UK and International Tax news

Finance Bill 2011 And Corporation Tax Changes

Wednesday 6th April 2011

The Finance Bill 2011, together with Explanatory Notes, was published on 31 March 2011.  A second reading of the Bill, following the first held on 29 March is scheduled for 26 April, which will be in the full House of Commons and where a limited number of clauses, selected by the Opposition, will be debated.  The rest of the Bill clauses will be debated by a Public Bill Committee on subsequent Tuesdays and Thursdays prior to returning to the Commons for the Report Stage and third reading and thereafter its passage through the House of Lords.

Comments in respect of several specific corporation tax changes are set out below.

Clause 45 and Sch 10 of the Bill simplify certain aspects of the rules for the calculation of degrouping charges in the corporation tax regimes for chargeable gains and intangible fixed assets. Schedule 10 also addresses interactions between the chargeable gains degrouping charge rules and the exemption for disposals of substantial shareholdings.

The new rules are to ensure that the operation of s139 TCGA92 to certain corporate reconstructions is not affected where the revised rules mean that a degrouping charge is treated as increasing the consideration on a share disposal. S.139 only applies where a person disposing of a company’s business receives no part of the consideration for the disposal. Where the degrouping charge results in additional consideration being deemed to be received this is disregarded for the purposes of s.139.

The commencement date of the changes as published in the Finance Bill is that the rules will apply where a company leaves a group on or after the day the Bill receives Royal Assent. However, the Government has subsequently announced that a Government Amendment to the Bill will be introduced so that a group may opt to have the new rules apply where companies leave the group on or after 1 April 2011.  The earlier commencement date will apply where the principal company of the capital gains group makes an election.  

The election will mean that the new rules will apply to all members of the group from 1 April 2011 in respect of their leaving the group that has made the election. Where a company leaves the group and then leaves another group before the date of Royal Assent, and that second group has not made an election, the revised rules will not apply when the company leaves the second group.

The election may be revoked but this must be done by 31 March 2012.  An election that has been revoked will have no effect so that the new rules will apply only to companies that leave the group from the date of Royal Assent.

Clause 47 and Sch 12 introduce a number of changes to the controlled foreign company (CFC) rules. In particular:

• an exemption for certain intra-group activities where there is limited connection with the UK;

• an exemption for CFCs whose main business is the exploitation of intellectual property (IP) where both the IP and the CFC have minimal connection with the UK;

• an exemption which runs for three years for foreign subsidiaries that, as a consequence of an acquisition or a reorganisation come within the scope of the CFC regime;

• an exemption for CFCs with a low level of profits, with an accounts based limit of £200,000 profits per annum, as an alternative to the existing £50,000 limit based on chargeable tax profits; and

• extension of the transitional rules for holding companies until July 2012.

The changes have effect for accounting periods beginning on or after 1 January 2011, other than the extension of the transitional rules, which is deemed always to have had effect.

Clause 46 and Sch 11 simplify the current rules that apply to restrict the circumstances in which pre entry capital losses of a company that joins a group can be set against gains. In particular, the use of losses that arise after a company joins a group will no longer be restricted.  Losses that are restricted may be used against gains arising on assets used in the same business that the company conducted before joining the group rather than, as now, only against gains on assets used in the same trade.

Clause 48 and Sch 13 give an optional exemption from corporation tax for profits arising from foreign permanent establishments of a UK company.  If profits are exempt from corporation tax under these provisions, losses will be excluded to the extent that they arise from foreign permanent establishments.  Profits and losses will be treated in this way only when the company has made an election for these rules to apply to it.  Once a company has made this election, foreign permanent establishment profits will be exempt and losses will be cancelled from the commencement of the next accounting period, subject to a transitional rule.

With regard to the rules affecting associated companies and the small companies rate of tax, clause 55 amends the legislation to ensure that companies are not held to be associated through an attribution of rights, solely by virtue of relationships between individuals but rather only where the level of commercial interdependence between the companies themselves makes it appropriate to do so.

Clause 58 updates the definition of transfer pricing guidelines within the UK’s transfer pricing legislation to refer to the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations approved by OECD for publication in July 2010.

It also extends the power to make future changes to the definition by secondary legislation to include replacement of the existing version of the OECD Transfer Pricing Guidelines.

The changes apply, for corporation tax purposes, for accounting periods beginning on or after 1 April 2011, and, for income tax purposes, for the tax year 2011-12 and subsequent tax years.

If you would like to discuss these or other Finance Bill provisions relating to corporation tax, please contact Keith Rushen on +44 (0)20 7486 2378.

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