Finance Bill 2002: EXPLANATORY NOTE
CLAUSE 42 AND SCHEDULE 7: ROLL-OVER OF DEGROUPING CHARGE ON BUSINESS ASSETS
SUMMARY
1. Clause 42 and Schedule 7 introduce new provisions into the Taxation of Chargeable Gains Act 1992 (TCGA) that will enable the charge on gains arising by virtue of section 179 of the TCGA (the degrouping charge) to be postponed. The proposed new rules apply the existing business asset rollover relief provisions in a modified form.
DETAILS OF THE CLAUSE
2. Subsection (1) of the clause inserts section 179B into the TCGA.
Section 179B Taxation of Chargeable Gains Act 1992
3. Subsection (1) extends the roll-over relief provisions in sections 152 and 153 of the TCGA to degrouping gains.
4. Subsection (2) provides that sections 152 and 153, and the other provisions specified in Schedule 7AB, apply for this purpose as modified by Schedule 7AB.
5. Subsection (3) ensures that where there has been an election under section 179A in respect of a gain arising to company A which is consequently treated as having arisen instead to company C, any claim for roll-over relief under section 179B must be made by company C. (Subsection (6) provides interpretation for the references in section 179B to company A and company C.)
6. Subsection (4) sets out how references in Schedule 7AB which are relevant to company A are to apply for the purposes of a claim for rollover relief by company C.
7. Subsection (5) makes appropriate provision for apportionment where only part of a degrouping gain is reallocated under section 179A.
8. Subsection (2) of the clause inserts Schedule 7AB into the TCGA (which is set out in Schedule 7 to the Finance Bill).
9. Subsection (3) of the clause amends the regulation-making power in section 86 of Finance Act 1993 so that where amendments are made by regulations under that section to the business assets rollover relief provisions, consequential changes can be made by those regulations to Schedule 7AB where necessary.
10. Subsection (4) of the clause provides the commencement provisions - claims to rollover relief can be made under the new provision where the degrouping event takes place on or after 1 April 2002.
DETAILS OF THE SCHEDULE
11. Schedule 7 inserts the new Schedule 7AB into the Taxation of Chargeable Gains Act 1992 (TCGA).
Schedule 7AB Taxation of Chargeable Gains Act 1992 - Roll-over of degrouping charge: modification of enactments
12. Paragraph 1 is introductory. It defines terms, principally by reference to section 179 of the TCGA. In particular, company B is the company that transferred the asset intra-group to company A and it is company A which leaves the group triggering the degrouping charge.
13. Paragraph 2 modifies section 152 of the TCGA, the primary rollover relief provision, and provides that
- company B must have been carrying on a trade at the time of the intra-group transfer
- the asset (which is transferred to company A) must have been used for the purposes of company B's trade
- an amount equal to the deemed sale consideration (the market value of the asset at the time of the deemed disposal) must be reinvested in new assets (i.e. assets which are distinct from the asset that is deemed to be disposed of and reacquired) by company A for full rollover relief to be available
- the new assets must be taken into use for the purposes of A's trade
- both the old and new assets must be within the classes of assets in section 155 of the TCGA
- company A must make a claim to relief.
14. Where these conditions are satisfied, the normal rollover consequences flow. Company A is treated as having disposed of the asset transferred from company B at such amount that neither gain nor loss arises. The acquisition cost in company A's hands of the new asset is correspondingly reduced. But company A's acquisition cost of the asset which has been subject to the deemed disposal and reacquisition is not reduced, otherwise there would be a double adjustment.
15. Sub-paragraph (3) ensures that the reinvestment period (up to 12 months before and 3 years after, or such longer time as the Board may allow) operates by reference to the time when the degrouping gain accrues. This time is later than the time when the transferred asset is deemed to have been disposed of and reacquired.
16. The rest of the paragraph makes detailed modifications to section 152 of the TCGA.
17. Paragraph 3 makes corresponding modifications to section 153 of the TCGA, which allows reduced rollover relief where only part of the deemed sale consideration for the transferred asset is reinvested by company A in new assets.
18. Paragraph 4 modifies section 153A of the TCGA (which deals with provisional claims to rollover relief) for the purposes of the rollover claim on gains under section 179 of the TCGA. It provides that company A can make a provisional claim by making an appropriate declaration in its corporation tax return for the accounting period in which the degrouping gain arises.
19. Paragraph 5 modifies section 155 of the TCGA, which sets out the relevant classes of assets for rollover relief. It clarifies that for the purposes of determining whether the relevant asset is within Head A of Class 1, the trade referred to is the trade carried on by company B.
20. Paragraph 6 modifies section 159 of the TCGA, which restricts the availability of rollover relief in the case of claims by non-residents. It ensures that a gain cannot be rolled over into new assets that are outside the scope of UK corporation tax. The detailed modifications ensure that the appropriate result is delivered in the case of relief for the degrouping charge.
21. Paragraph 7 makes appropriate modifications to section 175 of the TCGA, which applies rollover relief to a capital gains group.
22. The overall effect of the modifications is that where company A is a member of a group at the time the degrouping gain arises and another member of that group reinvests an amount equal to the deemed sale consideration (the market value of the asset at the time of the deemed disposal), that other company can make a claim to rollover relief. A claim to less than full rollover can be made as appropriate if less than the full market value is reinvested, subject to the normal rules of section 153 of the TCGA (as modified for this purpose).
23. Sub-paragraph (4) of paragraph 7 ensures that a claim can be made if company B was not carrying on a trade at the time it transferred the asset to company A, but the asset had previously been used solely for the purposes of a trade carried on by a fellow group member.
24. Paragraph 8 makes a small modification to section 185 of the TCGA, which takes effect where a company ceases to be UK-resident, for the purposes of rollover relief on the degrouping charge. It ensures that the provision operates by reference to the time the degrouping gain arises so that the gain cannot be rolled over into an asset acquired after the company ceases to be resident in the UK (unless the asset remains within the UK tax net).
25. Paragraph 9 makes appropriate modifications to section 198 of the TCGA, which deals with the replacement of business assets used in connection with oil fields.
26. Paragraph 10 makes appropriate modifications to the tonnage tax provisions (paragraph 67 of Schedule 22 to Finance Act 2000).
BACKGROUND NOTE
27. This measure is introduced as part of the package of corporation tax reforms containing the exemption regime for substantial shareholdings introduced by Clause 43 and Schedule 8 to this Bill. A draft clause and Schedule were published for comment at the time of the Pre-Budget Report in November 2001 as part of the substantial shareholdings consultation process. A further draft clause and Schedule were published on 26th March reflecting the outcome of the consultation.