 to 126. It is new.

Section 123: Assumptions as to UK residence

458.This section is the first of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules. It is based on paragraph 12 of Schedule 18A to ICTA.

459.Subsection (1) requires the assumption that the surrendering company is resident in the United Kingdom.

460.Subsection (2) makes clear that the assumption in subsection (1) does not:

• affect where the company’s activities are carried on (but section 124 may make an assumption about that); or

• treat the company as ceasing to be UK resident at the end of the EEA accounting period (but section 125 treats the company’s accounting period as ending then).

461.Subsection (3) requires the assumption that the surrendering company becomes UK resident at the beginning of the EEA accounting period.

Section 124: Assumptions as to places in which activities carried on

462.This section is the second of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules.It is based on paragraph 13 of Schedule 18A to ICTA.

463.Subsection (1) requires the assumption that the company’s activities are carried on in the United Kingdom instead of in the EEA territory. So any special rules about foreign income do not apply.

464.Subsection (2) makes clear that the assumption in subsection (1) includes the assumption that any land held by the surrendering company is in the United Kingdom.

465.Subsection (3) explains how the United Kingdom concepts of law in subsection (2) (“estate”, “interest” and “rights”) are to be applied to land that is outside the United Kingdom.

Section 125: Assumptions as to accounting periods

466.This section is the third of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules.It is based on paragraph 14 of Schedule 18A to ICTA.

467.Subsection (1) determines the start of the accounting period for recalculating the surrendering company’s EEA amount.

468.Subsections (2) to (4) determine when the accounting period ends. As in section 10 of CTA 2009, the accounting period ends at the end of the EEA accounting period or, if earlier, after 12 months.

469.The section clarifies the position if, exceptionally, the EEA accounting period is longer than two years. Paragraph 14 of Schedule 18A to ICTA does not explicitly cater for this possibility butthe only logical interpretation involves treating the process in sub-paragraphs (2) to (4) as iterative. So this section does not change the law.

Section 126: Assumptions in relation to capital allowances

470.This section is the last of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules. It is based in paragraph 15 of Schedule 18A to ICTA.

471.Subsection (1) sets out when the section applies.

472.Subsection (2) invokes section 13 of CAA. So the surrendering company is treated as having incurred expenditure on the plant or machinery on the first day of the EEA accounting period. The amount of the expenditure is the market value of the plant or machinery.

473.Subsection (3) ensures that all the relevant rules in the plant and machinery Part of CAA apply in the recalculation of the EEA amount.

Section 127: Amounts excluded because of certain arrangements

474.This section is a rule to deal with contrived situations. It is based on section 403G of ICTA.

475.Subsection (1) excludes from the EEA amount any amount that arises from an “arrangement”. The exclusion is mentioned in Step 5 of section 113(2). Subsection (1)(a) of the section ensures that the rule does not apply to any part of the EEA amount that is attributable to a United Kingdom permanent establishment. That part is dealt with under section 107.

476.Subsection (2) identifies the excluded amount by reference to “arrangements”.

477.Subsection (3) tests the purpose of the arrangements. They are within this section if their main purpose is to secure group relief.

Section 128: Rules for recalculating EEA amount

478.This section requires the EEA amount to be recalculated using United Kingdom tax rules. It is based on paragraph 16 of Schedule 18A to ICTA.

479.If the recalculation results in a lower amount, the recalculated amount (or the relevant proportion of it) is the amount that may be surrendered as group relief (see Step 4 in section 113(2)).

480.Subsection (1) is the basic rule. The EEA amount is recalculated. Furthermore, any rule that would disallow the amount for United Kingdom tax purposes (such as the rule about non-commercial losses) is applied.

481.Subsections (2) to (4) allow the Treasury to make regulations about the recalculation of the EEA amount.

Chapter 4: Claims for group relief

Overview

482.This Chapter sets out the conditions for relief involving UK related companies (under Chapter 2) and EEA related companies (under Chapter 3). It also sets out restrictions on relief that may be given on claims.

Section 129: Overview of Chapter

483.This section sets out the structure of the Chapter. It is new.

Section 130: Group relief claims on amounts surrenderable under Chapter 2

484.This section sets out the basic rules for claims for group relief surrendered by UK related companies. It is based on section 402 of ICTA and paragraph 70 of Schedule 18 to FA 1998.

485.The corresponding rules for EEA related companies are in section 135.

486.Subsection (2) requires a claim by the claimant company. The surrender is required by section 99(6). The subsection goes on to set out three conditions for a claim.

• There must be a consent (see section 99(6)).

• There must be an overlapping period (see section 142).

• The relief must be available as a result of the existence of:

  • a group (see section 131);

  • a consortium, not involving a “link” company (see section 132); or

  • a consortium involving a “link” company (see section 133).

487.The detail of each part of the third condition includes a requirement that the companies concerned are “UK related” (defined in section 134). That requirement in the case of a group is based on section 402(2) of ICTA.

488.In the case of a consortium it is explicit in section 402(3A) and (3B) of ICTA that the claimant and surrendering companies must be UK related.

489.In the case of a claim for the losses of a company (C) owned by a consortium, section 406(2) of ICTA applies only if the link company (L) could make a claim. That is the case only if L is UK related.

490.In the case of a claim by a company (C) owned by a consortium there is no explicit rule in section 406(5) of ICTA that is equivalent to the rule in section 406(2). But it is implicit in the section: indeed, subsection (8) can work only if the link company (L) is UK related; otherwise section 402(3A) and (3B) of ICTA would prevent L from being the surrendering company.

491.So each of the conditions in sections 131 to 133 is explicit in requiring that all of the surrendering, claimant and link companies are UK related.

492.Subsection (3) makes clear that more than one company may claim the relief available in the surrendering company. But the total claimed cannot exceed the relief available (see section 137(7)).

Section 131: The group condition

493.This section deals with straightforward claims for group relief (that is, claims not involving consortiums) surrendered by a UK related company. It is based on section 402 of ICTA.

494.The corresponding rule for EEA related companies is in section 136.

Section 132: Consortium condition 1

495.This section allows claims involving companies owned by a consortium. It is based on section 402 of ICTA.

496.Subsection (2) allows group relief to go “upwards” from a company owned by a consortium to a member of the consortium.

497.Subsection (3) allows group relief to go “downwards” from a member of a consortium to a company owned by the consortium.

498.Subsections (4) and (5) deny relief if the consortium relationship depends on shares that are held by a share-dealing company as part of its circulating capital.

Section 133: Consortium conditions 2 and 3

499.This section extends the relief that is available to consortiums. It is based on sections 402 and 406 of ICTA.

500.The extension involves a company (“the link company”) that is a consortium member and is also a member of a group. There are special rules for companies in the same group as the company owned by a consortium in sections 148 and 149.

501.Subsection (1) allows relief to go “upwards” from a company (C) owned by a consortium to a company (P) that is in the same group as the link company (L).

502.Subsection (2) allows relief to go “downwards” from a company (P) that is in the same group as the link company (L) to a company (C) owned by the consortium.

503.Subsections (3) and (4) deny relief if the consortium relationship depends on shares that are held by a share-dealing company as circulating capital.

504.The rule in subsections (3) and (4) is not explicit in the source legislation. If shares in C are held by L as circulating capital, section 402(4) of ICTA prevents a consortium claim by L. Similarly, C may not claim L’s losses etc. It follows that when P steps into the shoes of L in accordance with section 406(2) or (5) of ICTA P may not claim C’s losses etc and C may not claim P’s losses etc.

Section 134: Meaning of “UK related” company

505.This section defines “UK related”. It is based on section 402 of ICTA.

Section 135: Group relief claims on amounts surrenderable under Chapter 3

506.This section gives the rules for claims for group relief surrendered by EEA related companies. It is based on section 402 of ICTA and paragraph 70 of Schedule 18 to FA 1998.

507.The corresponding rules for UK related companies are in section 130.

508.Subsection (2) requires a claim by the claimant company. The surrender is required by section 99(6). The subsection goes on to set out three conditions for a claim.

• There must be a consent (see section 99(6)).

• There must be an overlapping period (see section 142).

• The relief must be available as a result of the existence of a group (see section 136).

509.Subsection (3) makes clear that more than one company may claim the relief available in the surrendering company. But the total claimed cannot exceed the relief available (see section 137(7)).

Section 136: The EEA group condition

510.This section sets out the condition for group relief to be surrendered by an EEA related company. It is based on section 402 of ICTA.

511.Subsections (2) and (3) set out the condition, that either the claimant company or the company that owns both it and the surrendering company is UK resident.

Section 137: Deduction from total profits

512.This section explains how group relief is given to the claimant company. It is based on sections 403, 407 and 411 of ICTA.

513.Subsection (1) is the link to section 4.

514.Subsection (2) makes clear that the claimant company may claim all or part of the surrendering company’s surrenderable amounts.

515.Subsection (3) subjects subsection (2) to the restrictions later in the Chapter. Paragraph (e) refers to one of the restrictions mentioned in section 403(4) of ICTA. The other restrictions in that subsection are referred to in sections 99(5) and 105(5) or are rewritten in section 109.

516.Subsection (4) is the rule that group relief is the final deduction to be given in arriving at a company’s taxable profits, subject only to the exceptions set out in subsection (5).

517.Subsection (5) sets out the reliefs that are to be given after group relief. So, for instance, group relief may reduce a company’s profits for an accounting period to an extent that there is a restriction to relief for losses carried back to that accounting period.

518.Subsection (6) makes clear that each relief in subsection (4) that depends on the making of a claim is to be taken account of on the assumption that the relevant claim is made. But there is an exception in the case of relief for non-trading loan relationship deficits: that relief is taken account of only if the relevant claim is actually made.

519.Subsection (7) ensures that an amount of relief is not given twice.

Section 138: Limitation on amount of group relief applying to all claims

520.This section restricts the amount of group relief to the profits available to absorb it. It is based on section 403A of ICTA.

521.It compares the “unused part of the surrenderable amounts” (defined in section 139) with the “unrelieved part of the claimant company’s available total profits” (defined in section 140). The amount of group relief is restricted to the lower of the two compared amounts.

Section 139: Unused part of the surrenderable amounts

522.This section defines “unused part of the surrenderable amounts” for the purpose of section 138. It is based onsections 403A and 403B of ICTA.

523.Subsection (1) introduces the rules for calculating the “unused part of the surrenderable amounts”. In particular, the rules cater for the cases where:

• the surrendering company and the claimant company have different accounting periods; or

• there are multiple claims for the surrendering company’s losses etc.

524.Subsection (2) sets out the restriction to be made if the surrendering company and claimant company have different accounting periods. In that case the “surrender period” (see section 99(7)) and “claim period” (see section 130(2)) are not the same. The loss etc is apportioned on a time basis to the “overlapping period” (see section 142).

525.Subsection (3) introduces the calculation that has to be made if there are multiple claims for the surrendering company’s loss etc. It considers what “prior claims” have been made and what “prior surrenders” have been made as a result.

526.Subsection (4) defines a “prior claim”.

527.Subsection (5) is a method statement for calculating the total amount of any “prior claims”. The overlapping period for any prior claim is given by section 142.

528.If no part of that overlapping period falls within the claim period of the current claim, that prior claim is ignored. But if part of theoverlapping period does fall within the claim period of the current claim a time-apportioned amount of the prior claim is taken into account.

529.The total of the amounts to be taken into account for prior claims is deducted to arrive at the usable amount of the surrenderable amounts.

Section 140: Unrelieved part of claimant company’s available total profits

530.This section defines “unrelieved part of the claimant company’s available total profits” for the purpose of section 138. It is based onsections 403A, 403B and 403D of ICTA.

531.Subsection (1) introduces the rules for calculating the “unrelieved part of the claimant company’s available total profits”. In particular, the rules cater for the cases where:

• the surrendering company and the claimant company have different accounting periods; or

• there are other claims by the claimant company for the claim period.

532.Subsection (2) sets out the restriction to be made if the surrendering company and claimant company have different accounting periods. In that case the “surrender period” (see section 99(7)) and “claim period” (see section 130(2)) are not the same. The claimant company’s available total profits are apportioned on a time basis to the “overlapping period” (see section 142).

533.Subsection (3) introduces the calculation that has to be made if there are other claims by the claimant company for the claim period. It considers what “prior claims” have been made and what “previously claimed group relief” has been given as a result.

534.Subsection (4) defines a “prior claim”.

535.Subsection (5) is a method statement for calculating the total amount of any “prior claims”. The overlapping period for any relevant prior claim is given by section 142.

536.If no part of that overlapping period falls within the claim period of the current claim, that prior claim is ignored. But if part of theoverlapping period does fall within the claim period of the current claim a time-apportioned amount of the prior claim is taken into account.

537.The total of the amounts to be taken into account for relevant prior claims is deducted to arrive at the unrelieved amount of the claimant company’s total profits.

538.Subsection (6) apportions the previously claimed group relief to the period of the current claim.

539.Subsection (7) explains what is meant by “available total profits” in subsection (1). “Total profits” are defined in section 4 to include only amounts charged to corporation tax. So there is no need to exclude non-chargeable profits and section 403D(2)(a) of ICTA is not rewritten in this section.

540.Section 403A(2)(b) of ICTA refers to “total profits … reduced by … previously claimed group relief”. Such group relief can have been given only against profits “as reduced by any other relief” (section 407(1)(b) of ICTA). So subsection (7) of this section makes clear that the total profits must be reduced by such other relief before being further reduced by group relief.

541.Subsection (8) deals with the case of a claimant company that is not resident in the United Kingdom. Its available total profits do not include any profits that are “double taxation exempt” (see section 186).

Section 141: Sections 139 and 140:supplementary

542.This section sets out three rules about relevant prior claims. It is based on section 403A of ICTA.

543.Subsection (1) explains what happens if two or more claims are made at the same time. They are treated as made in whatever order the company or companies choose, by making an election.

544.The section does not specify that the election is to be made “by notice to any officer of the Board” (section 403A(7)(a) of ICTA). The rules in Schedule 18 to FA 1998 apply for the purposes of this Act. Either the election is to be made in a company’s return or it is to be made to “an officer of the Board” (paragraph 2(1) of Schedule 1A to TMA, applied by paragraph 59 of Schedule 18 to FA 1998).

545.If no such election is made, the choice is made by HMRC.

546.Subsection (2) introduces the second rule, about measuring a relevant prior claim. The amount of such a claim is determined when it is made. So it takes account of any earlier claims; and takes no account of any later claims.

547.The section does not rewrite the rule in section 403A(6) of ICTA about a claim becoming final. See Change 24 in Annex 1.

548.Subsection (3) sets out the third rule. It substitutes a “just and reasonable” apportionment for any time-apportionment prescribed by section 139 or 140.

Section 142: Meaning of “the overlapping period”

549.This section defines “the overlapping period” for Chapter 4 of this Part of the Act. It is based on section 403A of ICTA. The expression as defined in this section is used in sections 139, 140, 143 and 144.

550.Subsection (1) is the basic rule. The overlapping period is the period that is common to:

• the surrender period (of the surrendering company – defined in section 99(7)); and

• the claim period (of the claimant company – defined in section 130(2)).

551.Subsection (2) excludes from the overlapping period any part of it during which the conditions for relief are not satisfied.

552.Subsection (3) sets out the conditions for relief that have to be satisfied during the overlapping period. Only one of the conditions is relevant to any claim. They are the conditions set out in sections 131 to 133 (for UK related companies) and 136 (for EEA related companies).

Section 143: Condition 1: surrendering company owned by consortium

553.This section is the basic rule about relief surrendered by a company to a member of the consortium that owns it. It is based on section 403C of ICTA.

554.Subsection (1) ties the section to consortium condition 1: that is, a case that does not involve a link company. Cases involving link companies are dealt with in sections 145 and 146.

555.Subsection (2) restricts the relief by reference to the consortium member’s interest in the surrendering company.

556.Subsection (3) sets out what that interest is. Usually it is the proportion represented by the consortium member’s shareholding in the surrendering company. But if that shareholding entitles the consortium member to a lower proportion of the surrendering company’s profits or assets the lower proportion is used.

557.Subsection (4) deals with the case where the consortium member’s interest in the surrendering company varies in the overlapping period (see section 142). In that case an average is taken.

558.Subsection (5) deals with the case where a trading company (T) is indirectly owned by a consortium through a holding company (H) (see section 185). In that case the various proportions referred to in the section are calculated by reference to the consortium member’s (M1’s) interest in H.

Section 144: Condition 1: claimant company owned by consortium

559.This section is the basic rule about relief surrendered by a member of a consortium to a company that is owned by the consortium. It is based on section 403C of ICTA.

560.Subsection (1) ties the section to consortium condition 1: that is, a case that does not involve a link company. Cases involving link companies are dealt with in sections 145 and 146.

561.Subsection (2) restricts the relief by reference to the consortium member’s interest in the claimant company.

562.Subsection (3) sets out what that interest is. Usually it is the proportion represented by the consortium member’s shareholding in the claimant company. But if that shareholding entitles the consortium member to a lower proportion of the surrendering company’s profits or assets the lower proportion is used.

563.Subsection (4) deals with the case where the consortium member’s interest in the claimant company varies in the overlapping period (see section 142). In that case an average is taken.

564.Subsection (5) deals with the case where a trading company (T) is indirectly owned by a consortium through a holding company (H) (see section 185). In that case the various proportions referred to in the section are calculated by reference to the consortium member’s (M1’s) interest in H.

Section 145: Conditions 2 and 3: limitations in sections 143 and 144

565.This section is the basic rule about relief involving a link company (see section 133). It is based on section 406 of ICTA.

566.Subsection (2) deals with a claim by a company that is a member of the same group as the link company for relief from a company owned by the consortium.

567.The overlapping period for the claim is still determined by reference to the accounting periods of the actual claimant company (P) and the surrendering company (C). But the subsection treats the link company (L) as if it were the claimant company for the purpose of section 143(3). So the “applicable proportion” of the surrenderable amounts is based on L’s interest in Cin the overlapping period (if necessary, based on an average of that period – see section 143(4)(b)).

568.Subsection (3) deals with a claim by a company owned by a consortium for relief from a company that is a member of the same group as the link company.

569.The overlapping period for the claim is still determined by reference to the accounting periods of the claimant company (C) and the actual surrendering company (P). But the subsection treats the link company (L) as if it were the surrendering company for the purpose of section 144(3). So the “applicable proportion” of C’s profits is based on L’s interest in C in the overlapping period (if necessary, based on an average of that period – see section 144(4)(b)).

Section 146: Conditions 2 and 3: companies in link company’s group

570.This section restricts the amount of relief that can be claimed in cases involving link companies. It is based on section 406 of ICTA.

571.Subsections (1) to (3) deal with the case of the surrender of relief by a company owned by a consortium. The link company’s group, as a whole, cannot claim more relief than would have been available to the link company alone.

572.Subsections (4)> to (6) deal with the case of the surrender of relief by the link company and members of its group to a company owned by the consortium. The claimant company cannot claim relief in an amount greater than its profits that would be available to absorb relief surrendered by the link company alone.

573.Subsection (7) explains how to operate the restriction in subsection (6) if the link company and claimant company have different accounting periods. The tests in section 144 are applied in the claimant company’s accounting period.

574.Subsection (8) supplies definitions for the section.

Section 147: Conditions 1 and 2: surrenderable amounts including trading loss

575.This section restricts the amount of trading losses that can be surrendered by a company owned by a consortium. It is based on section 403ZA of ICTA.

576.Subsection (1) applies the section to consortium condition 1: that is, a case that does not involve a link company.

577.Subsection (2) extends the section to consortium condition 2: that is, cases involving a link company (L) where the surrendering company (C) is owned by a consortium.

578.Subsection (3) is the rule that a trading loss within section 37 (“sideways relief”) is not available for group relief to the extent that relief could be given for it within the surrendering company.

579.Subsection (4) explains how the rule in this section interacts with the rule in section 148: this section applies first to reduce the surrenderable losses.

Section 148: Conditions 1 and 2: surrendering company in group of companies

580.This section treats the company owned by a consortium and any companies in its group as a single company for the purposes of surrenders by companies in the group. It is based on sections 405 and 406 of ICTA. The rule about companies in the same group as the consortium member is in section 146.

581.Subsection (1) applies the section to consortium condition 1: that is, a case that does not involve a link company.

582.Subsection (2) extends the section to consortium condition 2: that is, cases involving a link company (L) where the surrendering company (S) is owned by a consortium (or is a member of the same group as the company owned by the consortium).

583.Subsections (3) and (4) restrict the relief available to any excess of the surrenderable amounts over the “group’s potential relief”.

584.Subsection (5) sets out how to calculate the “group’s potential relief”. This is the amount of profits that could be covered by all the available losses etc within the group. As section 147(3) makes clear, within the individual companies in the group, trading losses are treated as set off first against other profits.

585.If the consortium company C and its subsidiary S have different accounting dates, it may be necessary to apportion a loss to the surrender period in determining the “group’s potential relief”. See Change 25 in Annex 1.

586.Subsection (6) clarifies the basis on which the group relief claims are assumed to be made within the group.

Section 149: Conditions 1 and 3: claimant company in group of companies

587.This section treats the company (C) owned by a consortium and any companies (S etc) in its group as a single company for the purposes of claims by companies in the group. It is based on section 405 of ICTA. The rule about companies in the same group as the consortium member is in section 146.

588.Subsection (1) applies the section to consortium condition 1: that is, a case that does not involve a link company.

589.Subsection (2) extends the section to consortium condition 3: that is, cases involving a link company (L) where the claimant company (S) is owned by a consortium (or is a member of the same group as the company owned by the consortium).

590.Subsections (3) to (5) restrict the relief available to the amount that remains after relief is notionally given by way of group relief for all the available losses etc within the group. But those available losses etc may already have been reduced by actual claims within the group.

591.Subsection (6) clarifies the basis on which the group relief claims are treated as already made within the group.

Chapter 5: Subsidiaries, groups and consortiums

Overview

592.This Chapter sets out the rules for determining the relationships between companies for the purpose of group relief.

Section 150: Overview of Chapter

593.This section introduces the Chapter. It is new.

Section 151: Meaning of “75% subsidiary” and “90% subsidiary”

594.This section explains what is meant by “75% subsidiary” and “90% subsidiary”. It is based on section 413 of ICTA.

595.Subsection (1) imports the definitions in Chapter 3 of Part 24 of this Act.

596.Subsection (2) includes the share capital of a registered industrial or provident society in “ordinary share capital”.

597.Subsection (3) excludes shares held as circulating capital by a company that deals in shares.

598.The section simplifies the rule in section 413(5) of ICTA by not dealing separately with indirect share holdings. If any of the companies in the ownership chain holds the relevant shares as circulating capital the chain is broken for the purposes of this section.

599.Subsection (4) introduces the additional tests for a company to be treated as a 75% subsidiary of another. They are that “equity holders” in the subsidiary must be beneficially entitled to:

• at least 75% of the subsidiary’s profits; and

• at least 75% of the subsidiary’s assets in a winding up.

600.The test for a “90% subsidiary” is in similar terms.

601.The detail of the rules about equity holders is set out in Chapter 6 of this Part of the Act.

Section 152: Groups of companies

602.This section sets out the conditions for companies to be treated as members of the same group. It is based on section 413 of ICTA.

603.In regulation 17 of the Taxation of Securitisation Companies Regulations 2006 (SI 2006/3296) there is a rule that a securitisation company (defined in regulation 4) is not to be treated as a member of a group or consortium. And regulation 8 of the Taxation of Insurance Securitisation Companies Regulations 2007 (SI 2007/3402) has a similar rule about insurance securitisation companies (defined in regulation 4). The regulations continue to apply for the purposes of this Part of this Act as they apply for the purposes of Chapter 4 of Part 10 of ICTA.

604.Similar regulations relating to property securitisation companies have been published in draft for consultation.

Section 153: Companies owned by consortiums and members of consortiums

605.This section sets out the conditions for a company to be “owned by a consortium”. It is based on sections 402 and 413 of ICTA.

606.Subsection (1) sets out the two basic conditions.

607.Subsection (3) extends the relief that is available to consortiums. The extension involves trading companies in the same group as a holding company owned by a consortium. The corresponding extension to companies in the same group as a consortium member is in section 133(1) and (2).

608.“Holding company” is defined in section 185(2).

Section 154: Arrangements for transfer of member of group of companies etc

609.This section counteracts arrangements designed to obtain group relief. It is based on section 410 of ICTA.

610.It is possible to arrange for a loss-making company in a group to become temporarily a member of a second group while the economic reality is that it remains a member of the first group. The section operates as soon as arrangements are made for the ownership of the company to change.

611.Subsection (1) appliesthe section potentially to any case involving two companies in a group.

612.Subsection (2) denies group relief (by treating the companies as not members of the same group) if “arrangements” are in place.

613.Subsection (3) sets out the three “effects” which bring arrangements within the section. They all involve a change in the control of one of the companies or of a trade that it carries on.

Section 155: Arrangements for transfer of company owned by consortium etc

614.This section counteracts arrangements designed to obtain consortium relief. It is based on section 410 of ICTA.

615.It is possible to arrange for a loss-making company to become temporarily:

• a member of a consortium; or

• owned by a consortium

while the economic reality is that it is neither of these things. The section operates as soon as arrangements are made for the ownership of the company to change.

616.Subsection (1) appliesthe section potentially to any case involving a trading company and a consortium.

617.Subsection (2) denies group relief (by treating the trading company as not owned by a consortium) if “arrangements” are in place.

618.Subsection (3) sets out the four “effects” which bring arrangements within the section. They all involve a change in the control of the trading company or of a trade that it carries on.

619.Subsection (5) extends the operation of the section to cases where the trading company is owned indirectly by a consortium.

Section 156: Sections 154 and 155: supplementary

620.This section explains some of the terms used in the two previous sections. It is based on section 410 of ICTA.

621.The reference to Scottish Ministers in subsection (2)(b) reflects section 117 of the Scotland Act 1998.

622.The definitions of “connected persons” and “control” applied by section 410(5) of ICTA are not rewritten in this section. There are Act-wide definitions in section 1176.

Chapter 6: Equity holders and profits or assets available for distribution

Overview

623.This Chapter sets out how the rights of equity holders are determined in this Part. These rights (to profits and assets of a company) are used as alternatives to simple shareholding for determining interests in a company:

• in determining the proportion of a company’s loss etc that can be surrendered to a member of a consortium that owns the company (section 143(3));

• in determining the proportion of a company’s profits that can used to absorb losses etc surrendered by a member of a consortium that owns the company (section 144(3)); and

• in the tests as to whether or not a company is a 75% subsidiary (or a 90% subsidiary) of another (section 151(4)).

Section 157: Introduction to Chapter

624.This section sets out the structure of the Chapter. It is based on Schedule 18 to ICTA.

625.Subsection (2) gives two rules of interpretation for the Chapter.

Section 158: Meaning of “equity holder”

626.This section defines “equity holder”. It is based on paragraph 1 of Schedule 18 to ICTA.

627.Subsection (1) establishes that an equity holder may be:

• a shareholder (but only in relation to “ordinary shares” – see section 160); or

• a loan creditor (but only in relation to loans that are not “normal commercial loans” – see section 162).

628.Subsection (2) sets out the tests in section 417 of ICTA (also rewritten in section 453) to determine whether a person is a loan creditor of a company.

Section 159: Use of relevant company’s assets

629.This section extends the meaning of “equity holder”. It is based on paragraph 1 of Schedule 18 to ICTA.

630.The section treats as an equity holder a person who provides money to a company so that it can acquire an asset which is used in a trade by the person who provided the money. The company claims capital allowances on the asset.

631.In this case the person who provides the money has an economic stake in the company, whose results depend on the profits of the trade in which the asset is used. And this is the case even if the money is provided by way of, say, restricted preference shares which would not otherwise count towards the investor’s stake in the company (see section 160).

632.Subsection (1) sets the scene, specifying the conditions to be met for the section to apply.

633.Subsection (2) is the main rule: the person who provides the money is treated an equity holder.

634.Subsection (3) sets out the capital allowances to which the company must be entitled if the section is to apply.

635.Subsection (4) excludes from the application of the section a normal commercial loan made in the course of a banking business. The exclusion applies only to the extent that the amount of the commercial loan exceeds the cost of the assets.

Section 160: Meaning of “ordinary shares”

636.This section defines “ordinary shares” by excluding restricted preference shares from the holdings that are to be considered for the purposes of this Chapter. It is based on paragraph 1 of Schedule 18 to ICTA.

637.Subsection (2) introduces the five conditions that have to be met if the shares are to be excluded as restricted preference shares.

638.Subsection (3) is the first condition. There must be new consideration. “New consideration” is defined in section 157(2) by reference to section 1115.

639.Subsections (4) to (7) set out the other conditions.

Section 161: Meaning of “restricted right to dividends”

640.This section defines restricted right to dividends for use in condition D in section 160(6). It is based on paragraph 1A of Schedule 18 to ICTA.

641.Subsection (1) sets out the condition that dividends should not represent more than a reasonable commercial rate of return. This condition must be met whichever of the other conditions is relied on.

642.Subsection (2) rewrites condition A in paragraph 1A(2) of Schedule 18 to ICTA. It relates to fixed rate shares.

643.Subsection (3) rewrites condition B in paragraph 1A(3) of Schedule 18 to ICTA. It relates to shares that carry a dividend based on a published index (see subsection (5)).

644.Subsection (4) rewrites condition C in paragraph 1A(4) of Schedule 18 to ICTA. It relates to shares that carry a dividend that may be reduced or not paid in special circumstances (see subsection (6)).

645.Subsections (5) to (8) provide interpretative rules for the section, including a Treasury power in relation to “special circumstances” for the purpose of subsection (4).

Section 162: Meaning of “normal commercial loan”

646.This section defines normal commercial loans so that they can be excluded from the loansthat are to be considered for the purposes of this Chapter. It is based on paragraph 1 of Schedule 18 to ICTA.

647.Subsection (1) requires that the loan includes new consideration. “New consideration” is defined in section 157(2) by reference to section 1115.

648.The subsection also introduces the four further conditions for a loan to be excluded. The details of the conditions are in subsections (2) to (5).

Section 163: Normal commercial loans: company’s results or value of assets

649.This section explains some of the concepts used in section 162. It is based on paragraph 1 of Schedule 18 to ICTA.

650.Subsection (1) allows a “fixed” rate of interest to include a rate that depends inversely on the company’s results. Interest at a rate that increases when the company’s results improve is like a dividend. But there is no need to treat interest as a dividend if its rate reduces when the company’s results improve.

651.Subsection (2) allows a “fixed” rate of interest to include a rate that depends inversely on the value of the company’s assets. Interest at a rate that increases when the company’s assets increase in value is like a dividend. But there is no need to treat interest as a dividend if its rate reduces when the company’s assets increase in value.

652.Subsections (3) to (6) make clear that a loan is not treated as depending on the value of any of the company’s assets (see section 162(4)(b)) simply because it is secured by a charge over land acquired with the loan.

Section 164: Sections 160 and 162: supplementary

653.This section explains how the “quoted parent company” test is applied. It is based on paragraph 1 of Schedule 18 to ICTA.

654.In accordance with section 158 a holder of restricted preference shares does not count as an equity holder. Such shares may carry the right to conversion into shares or securities in the company’s “quoted parent company” (see section 160(4)(c)). In order to establish whether the company (S) is a 75% subsidiary of the possible quoted parent company (P) it may be necessary to know whether P is an equity holder in S (see section 151(4)). So the process becomes circular.

655.A similar circularity can result from consideration of whether a loan is a normal commercial loan. The loan may carry the right to conversion into shares or securities in the company’s “quoted parent company” (see section 162(2)(c)). Again, it is necessary to establish whether the company is a 75% subsidiary of the possible quoted parent company.

656.Subsection (1) deals with shares. It applies if all the conditions in section 160 are met, apart from the one (B) which may depend on conversion to shares or securities in a quoted parent company.

657.Subsection (2) deals with securities. It applies if all the conditions in section 162 are met, apart from the one (A) which may depend on conversion to shares or securities in a quoted parent company.

658.Subsection (3) sets out the main condition for a company having a quoted parent company: it must be a 75% subsidiary; and the parent’s shares must be quoted on a stock exchange.

659.Subsection (6) sets the scope of the rule which breaks the circularity. It applies only for the purposes of sections 160 and 162 and this section.

660.Subsection (7) is the rulewhich breaks the circularity: the “candidate company” is assumed to be a quoted parent company.

Section 165: Proportion of profits available for distribution to which company is entitled

661.This section sets out how to apply the tests in this Part that are based on an entitlement to a distribution of profits. It is based on paragraph 2 of Schedule 18 to ICTA.

662.The tests in this Part, based on an entitlement to a distribution of profits, are in sections 143(3)(b), 144(3)(b) and 151(4)(a). The tests are also applied, by cross-reference, in, for example, the rules about small profits relief (see section 33(7)).

663.Subsection (1) sets the scope of the section and introduces company A (the parent) and company B (the subsidiary).

664.Subsection (2) is the basic rule: the proportion of the profits to which company A is entitled is based on what it would get if all company B’s profits of an accounting period were distributed to its equity holders. If there are no profits in that accounting period a notional profit of £100 is assumed.

665.Subsection (3) clarifies the position in the case where some of company B’s profits are in fact distributed. The section is still concerned with the whole of its profits.

666.Subsection (4) requires that company B’s profits are calculated in accordance with United Kingdom tax rules, wherever it is resident.

667.Subsection (5) makes clear that the section is not concerned with any payments that are repayments of capital.

668.Subsection (6) includes in company A’s entitlement any payment which it gets as an equity holder even if the payment would not otherwise count as a distribution.

Section 166: Proportion of assets available for distribution to which company is entitled

669.This section sets out how to apply the tests in this Part that are based on an entitlement to a distribution of assets in a winding up. It is based on paragraph 3 of Schedule 18 to ICTA.

670.The tests in this Part, based on an entitlement to a distribution of assets in a winding up, are in sections 143(3)(c), 144(3)(c) and 151(4)(b). The tests are also applied, by cross-reference, in the rules about small profits relief (see section 33(7)).

671.Subsection (1) sets the scope of the section and introduces company A (the parent) and company B (the subsidiary).

672.Subsection (2) is the basic rule: the proportion of the assets to which company A is entitled is based on what it would get if company B’s net assets at the end of an accounting period were distributed to its equity holders in a winding up. If there are no net assets (or if there is no balance sheet) at the end of that accounting period net assets of a notional amount of £100 are assumed.

673.Subsection (3) identifies the gross assets of company B, from which its liabilities are deducted to arrive at its net assets.

674.Subsection (4) identifies the liabilities of company B, which are deducted from its gross assets to arrive at its net assets.

675.Subsection (5) includes in company A’s entitlement any payment which it would get as an equity holder even if the payment would not otherwise count as a distribution of assets.

676.Subsections (6) and (7) make clear that the section is not concerned with any payments that are repayments of capital. This exclusion affects the calculations of both company B’s gross assets and the amount to which the equity holder is entitled.

Section 167: Profits or assets available for distribution and entitlement: supplementary

677.This section includes three special rules for calculating an equity holder’s entitlements for the purposes of sections 143(3), 144(3) and 151(4). It is based on paragraphs 1 and 6 of Schedule 18 to ICTA.

Section 168: Meaning of “the relevant accounting period”

678.This section defines some expressions. It is based on paragraph 7 of Schedule 18 to ICTA.

679.The “relevant accounting period” is used for the calculation of a company’s entitlement to profits or assets. Such a calculation is used to determine whether or nota company:

• is a member of a group; or

• is owned by a consortium.

680.Subsections (2) and (3) explain how to make the calculations in the cases of non-UK resident companies.

Section 169: Application and interpretation of sections 170 to 182

681.This section introduces a group of sections that deal with shares and securities that have restricted or temporary rights. It is based on paragraphs 4, 5 and 5F of Schedule 18 to ICTA.

Section 170: Shares or securities with limited rights

682.This section requires an alternative calculation if an equity holder’s rights (either to profits or to assets in a winding up) are restricted. It is based on paragraph 4 of Schedule 18 to ICTA.

683.Subsection (1) introduces the section. The calculation is made at the “relevant time” (see section 169(2)).

684.Subsection (2) requires a calculation of the “alternative proportion” on the assumption that all the restricted rights are waived. So, if those rights belong to the company in question, its proportion is reduced. But if the rights belong to other equity holders its proportion is increased.

685.Subsection (3) substitutes the alternative proportion for the proportion worked out using the basic rules, but only if the alternative proportion is smaller.

686.Subsection (5) makes clear that any sort of restriction of the rights of an equity holder is to be taken into account for the purposes of the section.

687.Subsection (6) draws attention to the fact that restrictions based on profits or assets referable to a trade carried on in the United Kingdom by a non-UK resident company are dealt with in sections 179 to 182 and not in this section.

Section 171: Shares or securities with temporary rights

688.This section and section 172 require an alternative calculation if an equity holder’s rights (either to profits or to assets in a winding up) are capable of changing. Both sections are based on paragraph 5 of Schedule 18 to ICTA.

689.Subsection (1) sets the scope of the section. If it applies, the consequences are set out in section 172. The calculation is made at the “relevant time” (see section 169(2)).

Section 172: Company A’s proportion if shares etc have temporary rights

690.This section and section 171 require an alternative calculation if an equity holder’s rights (either to profits or to assets in a winding up) are capable of changing. Both sections are based on paragraph 5 of Schedule 18 to ICTA.

691.Subsection (1) takes up the story from the previous section, which determines whether or not this section applies. To arrive at the “alternative proportion” one must assume that the rights of the equity holders are now what they will be at a “future time” when the rights become different (see section 171(2) and (3)).

692.Subsection (2) explains “relevant future time”.

693.Subsection (3) is the rule that the alternative proportion is used if it is smaller than the proportion that would otherwise be used.

Section 173: Cases in which option arrangements are in place

694.This section defines “option arrangement” for the purpose of section 174. It is based on paragraph 5B of Schedule 18 to ICTA.

695.Subsection (1) is a cross-reference to section 174, which sets out the consequences of option arrangements.

696.Subsection (2) introduces the two conditions that have to be satisfied if an arrangement is to be an option arrangement.

697.Subsection (3) is the condition that the arrangement changes the equity holder’s entitlement. The subsection refers (twice) to beneficial entitlement but paragraph 5B(2) of Schedule 18 to ICTA refers only to entitlement. This is not a change in the law because the option arrangements are relevant only if they are used for a “determination” to be made under paragraph 5B(7) of the Schedule. The determination is made in accordance with paragraph 2(1) or 3(1) of the Schedule. Those sub-paragraphs make clear that the Schedule is concerned only with beneficial entitlements.

698.Subsection (4) is the condition that the option may lead to a person acquiring shares or securities. Shares must be ordinary shares (defined in section 160). The option may be a “call” option, which gives a person the right to acquire the shares or securities; or a “put” option, which gives a person the right to require another person to acquire shares or securities.

699.Subsection (5) excludes rights that arise from an SAYE option scheme or that are to acquire normal commercial loans.Rights to acquire restricted preference shares (see section 160) are excluded by the reference to “ordinary shares” in subsection (4).

700.Subsections (6) and (7)set out the excluded rights under an SAYE option scheme.

Section 174: Company A’s proportion if option arrangements in place

701.This section requires an alternative calculation if an equity holder’s rights (either to profits or to assets in a winding up) are affected by option arrangements. It is based on paragraph 5B of Schedule 18 to ICTA.

702.There is a distinction between:

• an option which affects the rights carried by shares or securities; and

• an option which leads to the acquisition of shares or securities.

703.In the first case, such an option would fall within section 171. This section deals with the second case, which was considered in J Sainsbury plc v O’Connor (1991), 64 TC 208 CA(2).

704.Subsection (1) provides a method statement. It requires a calculation for every permutation of rights that may exist if options are exercised so that shares or securities in the company are acquired. The permutation that gives the lowest proportion is the “alternative proportion”.

705.Subsection (2) is the rule that the alternative proportion is used if it is lower than the proportion that would otherwise be used.

Sections 175 to 178

Overview

706.The first step in a calculation of an equity holder’s proportion of profits available for distribution is based on the equity holder’s share holding (see section 165). The equivalent first step in the calculation of an equity holder’s proportion of assets available for distribution in a winding up is in section 166.

707.The next step is to check whether there is a (lower) alternative proportion in accordance with the three special rules in:

• section 170 (limited rights);

• section 172 (temporary rights); or

• section 174 (options).

708.If only one of the special rules applies the lower alternative proportion is used. But sections 175 to 178 explain what happens if two or three of the special rules apply in the same case.

709.If two rules apply, there are four possible proportions:

• calculated under the basic rule in section 165 or 166;

• calculated under one of the special rules;

• calculated under the other of the special rules; or

• calculated under both rules together.

710.If all three rules apply, there are eight possible proportions.

711.In all cases, the lowest proportion is used.

Section 175: Cases in which both sections 170 and 172 apply

712.This section deals with the first and second special rules. It is based on paragraph 5A of Schedule 18 to ICTA.

Section 176: Cases in which both sections 170 and 174 apply

713.This section deals with the first and third special rules. It is based on paragraph 5C of Schedule 18 to ICTA.

Section 177: Cases in which both sections 172 and 174 apply

714.This section deals with the second and third special rules. It is based on paragraph 5D of Schedule 18 to ICTA.

Section 178: Cases in which sections 170, 172 and 174 all apply

715.This section deals with the first, second and third special rules. It is based on paragraph 5E of Schedule 18 to ICTA.

Section 179: Cases in which surrendering or claimant company is non-UK resident

716.This section introduces special rules about equity holders in non-UK resident companies. It is based on paragraph 5F of Schedule 18 to ICTA.

717.Subsection (1) sets the scope of the section.

718.Subsection (2) applies the special rules in section 180 if the equity holder’s rights are used to establish whether or not a non-UK resident company is owned by a consortium.

719.Subsection (3) applies the special rules in section 180 if the equity holder’s rights are used to establish whether or not a non-UK resident company is a subsidiary of another company.

720.Subsection (4) applies the special rules if (“Case 1”) the equity holder’s rights are referable to the profits or assets of the non-resident company’s “UK trade”. It also operates in this way if (“Case 2”) the equity holder has rights under an option arrangement which are referable to the profits or assets of the non-resident company’s UK trade. The extent to which profits or assets are referable to the company’s UK trade is determined in accordance with section 182.

Section 180: Company A’s proportion if non-UK resident involved

721.This section is the main special rule aboutequity holders in non-UK resident companies. It is based on paragraph 5F of Schedule 18 to ICTA.

722.Subsection (1) introduces the section: subsection (2) applies in cases where there are no limited rights, temporary rights or option arrangements; subsection (3) applies in other cases.

723.Subsection (2) deals with the straightforward case in which none of sections 170 (limited rights), 172 (temporary rights) or 174 (options) applies. The alternative proportion calculated on the assumptions in section 181 is used if it is lower than the proportion that would otherwise be used.

724.Subsection (3) is a method statement which deals with the more complicated cases involving sections 170 (limited rights), 172 (temporary rights) and 174 (options), either singly or in the various possible combinations (see sections 175 to 178). The rule is that any calculations under those sections is done again using the assumptions in section 181 and the result of that calculation is used if it is lower than the proportion would otherwise be.

Section 181: Assumptions to be applied if non-UK resident company involved

725.This section sets out how to calculate the “alternative proportion” for section 180. It is based on paragraph 5F of Schedule 18 to ICTA.

726.All the calculations under section 180 are done by reference to amounts that are “referable to company B’s UK trade” (defined in section 182).

727.Assumptions 2 and 3 do not include £100 as an alternative to the company’s United Kingdom profits or assets (see paragraph 5F(7)(b) of Schedule 18 to ICTA, which applies if the profits are between £1 and £99). This is because the alternative has little or no practical effect. See Change 26 in Annex 1. In a case where there are no profits, section 165(2) substitutes the amount of £100.

728.Assumption 4 refers (three times) to beneficial entitlement but paragraph 5F(7)(c) and (8) of Schedule 18 to ICTA refers only to entitlement. This is not a change in the law because the option arrangements are relevant only if they are used for a “determination” to be made under paragraph 5F(4) or (5) of the Schedule. The determination is made in accordance with paragraph 2(1) or 3(1) of the Schedule. Those sub-paragraphs make clear that the Schedule is concerned only with beneficial entitlements.

Section 182: Assets etc referable to UK trade

729.This section determines the extent to which amounts are referable to a company’s “UK trade”. It is based on paragraph 5F of Schedule 18 to ICTA.

730.Paragraph (b) of the section excludes amounts attributable to activities that are “double taxation exempt”. That expression is defined in section 186.

Chapter 7: Miscellaneous provisions and interpretation of Part

Overview

731.This Chapter contains definitions and two minor rules.

Section 183: Payments for group relief

732.This section takes outside the tax system any payments for group relief. It is based on section 402 of ICTA.

733.Originally (from 1953 to 1967) a form of group relief was available, based on “subvention” payments from one company to another. The payment was allowed as a deduction, reducing the profits of the paying company; and it was a taxable receipt of the company receiving the payment. Such payments are no longer required by United Kingdom tax law. But they may be made by agreement between group members. This section ensures that they are neither allowed as a deduction nor taxed.

Section 184: References to “allowance” in CAA 2001

734.This section clarifies the position if capital allowances are surrendered as group relief. It is based on section 411 of ICTA.

735.Capital allowances surrendered as group relief still count as having been made to the surrendering company. This means that a balancing charge on the surrendering company takes into account those surrendered allowances.

Section 185: “Trading company” and “holding company”

736.This section provides definitions. It is based on section 413(3) of ICTA.

Section 186: When activities of a company are double taxation exempt

737.This section explains what is meant by activities that are double taxation exempt. It is based on section 403D of, and paragraph 5F of Schedule 18 to, ICTA.

738.The definition is used in sections 107(4), 108(3), 140(8), and 182(b).

739.Subsection (1) makes the link between the activities that are described in the Part as exempt and the profits from those activities which are the subject of exemption under a DTA.

740.Subsection (2) makes clear that activities are to be treated as exempt whether or not any necessary claim for exemption is actually made.

741.Subsection (3) defines “double taxation arrangements” by reference tosection 2 of TIOPA. They are “… arrangements … made in relation to any territory outside the United Kingdom with a view to affording relief from double taxation in relation to …” the taxes within subsection (3) of that section.

Section 187: Meaning of “non-UK tax”

742.This section defines “non-UK tax” for this Part of the Act. It is based on sections 403D and 403E of, and paragraph 17 of Schedule 18A to, ICTA. The expression is used in sections 106 to 109, 115 to 121 and 949.

743.Subsection (1) is the basic rule that the non-UK tax must correspond to United Kingdom income tax or corporation tax.

744.Subsection (2) makes clear that the non-UK tax need not be a national tax: it may be a tax imposed by a province or state of a foreign country.

Section 188: Other definitions

745.This section sets out definitions of expressions used in the Part. It is based on sections 6(4) and 413 of ICTA.

746.Subsection (2) defines “trade” so that it includes an office but does not refer to a company having a vocation or employment.See Change 4 in Annex 1.