FINANCE BILL 2000
CLAUSE 101 AND SCHEDULE 29: NON RESIDENT COMPANIES AND GROUPS OF COMPANIES
SUMMARY
1. Clause 101 and Schedule 29 modernise the rules for chargeable gains of companies. The changes will allow tax neutral transfers of assets between companies in a wider variety of circumstances than at present. The changes focus on assets remaining within the UK tax net and give companies more freedom in organising their UK businesses to take advantage of relieving rules. The new provisions take effect from 1 April 2000 except for changes to current anti-avoidance provisions which were effective from Budget day.
2. The major changes are to the definition of a group of companies, and to the transfers of assets which may take place within that group without triggering a tax charge. At present membership of the group is restricted to companies resident in the UK. The new rules will allow any company, whatever its country of residence, to be a member of a group. Transfers within the group will only be on a tax neutral basis if the asset remains within the UK tax net. Similar changes are being made in clause 96 to the rules for group relief.
3. Similarly, from 1 April, when assets are transferred from one company to another as part of a scheme of reconstruction or amalgamation, tax relief will be available irrespective of where the participating companies are resident, as long as the assets remain within the UK tax net.
4. The Schedule also introduces consequential changes, the most significant of which are to the loss and gain buying provisions so that they are now directed at companies joining the worldwide group or bringing assets into the charge to UK tax for the first time.
DETAILS OF THE CLAUSE
5. Clause 101 provides that Schedule 29 will have effect. The main provisions are contained in Part I. Parts II and III deal with consequential amendments and transitional provisions respectively.
DETAILS OF THE SCHEDULE
Part I
6. Paragraph 1 sets out how the definition of group in section 170 Taxation of Chargeable Gains Act 1992 (TCGA) is to be changed. It removes the UK residence requirements in subsections (2) and (9)(b) of that section and defines these changes as the main amendments for the purposes of the rest of this Schedule.
7. Paragraph 2 sets out the changes to section 171 TCGA, the section which provides the tax neutral transfer rules for transfers of assets between members of a group, and says when they will have effect.
8. Subparagraph (2) substitutes a new subsection (1) and inserts a new subsection (1A) into section 171 TCGA.
9. New sections 171(1) and (1A) set out when the tax neutral transfer rule applies and how this works. It applies where a company disposes of an asset to another company, both are members of the same group and the companies are either resident in the UK or if either or both are not resident, the asset is a chargeable asset. The amount treated as given for the asset for the purposes of corporation tax on gains is deemed to be such an amount that neither a gain nor loss arises to the company making the disposal.
10. Subsection (1A) defines a chargeable asset for these purposes as an asset which, were it to be disposed of, any chargeable gain thereon would be assessable to corporation tax because it was within the charge under section 10(3) TCGA i.e. it was being used in a UK trading branch of a non resident company.
11. Subparagraphs (3) and (4) make consequential amendments to section 171(2) and (3) TCGA and sub-paragraph (5) is a consequential amendment because of the changes to section 171(1).
12. Subparagraph (6) provides that the new section 171 TCGA and the main amendments apply for disposals on or after 1 April 2000.
13. Paragraph 3 repeals section 172 TCGA for disposals on or after 1 April 2000. Section 172 ensured that there was no tax charge when the whole or part of a trade carried on in the UK through a branch or agency by a non resident company was transferred to a UK resident company which was a member of the same worldwide group. The main amendments and changes to section 171 TCGA now make this section redundant.
14. Paragraph 4 sets out changes to section 179 TCGA. This section imposes a charge if a company ceases to be a member of a group while holding an asset acquired from another company when it was a member of that group. This is an anti-avoidance provision to prevent companies from sheltering gains on assets through indirect disposals. After 1 April 2000 section 179 will apply by reference to the worldwide group, and the charge will arise only if the asset was within the UK tax net at all times either because it was held by a UK resident company or was being used for the purposes of a UK trading branch of a non resident company.
15. Paragraph 5 sets out changes to section 139 TCGA which provides for tax neutral transfers between companies which are not members of the same group when assets are transferred as part of a scheme of reconstruction or amalgamation of a business. From 1 April 2000 the participating companies no longer have to be resident in the UK. Instead, to qualify for relief the assets transferred must remain within the UK tax net, either because they are held by a UK resident company or are being used for the purposes of a UK trading branch of a non resident company.
16. Paragraph 6 amends section 25 TCGA which deems a disposal at market value in respect of assets held by a non resident company when it ceases to use the assets in carrying on a UK trade through a branch or agency. This charge is lifted when assets are transferred from a non-resident company to any other company under a scheme of reconstruction or amalgamation to which section 139 TCGA applies, and within a group where section 171 TCGA applies to the transfer.
17. Paragraph 7 applies the revised group definition in section 170 TCGA to Schedule 7A TCGA. This Schedule is designed to restrict allowable losses in a group to those that arise on an asset after a company joins a group. It prevents groups purchasing companies that have realised losses outside the group, or own assets that were standing at a loss before they entered the group.
18. Sub-paragraphs (1) to (5) amend paragraph 1 of Schedule 7A TCGA so that the Schedule will now apply to restrict use of losses accrued or assets held whenever a company becomes a member of a worldwide group and it is either resident in the UK, or brings assets within the UK tax net. Schedule 7A will also apply where a non-resident company is already within the worldwide group and either becomes resident, or transfers assets so that those assets come within the UK tax net. That part of the loss referable to the period prior to the company becoming resident, or the asset otherwise coming within the UK tax net, will be within the restrictions imposed by Schedule 7A;
19. Sub-paragraphs (6) to (8) provide that the changes are to apply for accounting periods ending on or after 21 March 2000 in determining the allowability of any loss on or after that date;
20. Sub-paragraph (9) deals with a company not previously a member of a UK resident group which becomes a member of a worldwide group from 21 March 2000 as a consequence of the main amendments to section 170 TCGA. Schedule 7A is not to affect losses that have already been realised in such a company or any losses on assets held at that time (subject to the provisions which restrict, from 21 March 2000, the importing of losses into the UK tax net).
21. Paragraph 8 applies the revised group definition to schedule 7AA TCGA. This is another anti-avoidance provision which restricts the set off of losses against gains which did not accrue in the same group. The new definition of group will apply to events taking place for accounting periods ending on or after 21 March 2000.
22. Paragraph 9 sets out changes to the provisions for recovering unpaid tax and will apply for gains accruing on or after 1 April 2000.
23. Sub-paragraph (1) substitutes a new section 190 TCGA for the existing sections 190 and 191.
New section 190
24. Subsection (1) applies the section where a company has a chargeable gain and all or part of the corporation tax due for the accounting period in which the gain arose remains unpaid six months after it became payable.
25. Subsection (2) sets the condition that the company is either resident in the United Kingdom when the gain arose or the gain is taxable under section 10(3) TCGA (i.e. the asset was being used for the purposes of a UK trading branch of a non-resident company).
26. Subsections (3), (4) and (5) set out who can be required, by notice from the Board of Inland Revenue, to pay the unpaid tax and the form of the notice. The notice can be issued to another company in the group, or a controlling director of either the company originally assessed or another company in the group.
27. Subsections (6) to (10) provide that the notice must be issued within 3 years of the final determination of liability of the company and that it is treated as an assessment for purposes of interest, collection and appeal procedures.
28. Subsections (11) and (12) provide recovery rights to any person to whom the notice is issued against the company originally liable, but prohibits any tax deduction for the amount paid.
29. Subsection (13) defines director, controlling director and group.
30. Subparagraph (2) makes a consequential amendment to the Taxes Management Act for determining the date from which interest will run.
31. Subparagraphs (3) and (4) provide that the new section has effect in respect of gains accruing after 1 April 2000. The question of whether a company is a member of a group for purposes of the section will be determined in accordance with the main amendments.
32. Paragraph 10 implements changes to section 175 TCGA, which deals with rollover relief arising on the replacement of business assets. The changes ensure that the relief is now available by reference to the worldwide group, subject to the assets in respect of which relief is claimed remaining within the UK tax net.
33. The changes apply when there is a disposal or acquisition on or after 1 April 2000 in respect of which a claim for rollover relief is made.
34. Paragraph 11 substitutes a new section 173 TCGA, which deals with transfers to or from trading stock. From 1 April 2000, it extends the current rules to deal with transfers between companies within the worldwide group
35. Paragraph 12 extends section 41 TCGA, which deals with the restriction of losses by reference to capital allowances, to transfers of assets within the worldwide group in respect of disposals on or after 1 April 2000.
36. Paragraph 13 sets out the application of the new group definition to disposals of assets held on 6 April 1965. This will ensure that where there is a transfer of assets within the UK tax net between companies in the worldwide group after 1 April 2000 the single company fiction will be maintained for the purposes of any apportionment of the gain.
Part II
37. Paragraph 14 applies the revised definition of group to section 97 of the Inheritance Tax Act 1984 (which deals with transfers of assets within groups) in relation to disposals on or after 1 April 2000.
38. Paragraph 15 amends section 132 Finance Act 1988 (which provides for recovery of tax from another group company or controlling director when a company migrates) consequent on the revised definition of group in relation to migrations on or after 1 April 2000.
39. Paragraph 16 amends section 14 TCGA which deals with the taxation of non-resident companies. The changes ensure that other amendments do not alter the scope of this section.
40. Paragraph 17 amends section 31A TCGA which is an anti-avoidance provision to prevent companies avoiding gains on disposals of assets by shifting value out of those assets in a non taxable form. Where the chargeable company has left the group at the time a gain is triggered by the provisions, subsection (9)(b) will provide for an alternative collection mechanism by way of a notice on any other member of the group. This applies for disposals on or after 1 April 2000.
41. Paragraph 18 amends section 106 TCGA which has special rules for matching disposals and acquisitions of shares within a prescribed period by a member of a group of companies. For periods up to 31 March 2000, the section treats shares held or acquired by one member of a group as held or acquired by another member for the purpose of determining whether a disposal by that other member is within these rules. (Acquisitions of shares from a company which is a member of the group throughout the prescribed period are disregarded.) For periods after 31 March 2000 the section will focus on those shares held by a worldwide group which are within the UK tax net.
42. Paragraphs 19, 20 and 21 are consequential on the repeal of section 172 TCGA.
43. Paragraph 22 applies the revised group definition to section 138A TCGA (which deals with earn out rights for exchange of securities) in relation to rights earned or conferred after 1 April 2000.
44. Paragraphs 23 amends sections 140 TCGA (which deals with the postponement of the charge to tax on the transfer of assets to a non resident company) to take account of the revised group definition in respect of disposals on or after 1 April 2000.
45. Paragraph 24 amends section 176 TCGA to reflect the new group definition for depreciatory transactions on or after 1 April 2000.
46. Paragraph 25 is consequential on the repeal of section 172 TCGA and applies the main amendments to disposals falling within section 177 TCGA (dividend stripping) for disposals on or after 1 April 2000.
47. Paragraphs 26 and 27 repeal sections 178 and 180 TCGA which are spent.
48. Paragraphs 28 and 29 are consequential on the repeal of section 178 and section 181(5) TCGA is also repealed as it is redundant from 1 April because of the new group definition.
49. Paragraph 30 amends section 211 TCGA which deals with transfers of long term business of insurance companies. It extends the circumstances in which section 139 TCGA can apply to a disposal of assets in the course of a transfer of business between two life insurance companies. One way in which it extended section 139 was to allow the section to apply where one or both of the companies was non-resident. With the extension of section 139 in this Schedule, the extension made by section 211 becomes redundant and is removed by subparagraph (2). Sub-paragraph (3) inserts a new subsection (2A) which ensures that references in new section 139 to section 10(3) are to section 11(2)(b) to (e) of the Taxes Act 1988 (provisions which extend the normal scope of the charge on assets given by section 10(3) where an overseas life insurance company is involved) and repeals subsection (3) which is made redundant by this change.
50. Paragraph 31 applies the revised group definition to section 216 TCGA which deals with assets transferred from a building society to a company in relation to transfers on or after 1 April 2000.
51. Paragraph 32 amends section 217C TCGA which deals with capital allowances in respect of assets transferred on incorporation of friendly societies. It is linked to the change to section 41 TCGA (see paragraph 12 of the Schedule) and applies to disposals on or after 1 April 2000.
52. Paragraphs 33 and 34 ensure that the new definition of group applies to sections 228 and 253 TCGA which deal with conditions for roll-over relief and relief for loans to traders.
53. Paragraph 35 amends section 276 TCGA, which deals with chargeable gains of companies trading in the North Sea. The changes ensure that the scope of the various provisions is unchanged in respect of transactions by such companies on or after 1 April 2000.
54. Paragraph 36 applies the new group definition to the rules for the application of taper relief in paragraph 11 of Schedule A1 TCGA and for any determination of whether a company is a member of a group after 1 April 2000.
55. Paragraphs 37 and 38 ensure that from 1 April 2000 the new definition of group applies to determinations of whether a company is a member of or a principal company of a group for the purposes of paragraph 5 of Schedule 2 TCGA and paragraphs 8 and 9 of Schedule 3 TCGA. Schedule 2 deals with disposals of assets held on 6 April 1965. Schedule 3 deals with assets held at 31 March 1982.
56. Paragraph 39 amends Schedule 7B TCGA, which sets out special rules for the treatment of overseas life insurance companies. It ensures that the changes provided for by this clause and Schedule are carried over appropriately into Schedule 7B for the purposes of determining the chargeable gains of overseas life insurance companies.
57. Paragraph 40 applies the main amendments for the purposes of Schedule 7C TCGA which is being introduced by this Bill.
58. Paragraphs 41 and 42 ensure that the new group definition applies to the exchange gains and losses rules under section 136 and 136A of Finance Act 1993 in respect of accrual periods beginning on or after 1 April 2000.
59. Paragraph 43 is consequential on the repeal of section 172 TCGA.
60. Paragraph 44 applies the new group definition to the loan relationships computational provisions in Schedule 9 Finance Act 1996 in respect of transactions entered into on or after 1 April 2000.
61. Paragraph 45 is consequential on the repeal of section 172 TCGA.
Part III
62. Paragraph 46 provides transitional rules to ensure continuity of treatment of companies belonging to new groups as a consequence of the main amendments.
63. Sub-paragraphs (1), (2) and (3) provide that where a group of companies was a group under the old definition and is subsequently treated as a new group under the revised definition, the old group and the new group are treated as the same group.
64. Sub-paragraphs (4) and (5) ensure that a company that is currently a member of a group will continue to be treated as part of the new group as long as it remains a 51% subsidiary of the company which was the principal company of the old group.
BACKGROUND
65. Companies can transfer assets on a tax neutral basis in a number of circumstances.
Intra group transfers
66. The most important rules allow transfers of assets on a no gain/no loss basis within a group (section 171 TCGA). These rules have allowed groups of companies to transfer assets between members without triggering tax charges, and enabled groups to bring together gains and losses in a single company to make best use of any allowable losses to offset gains.
67. A group exists, broadly, where one company owns 75% of the other, or a third company owns 75% of each of them and the subsidiary is an ?effective 51% subsidiary? of the principal company of the group. Membership of a group is currently restricted to companies resident in the UK and to benefit from these rules multi-national companies need to have a structure that concentrates their UK companies under a single UK company, regardless of whether that is the best commercial arrangement.
68. Furthermore, until now it has not been possible for non resident companies, liable to corporation tax on the profits of a trade carried on through a branch or agency in this country, to transfer assets on a no gain/no loss basis to or from fellow group members.
69. The changes to the rules will mean that the country of residence no longer matters when identifying a group of companies. Assets may now be transferred within the worldwide group on a tax neutral basis so long as the assets stay within the charge to UK corporation tax on chargeable gains.
Schemes of reconstruction or amalgamation
70. Transfers of assets are on a no gain/no loss basis where one company disposes of the whole or part of its business to another company as part of a scheme of reconstruction or amalgamation. The changes now being introduced mean that it will not matter if either party to the scheme is not resident in the UK as long as the assets of the business transferred remain within the scope of UK corporation tax on chargeable gains. This change will allow a business to be transferred on a no gain/no loss basis from a non resident company to another non resident company, provided that the business continues in the UK. Similarly, it may be transferred from a UK resident company to a non resident, or vice versa, subject to the same condition.
EXAMPLES
No gain/no loss transfers between UK resident companies with a common non resident parent company.
71. The diagram illustrates the simplest case where the change of rules has effect. Currently if company B transfers an asset to company C then, notwithstanding what company C pays for the asset, company B will be treated as making a disposal of the asset at its market value, and will be charged to corporation tax on any gain arising.
72. This contrasts with the treatment if company A were resident in the UK. In that case company B would be treated as if it had disposed of the asset at such an amount that would give rise to neither a gain nor a loss, and company C would be treated as acquiring it for that same amount. There would only be a chargeable gain if the asset were disposed of to a person outside of the group.
73. The proposed changes mean that even though company A is not resident in the UK company B and company C could transfer assets between them on a no gain/no loss basis, as if company A were UK resident.
No gain/no loss transfers between a UK resident company and a non resident company trading through a branch or agency in the UK
74. In the situation illustrated in this diagram, under the current rules a transfer of an asset from company B to company C would trigger a charge to tax because the no gain/no loss rules only applied transfers between companies resident in the UK, regardless of where the asset was used.
75. Assets used by non-resident companies to trade through a branch or agency in the UK are within the charge to UK corporation tax. Under the new rules if company B transfers an asset to company C, and that asset is immediately brought into use in the trade carried on in the UK then that asset transfer will be treated as giving rise to neither a loss nor gain.
Degrouping rules after 1 April 2000
76. The degrouping rules are designed to charge an appropriate amount of tax when a group of companies disposes of an asset held in another company to a person outside the group. They are needed because otherwise groups of companies can shelter gains on assets by taking advantage of other rules.
77. The way the rules work can be illustrated using the diagram overleaf. If company B transfers an asset to company E there is then there is a potential charge under section 179 if, within 6 years of the date of transfer, company B sells company E outside the group while it still holds the asset.
78. Under the current rules only UK companies can be members of a group, and companies C and D are not in the same group as companies B or E. So if company B transfers company E to company C a degrouping charge will be triggered. From 1 April the rules at section 179 TCGA will focus on a company leaving the worldwide group. This means, using the same example, that the transfer by company B of company E to company C will not trigger a degrouping charge in respect of the assets acquired by company E. If company C sells company E outside the group within 6 years of the date it acquired the asset from company B, there will be a degrouping charge.
Schedule 7A (loss buying) rules
79. Schedule 7A is designed to stop groups of companies from importing losses from outside the group for use against gains that have arisen inside the group.
80. The way the rules will work for transactions from 21 March can be illustrated most easily by reference to the previous diagram.
81. In that diagram the current groups for chargeable gains would be the groups headed by companies B and C. From 1 April, those companies will be members of the same worldwide group and will be able to transfer assets between themselves under the no gain/no loss rules. And if there are capital losses accrued, or inherent in unrealised assets in either of the groups, they will be able to set off the losses under the normal rules without restriction from the loss buying rules. The commencement rules mean that it will not be necessary to track or restrict any losses previously accrued or built up in a separate subgroup at 21 March.
82. If, however, there are losses whose use is already restricted under the rules of Schedule 7A because companies joined a group at an earlier time then those losses will continue to be restricted as they are at present.