Office of Public Sector Information
1.These explanatory notes relate to the Corporation Tax Act 2009 which received Royal Assent on 26 March 2009. They have been prepared by the Tax Law Rewrite project at HMRC in order to assist readers in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament.
2.The notes need to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of the Act. So if a section or part of a section does not seem to require any explanation or comment, none is given.
3.The commentary on each section indicates the main origin or origins of the section. A full statement of the origins of each section is contained in the Act’s Table of Origins.
4.At the end of the commentary there is supporting material in two annexes.
Annex 1 contains details of the minor changes in the law made by the Act.
Annex 2 contains lists of:
the Extra-Statutory Concessions to which the Act gives effect;
the minor changes made by the Act which involve giving statutory effect to principles derived from case law; and
provisions not included in the Act on the grounds of redundancy.
5.The main purpose of the Corporation Tax Act 2009 is to rewrite the charge to corporation tax and the primary corporation tax legislation used by companies in computing their income.
6.The Act does not generally change the meaning of the law when rewriting it. The minor changes which it does make are within the remit of the Tax Law Rewrite project and the Parliamentary process for the Act. In the main, such minor changes are intended to clarify existing provisions, make them consistent or bring the law into line with well established practice.
7.In December 1995 the Inland Revenue presented a report to Parliament on the scope for simplifying the United Kingdom tax system (The Path to Tax Simplification). The main recommendation was that United Kingdom direct tax legislation should be rewritten in clearer, simpler language.
8.This recommendation was warmly welcomed, both in Parliament and in the tax community. In his November 1996 Budget speech the then Chancellor of the Exchequer (the Rt Hon Kenneth Clarke QC MP) announced that the Inland Revenue would propose detailed arrangements for a major project to rewrite direct tax legislation in plainer language.
9.The project team has been carrying out this work. The aim is that the rewritten legislation should use simpler language and structure than previous tax legislation. The members of the project are drawn from different backgrounds. They include longstanding HMRC employees, former private sector tax professionals and parliamentary counsel including (as head of the drafting team) a senior member of the Parliamentary Counsel Office.
10.The work of the project is overseen by a Steering Committee, chaired by the Rt Hon the Lord Newton of Braintree OBE DL. The membership of the Steering Committee as at 31 October 2008 was:
The Rt Hon the Lord Newton of Braintree OBE DL (Chairman)
Dr John Avery Jones CBE
Adam Broke
Baron Christopher of Leckhampton CBE
Nicholas Dee
Dave Hartnett CB
The Rt Hon Michael Jack MP
Eric Joyce MP
District Judge Rachel Karp
Professor John Tiley CBE
John Whiting CBE
11.The work is also reviewed by a Consultative Committee, representing the accountancy and legal professions and the interests of taxpayers. The membership of the Consultative Committee as at 31 October 2008 was:
| Robina Dyall | Chairman |
| Brian Atkinson | 100 Group |
| Adam Broke | Special Committee of Tax Law Consultative Bodies |
| Colin Campbell | Confederation of British Industry |
| Russell Chaplin | London Chamber of Commerce & Industry |
| Mary Fraser | Association of Chartered Certified Accountants |
| Malcolm Gammie CBE QC | The Law Society of England and Wales |
| Julian Ghosh QC | Revenue Bar Association |
| Keith Gordon | Chartered Institute of Taxation |
| Terry Hopes | Institute of Chartered Accountants in England and Wales |
| Bob McInerney | Federation of Small Businesses |
| Isobel d'Inverno | Law Society of Scotland |
| Amy Jones | Institute of Chartered Accountants of Scotland |
| Simon McKie | Institute of Chartered Accountants in England and Wales |
| Lakshmi Narain | Chartered Institute of Taxation |
| Francis Sandison | The Law Society of England and Wales |
| Michael Templeman | Institute of Directors |
| Professor David Williams | Office of the Social Security Commissioners |
| Mervyn Woods | Confederation of British Industry |
12.The work produced by the project has been subject to public consultation. This has allowed all interested parties an opportunity to comment on draft clauses.
13.This consultation took the form of a series of papers which published clauses in draft. There were 20 of these, published between July 2006 and November 2008 and a draft Bill was published for consultation in February 2008. All these documents are available on the Tax Law Rewrite website.
14.The project also held detailed informal discussions and workshops with leading private sector tax professionals and HMRC specialists to consider the drafting of the more complex areas of rewritten tax legislation, for example, loan relationships and derivative contracts.
15.Those who responded to one or more of the papers, or to the draft Bill, include:
Alma Consulting Group
Chartered Institute of Taxation
Confederation of British Industry
Deloitte & Touche LLP
Ernst & Young LLP
Institute of Chartered Accountants in England and Wales
International Swaps and Derivatives Association, Inc.
KPMG LLP
Law Society
London Investment Banking Association
London Society of Chartered Accountants
PricewaterhouseCoopers LLP
Note: this list excludes those who asked that their responses be treated in confidence.
16.This Act repeals the Schedules so far as they remain for corporation tax and therefore marks the end of the use of the word “Schedule” to define types of income. Instead, the Act uses terms that describe the nature of the income, such as “trading income”.
17.The Act:
contains the basic corporation tax provisions including the charge to tax, accounting periods and provisions relating to residence;
contains provisions relating to trading and property income and income from other sources;
contains special provisions for companies affecting the calculation of income, such as those for loan relationships, derivative contracts and intangible fixed assets;
contains provisions governing particular types of expenditure, for example, expenditure on research and development and films; and
will take the place of many provisions within ICTA, FA 1996, FA 2001 and FA 2002 as the main Act for the areas of corporation tax covered by this Act.
18.The Act has 1330 sections and four Schedules.
19.The sections are arranged as follows:
Part 1: Introduction
Part 2: Charge to corporation tax: basic provisions
Part 3: Trading income
Part 4: Property income
Part 5: Loan relationships
Part 6: Relationships treated as loan relationships etc
Part 7: Derivative contracts
Part 8: Intangible fixed assets
Part 9: Intellectual property: know-how and patents
Part 10: Miscellaneous income
Part 11: Relief for particular employee share acquisition schemes
Part 12: Other relief for employee share acquisitions
Part 13: Additional relief for expenditure on research and development
Part 14: Remediation of contaminated land
Part 15: Film production
Part 16: Companies with investment business
Part 17: Partnerships
Part 18: Unremittable income
Part 19: General exemptions
Part 20: General calculation rules
Part 21: Other general provisions
20.The Schedules are:
Schedule 1: Minor and consequential amendments
Schedule 2: Transitionals and savings
Schedule 3: Repeals and revocations
Schedule 4: Index of defined expressions
21.Tables of Origins and Destinations have also been prepared. The Table of Destinations shows the destination not only of repealed provisions but of all provisions rewritten in the Act.
22.The commentary uses a number of abbreviations. They are listed below.
| CAA | the Capital Allowances Act 2001 |
| CAA 1990 | the Capital Allowances Act 1990 |
| CRCA | the Commissioners for Revenue and Customs Act 2005 |
| ESC | Extra-statutory concession |
| HMRC | Her Majesty's Revenue and Customs |
| FA 1989 | Finance Act 1989 (and similarly for other Finance Acts) |
| F(No 2)A | Finance (No 2) Act |
| FISMA | the Financial Services and Markets Act 2000 |
| ICTA | the Income and Corporation Taxes Act 1988 |
| IHTA | the Inheritance Tax Act 1984 |
| ITA | the Income Tax Act 2007 |
| ITEPA | the Income Tax (Earnings and Pensions) Act 2003 |
| ITTOIA | the Income Tax (Trading and Other Income) Act 2005 |
| NIC | national insurance contributions |
| PAYE | Pay As You Earn |
| R&D | research and development |
| TCGA | the Taxation of Chargeable Gains Act 1992 |
| TMA | the Taxes Management Act 1970 |
| VAT | value added tax |
23.This section describes the content of the Act. It is new.
24.Subsections (1) and (2) make it clear that that a large part of the Act is directly concerned with the application of the charge to corporation tax on income.
25.Subsection (3) notes that Part 7 also includes provision for the charge to corporation tax on chargeable gains in relation to derivative contracts.
26.Subsection (4) notes that Parts 5 to 8 have a role in relation to the treatment of deficits and losses in connection with the matters to which the Parts relate.
27.Subsections (5) and (6) describe the particular cases covered by Parts 11 to 18 and subsection (7) the provisions of general application in Parts 19 to 21.
28.Subsection (8) notes where abbreviations and defined expressions used in the Act can be found.
29.The process of separating income tax and corporation tax began with ITTOIA and continued with ITA, which substantially completed the rewrite of income tax legislation for income tax purposes. Following that there were two parallel sets of income tax principles. Those in rewrite style apply only for income tax purposes and, for example, no longer include Schedules such as Schedule D and its Cases.
30.Prior to this Act corporation tax has been dependent on the continuing existence of the income tax rules in unrewritten style so that, for example, those Schedules and Cases continue to be applied for the purposes of corporation tax.
31.This Act continues and finalises the separation process so that the relevant principles apply separately for corporation tax. The adoption of this approach means that section 9 of ICTA (computation of income: application of income tax principles) is repealed by this Act (apart from section 9(5) which theoretically could have a continuing effect). Some of the provisions of section 9 of ICTA are rewritten in section 969 and there is a transitional provision in Schedule 2.
32.This Chapter deals with the charge to corporation tax on profits. The approach retains the principle of a single charge, currently under section 6 of ICTA. The charge under section 2 is on amounts of income and on chargeable gains that together form the “profits pot”.
33.This contrasts with the multiple charges to income tax in the Income Tax Acts, primarily ITTOIA, and reflects the different history of the two taxes.
34.The way the charge on profits operates is explained in the commentary on section 2. This section rewrites both section 6(1) and (4) of ICTA and section 9(1) and (4) of that Act. In the light of the separation of corporation tax from income tax it is necessary to find a different way of expressing the relationship between the general charge to corporation tax on income and the provisions that deal with its application.
35.There are also other charges to corporation tax. These are charges to an amount of corporation tax and they do not feature in the “profits pot”. There is an example of this kind of charge in this Act – in section 75{j032704}(2) (retraining courses: recovery of tax).
36.These are provisions of an administrative nature mainly recovering excessive relief. In some of the charges of this kind there are references to the assessment being made under Schedule D Case VI. The Case VI label will disappear along with Schedule D and the other Cases with the repeal of section 18 of ICTA. The references are removed by consequential amendments in Schedule 1. An example is the amendment to paragraph 27(4) of Schedule 16 to FA 2002.
37.This section provides the charge to corporation tax on profits. It is based on section 6(1) and (4) and section 9(1) and (4) of ICTA.
38.Subsection (1) states that corporation tax on profits is charged for a financial year for which an Act provides. It is based on the two overlapping propositions in section 6(1) of ICTA.
39.Under subsection (2) “profits” in Part 2 means “income and chargeable gains, except in so far as the context otherwise requires”. This interpretation derives from section 6(4) of ICTA. This Act amends section 6(4) of ICTA in Schedule 1.
40.Chargeable gains are defined in section 1(1) of TCGA. In subsection (3) “ the charge to corporation tax on income” is introduced as a label. The expression is defined for corporation tax purposes as a result of an amendment to section 834(1) of ICTA made by Schedule 1 to this Act.
41.Subsection (4) provides that the charge to corporation tax on income in effect depends on there being another provision of the Corporation Tax Acts that applies it.
42.This subsection is based on section 9(1) and (4) of ICTA. Section 9(1) in effect controls the meaning of “income” in section 6 of ICTA. As noted in the overview, this Act will complete the split between income tax and corporation tax and the formulation in section 9(1) of ICTA is no longer apposite since its wording is adapted to the circumstances of applying one body of tax law (income tax principles) for the purposes of another tax (corporation tax).
43.The effect of section 9 of ICTA is that the scope of the charge to income tax determines what is income for corporation tax purposes (except as otherwise provided by the Tax Acts). Income tax, although primarily a charge to tax on things which would be regarded as income in its ordinary sense, is not exclusively a charge on such things. Section 9(4) provides that anything that is within the charge to income tax is within the charge to corporation tax on income “whether expressed to be income or not and whether an actual amount or not”.
44.So the effect of section 9 of ICTA is that (subject to the provisions of the Corporation Tax Acts) the charge to corporation tax on income is driven by the particular heads of the charge to income tax.
45.The purpose of this section is to achieve an equivalent effect, so that the charge to corporation tax on income is driven by the particular heads of the charge to corporation tax on income. In this way the section substitutes the provisions of the Corporation Tax Acts for the income tax provisions. For example section 35 applies the charge to corporation tax on income to the profits of a trade.
46.This section ensures that income of a company within the charge to corporation tax is not chargeable to income tax as well as corporation tax. It is based on section 6(2) of ICTA.
47.This section ensures that chargeable gains of a company within the charge to corporation tax are not chargeable to capital gains tax as well as corporation tax. It is based on section 6(3) of ICTA.
48.This section sets out the territorial scope for the charge to corporation tax. It is based on section 8(1) and section 11(1) and (2) of ICTA.
49.Subsection (1) deals with the position of companies resident in the United Kingdom. It restates section 8(1) of ICTA which, although expressed in general terms, only has effect in relation to UK resident companies (because of the exception under section 11 for non-UK resident companies).
50.Chapter 3 of this Part sets out the statutory rules for company residence. Chapter 4 explains what are chargeable profits in the case of non-UK resident companies.
51.This section deals with profits accruing directly to the company where it is acting in a fiduciary or representative capacity, for example as a nominee. It is based on section 8(2) of ICTA.
52.In this case the charge under section 2 only applies where the company has a beneficial interest in the profits.
53.When a company goes into liquidation it ceases to be the beneficial owner of its assets. The exception in subsection (2) means that in this case the company’s profits remain within the charge to corporation tax.
54.This section sets out the treatment of profits that do not accrue to the company directly but in which the company has a beneficial interest under a trust. It is based on section 8(2) of ICTA.
55.The words “in any case in which it would be so chargeable if the profits accrued to it directly” are not reproduced because the treatment for which the section provides makes them unnecessary. Profits which are treated as accruing to a company directly are chargeable to corporation tax in the same circumstances that they would have been had they in fact accrued directly to the company.
56.There is no reference to profits arising under a partnership in contrast to section 8(2) of ICTA. Provisions for the charge to corporation tax on the profits of corporate partners are set out elsewhere in this Act and in particular in Part 17.
57.This section sets out how corporation tax is charged and assessed. It is based on section 8(3) and section 12(1) of ICTA.
58.The reference to deductions in section 8(3) and section 12(1) of ICTA and the words in brackets in section 12(1) “(whether or not received in or transmitted to the United Kingdom)” have not been rewritten since they do not add anything substantive to these provisions. There are rules elsewhere about what deductions can be made and this section together with section 5 make it clear that the charge is on profits wherever arising.
59.Section 70(1) is not rewritten in this Act but is reflected in subsection (3) of this section which contains the general rule about the basis of assessment.
60.This Chapter gives the definition of accounting period. It is based on section 12 of ICTA.
61.The accounting period is a basic building block of corporation tax because corporation tax is charged by reference to accounting periods. For nearly all established UK resident companies the accounting period coincides with the 12 month period for which it makes up its accounts. Most of the Chapter is taken up with rules explaining what happens outside the usual case.
62.The Chapter does not rewrite section 12(8) of ICTA. Section 12(8) is an administrative provision that deals with the validity of assessments. The Chapter is concerned with when accounting periods begin and end, and not with the circumstances in which an officer of Revenue and Customs may make an assessment or determination.
63.This section identifies when an accounting period begins. It is based on section 12 and section 342A of ICTA.
64.Subsection (1)(a) deals with the case in which a company comes within the charge to corporation tax. Subsection (1)(a) states an important general rule. This Act does not reproduce the two examples given in section 12(2)(a) of ICTA of circumstances in which this general rule would apply (becoming UK resident, acquiring a source of income). The examples add nothing useful and might obscure the general rule.
65.Subsection (1)(b) deals with the usual case of a company that is already within the charge to corporation tax so that a new accounting period begins when the previous accounting period ends.
66.Subsection (4) disapplies this section in the case of a company being wound up. Section 12, which makes special provision about companies being wound up, applies instead.
67.Subsection (6) is a general signpost that, in certain circumstances, the rules in this section are modified by rules in other provisions of the Corporation Tax Acts that deal with particular cases. The implications for accounting periods will be clear when considering the cases in question (for example, paragraph 3 of Schedule 10 to FA 2006 (sale of lessor companies) and paragraph 52 of Schedule 22 to FA 2000 (tonnage tax)).
68.This section identifies the end of an accounting period. It is based on section 12 of ICTA.
69.The starting point for the section to apply is that the company has an existing accounting period. The occurrence of any one of the listed events brings that accounting period to an end. In many cases section 9(1)(b) then applies to start a new accounting period.
70.The opening words of subsection (1) provide that an accounting period ends “on the first occurrence of any of” the events listed in paragraphs (a) to (j). These words fall to be read in relation to each accounting period which is commenced. The effect of these words is not that the first event on that list to occur settles how all subsequent accounting periods of that company are to end. Rather, the effect is that each accounting period may be ended by the occurrence of a different event, depending on what happens in that particular accounting period.
71.The rules applying to companies in administration have been integrated into the general rules. The case is different from where a company is being wound up. In that case (see section 12) there is a self-contained set of rules about when a company’s accounting periods end. In the case of a company in administration, the general rules about when an accounting period of a company end continue to apply, but there are two additional circumstances in which an accounting period ends. These are the circumstances mentioned in subsection (1)(i) and (j).
72.The legislation rewritten by subsections (1)(i) and (j), (2), (3) and (4) only applies to companies that enter administration on or after 15 September 2003. This limitation is preserved in Schedule 2 (transitionals and savings).
73.This section allows a company carrying on more than one trade to nominate the accounting date which marks the end of the accounting period. It is based on section 12 of ICTA.
74.The section is most likely to apply to a non-UK resident company carrying on more than one trade in the United Kingdom through a permanent establishment. If a UK resident company carries on more than one trade it prepares a single set of accounts to cover all the company’s activities. A non-UK resident company may not be subject to these regulatory requirements. Without this section an accounting period would end at each separate accounting date.
75.The company is allowed to choose which accounting date is used for the purposes of the test in section 10(1)(b). The company’s choice is subject to review by HMRC. In the source legislation this power is exercised by the Commissioners for HMRC. In practice it is exercised by an officer. Subsection (3) reflects that. See Change 1 in Annex 1.
76.The source legislation does not provide for the situation where a company has one or more businesses in addition to its trades, or several businesses but no trade. The effect is that the company’s choice and the officer of Revenue and Customs’ discretion is limited to selection of an accounting date relating to one of the company’s trades. In other words, neither the company nor the officer can choose as the accounting period end date an accounting date of one of the company’s businesses which is not a trade.
77.This section identifies the beginning and end of an accounting period if a company is being wound up. It is based on section 12 of ICTA.
78.Although the rules applying to companies in administration have been integrated into the general rules (see section 10(1)(i) and (j)), the separate exposition of the rules applying to companies being wound up have been preserved. This is because the scheme of section 12(7) of ICTA is to provide for a self-contained set of rules about when an accounting period ends. It follows that the accounting period of a company being wound up does not end on the occurrence of any of the events listed in section 10(1)(b) to (j). Accordingly, it is not appropriate to add the termination events listed in section 12 to the list of termination events in section 10(1).
79.Subsection (5) is new. It makes provision for when a new accounting period of a company being wound up begins. Section 12(7) of ICTA provides for an accounting period to begin on the commencement of winding up, but does not provide for the commencement of any subsequent accounting period. The rule in section 12(2)(b) of ICTA, now section 9(1)(b) of this Act, continues to apply for that purpose. It is preferable to make separate provision for the commencement of a new accounting period after the end of 12 months, rather than rely on section 9(1)(b) for this purpose.
80.The reason for this is that the rule in clause 9(1)(b) of this Act is that a new accounting period only begins at the end of 12 months if the company is still within the charge to corporation tax. However, section 12(7) of ICTA does not make the company’s remaining within the charge to corporation tax a condition of a new accounting period starting on the company beginning to be wound up. Also, that provision states that “an accounting period shall not end otherwise than by the expiration of 12 months from its beginning”. Given that, section 12(2)(b) of ICTA must necessarily be modified in its application to companies being wound up.
81.This Chapter gives the statutory rules for company residence outside double taxation conventions.
82.The rules on company residence are both statutory and non-statutory. The oldest of the company residence rules (“central management and control”) is based on common law.
83.The central management and control test is generally considered to be best expressed in De Beers Consolidated Mines v Howe (1905), 5 TC 198 HC. “A company resides, for the purposes of Income Tax, where its real business is carried on … I regard that as the true rule; and the real business is carried on where the central management and control actually abides”. This has been endorsed by subsequent decisions and was described by Lord Radcliffe in Bullock v Unit Construction Company (1959), 38 TC 712 HL as being “as precise and unequivocal as a positive statutory injunction”.
84.Residence may also be determined by the tie-breaker in a double taxation convention. When a company is resident in the territory of both parties a tie-breaker generally awards residence to the country where the effective management of the company is situated.
85.The two main statutory rules are found in section 66 of FA 1988 and section 249 of FA 1994. These two tests are rewritten in this Chapter.
86.Under section 66 of FA 1988 a company incorporated in the United Kingdom is, with some exceptions, regarded as resident here for all tax purposes. This overrides the rule in common law given above, although the common law test continues for companies outside section 66, that is to say companies which are not incorporated in the United Kingdom.
87.Section 249 of FA 1994 treats a company resident in the United Kingdom under the common law test or section 66 of FA 1998 as being non-UK resident if the tie-breaker in the double taxation treaty between the United Kingdom and that other territory would make the company resident outside the United Kingdom.
88.Both these statutory rules apply for the purposes of the Taxes Acts as defined in section 118 of TMA (see section 66(1) and 66A(2) of FA 1988 and section 249(1) of FA 1994). This Act rewrites the rules for the purposes of the Corporation Tax Acts only. Because the Corporation Tax Acts are defined more narrowly (Schedule 1 to the Interpretation Act 1978) than the Taxes Acts, Schedule 1 to this Act inserts new sections into TMA, TCGA and ITA to apply the rules given in this Chapter to those Acts.
89.This section sets out which residence rules are dealt with in this Chapter. It is new.
90.Although this Chapter does not legislate the common law test on residence (see above), subsection (3) makes clear that section 15 applies where a company has been resident in the United Kingdom under that test.
91.This section provides that a company incorporated in the United Kingdom is resident here for corporation tax purposes and, under section 5, is within the charge to corporation tax on all its income and chargeable gains. It is based on section 66(1) of FA 1988.
92.Subsection (2) makes it clear that a company which is resident in the United Kingdom under subsection (1) is not resident in any other territory.
93.Although section 66 of FA 1988 and section 249 of FA 1994 refer to a company being “regarded as” resident it is not considered necessary to adopt that or similar wording. A company is simply resident somewhere.
Corporation Tax Act 2009 