Extracts from the Revenue's fifty-second Tax Bulletin.
Corporation tax — large companies
Extracts from the Revenue's fifty-second Tax Bulletin.
Corporation tax — large companies
A company is required to show in its return if it considers that it was liable to pay by quarterly instalments on the basis of its self assessment. It must do this by putting an 'X' in box 79 at the foot of page 5 (short calculation) or page 8 (detailed calculation). It is essential to make this entry whether or not the company actually made the necessary payments. In particular, it makes no difference to the entry required in box 79 that the company's instalment payments have been paid through a group payment arrangement.
A company whose corporation tax has been paid through a group payment arrangement must indicate this by putting an 'X' in box 80. It should also enter '£0.00p' at box 75 except in the rare circumstance that the return is being filed after money has been allocated down to it from the group payment arrangement. It should also leave box 76 blank. This is perfectly acceptable provided an 'X' is present in box 80.
Group payment arrangements and repayments
Example 1
A Ltd files its return for its accounting period 1 January 2000 to 31 December 2000. The bulk of the company's income is investment income from which income tax has been deducted. After set-off against A Ltd's corporation tax liability, there is an income tax repayment due to it of £50,000. The company wishes to surrender this amount under section 102, Taxes Act 1988 to other members of its group, all of whom are participators in a group payment arrangement. It is not possible to 'pay' this surrender 'into the group payment arrangement'. However, it is perfectly possible, subject to the rules of section 102, for A Ltd to surrender the repayment to the individual companies in the usual way. A Ltd should give notice in its return and make the relevant entries in section 7 of the return form in the usual way. The group will then need to take the surrendered amounts into account when allocating money from the group payment arrangement to the participating companies at closure.
Example 2
C Ltd is the nominated company in relation to the 'Sea Activities' group payment arrangement for the period 1 April 2000 to 31 March 2001. C Ltd is in a position to claim a repayment from the group payment arrangement of £1.5 million.
D Ltd is a 75 per cent subsidiary of C Ltd, but is not in the Sea Activities group payment arrangement. It has not paid any quarterly instalments for its accounting period 1 April 2000 to 31 March 2001, but its circumstances changed during the latter part of the year and management accounts show, in retrospect, that it should have done so.
C Ltd can claim the full repayment under clause 4 of the group payment arrangement contract and ask for the necessary amount to be credited to D Ltd's account for the period. However, this will not be interest-efficient. At this stage section 102 cannot apply, as no individual company is entitled to a repayment. The credit to D Ltd's account will only be effective from the date on which it is agreed, not on the original dates of payment into the group payment arrangement.
Alternatively, C Ltd can leave all or part of the potential repayment in the group payment arrangement and distribute it as a surplus to one or more of the participating companies at closure. That company (or companies) can then give joint notice with D Ltd under section 102 and Regulation 9. This is likely to prove more effective in mitigating the interest effects of D Ltd's failure to pay by quarterly instalment payments.
Either way, D Ltd should write immediately to the Inspector who deals with its affairs to explain the reasons for the original error in relation to its instalment payment obligations, and to set out the intended course of action. The Revenue would not seek a penalty for non-payment under the regulations in such a case, where it is clear that the group has acted in good faith and taken action to correct its failure to pay by quarterly instalments at the first opportunity.
Paying through a group payment arrangement allows the group benefit of hindsight in allocating payments made on behalf of many companies between the individual companies. By tailoring the division of each individual payment made between the participating companies, the group can optimise the overall interest position.
Delay in removing a company from a payment arrangement
Failure to remove a company expeditiously from a payment arrangement can lead to real practical problems — see Example 3.
Example 3
A group has a group payment arrangement for the period 1 April 2000 to 31 March 2001. In December 2000, one of the participating companies is sold out of the group, so is no longer eligible to be a member of the group payment arrangement.
If the group does not remove the company from the arrangement before 31 March 2001, the effect of clause 14(a) of the contract is that the nominated company remains liable to pay the liabilities of the sold company for the period. If the company is only removed from the arrangement when the Revenue exercises its power under clause 13.2 of the contact, the nominated company is likely to retain the obligation to pay the company's tax for the following accounting period as well.
Credit and debit interest
All interest paid by the Revenue to companies is now taxable, following changes in sections 33 and 34, Finance Act 1998. Similarly, interest charged by the Revenue from a company is allowable for tax purposes in the same way as other interest paid by a company. This interest falls within the scope of the loan relationships legislation, in the same way as any other kind of interest receivable and payable. Under the loan relationship rules the interest should be taxed or relieved in accordance with an accepted accruals method of accounting — a receipts or payments basis is not acceptable. In practice, this may be hard to do with certainty. Inspectors are expected to take a pragmatic view, recognising the inherent practical problems.
Matching acquisitions and disposals
Finance Act 1998 brought in a new set of capital gains tax rules for matching disposals of shares (and similar fungible assets) with acquisitions. The Revenue has been asked whether the new rules apply when acquisitions and disposals take place while the person concerned is not resident in the United Kingdom. The short answer is 'Yes, they do apply'. So if, for example, an individual bed and breakfasts shares before coming (or returning) to the United Kingdom, the rule applies in the normal way, just as all the other rules do when matching that person's disposals of shares with his disposals.
Same day transactions and bed and breakfast
Section 105, Taxation of Chargeable Gains Act 1992 treats: all acquisitions on one day as a single acquisition; all disposals on one day as a single disposal; and matches, as far as possible, disposals with acquisitions on the same day. Some concern has been expressed that these rules prevent section 24(2), which allows 'negligible value' claims, operating as intended. When someone makes a negligible value claim he is treated as having 'sold, and immediately reacquired' the asset that is the subject of the claim. If the asset was a holding of shares and the same day rules applied to the disposal and reacquisition, neither a gain nor a loss would arise. back to Finance Act 1971. The Revenue's long held view, based on legal advice, is that the same day rule, which matches 'securities of the same class', does not apply in any case where a particular shareholding (the asset) is deemed to be disposed of and the same asset reacquired. So if a negligible value claim is made the loss is calculated by reference to the original cost of the shares for which the claim is made.
The bed and breakfast matching rule (section 106A(5)) takes second priority after the same day rule, but before other matching rules. It matches disposals with acquisitions of securities of the same class 'within the period of 30 days after the disposal'. Like the same day rule, the bed and breakfast rule applies to match securities of the same class. So the Revenue considers that the same result follows. The bed and breakfast rule cannot apply where the same asset is deemed to have been disposed of and reacquired. In addition, the Revenue does not regard an acquisition as falling 'within the period of 30 days after the disposal' if it falls on the same day as the disposal.
Another doubt has arisen where the bed and breakfast rule applies, as to the consequences of the rule for shares which were acquired before the relevant disposal, as shown below. For example, an individual makes the following purchases and sales of shares in XYZ plc:
1 June 1998 buys 5,000; 1 July 2001 sells 3,000.
15 July 2001 buys 3,000; 1 August 2001 sells 5,000.
The bed and breakfast rule matches the sale of 3,000 shares with the purchase a fortnight later. But how are the 5,000 shares sold a fortnight after that regarded, for example, when working out what taper relief is available?
The sale on 1 August 2001 is matched with the acquisition on 1 June 1998, because the bed and breakfast rule applies to the earlier sale. The result for capital gains tax purposes is that the individual is regarded as having held the 5,000 shares continuously from the time he acquired them until they are treated as sold under the relevant matching rule. The gain on disposal of those shares will therefore attract three years' worth of taper relief (assuming that all other taper relief conditions are met).
A similar point arises in relation to shares held by trustees. Section 80, Taxation of Chargeable Gains Act 1992 creates a deemed disposal of trust assets if the trustees leave the United Kingdom and become non-resident (and not ordinarily resident). It has been suggested that bed and breakfast rule can be used to nullify the gains which would otherwise arise on emigration. The following circumstances demonstrate this.
As at 31 January 2001, United Kingdom resident trustees hold 100,000 shares in a company. Then on 1 February 2001 the trustees sell the 100,000 shares. On 3 February 2001 they leave the United Kingdom and become non-resident On 5 February 2001 they buy another 100,000 shares in the same company.
The bed and breakfast rule matches the disposal on 1 February with the acquisition on 5 February. Under section 80 trustees are deemed to dispose on 3 February of 'assets constituting settled property of the settlement immediately before' they emigrated. But at that time the they do not actually hold any shares. The suggestion is that there are therefore no assets which can be deemed to have been disposed of under section 80(2).
However, this is not the right way to look at this situation. For capital gains tax purposes, the shares sold on 1 February are regarded as the ones bought on 5 February. It must follow that the shares held before 1 February had not been disposed of (again, for capital gains tax purposes) by the time the trustees left the United Kingdom. Those shares still constitute settled property immediately before the emigration, and must be treated as disposed of and reacquired at that time under section 80(2).
Editorial note. These views are disputed in some quarters; further discussion in Taxation is planned in due course.
Matrimonial Causes Act 1973
The Revenue has been asked what the position is for capital gains tax where, in effect, a court replaces in whole or in part its order for periodic maintenance payments by an order for a lump sum payment. In its view the lump sum derives from the exercise of the court's discretion in making its order and therefore is not a capital payment derived from an asset. Therefore in this situation section 22(1) is not in point and the recipient of the lump sum payment would have no liability to capital gains tax on the receipt.
The foregoing are extracts from longer articles published in the Tax Bulletin which is Crown copyright, and to which reference should be made for details of the full text. Information regarding subscriptions can be obtained from Mrs F Chowdhury, tel: 020 7438 7812. It is also available at www.inlandrevenue.gov.uk.
