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CLAUSE 84: PROFITS FOR PURPOSES OF SMALL COMPANIES’ RELIEF

SUMMARY

1.   This Clause reproduces, with minor amendments, parts of section 247 of the Taxes Act 1988 (group elections) within the rules determining entitlement to the small companies’ rate of Corporation Tax and marginal relief.  These rules currently contain cross-references to section 247, which is being repealed as a result of the changes to withholding tax. 

DETAILS OF THE CLAUSE

2.   Subsection (1) provides for the amendment of section 13 of the Taxes Act, which determines whether a company is entitled to the small companies’ rate of Corporation Tax (20%) or marginal relief.

3.   Subsection (2) amends section 13(7), which provides that the measure of a company’s profits for the purposes of section 13 includes franked investment income except where that income is received from a 51% subsidiary or fellow subsidiary, or from a trading or holding company owned in consortium with others. 

4.   The amendment in paragraph (a) relates to the definition of a fellow subsidiary.  It ensures that, where two UK-resident companies have a non-UK resident parent, any franked investment income passing between the two subsidiaries is excluded in measuring their profits.

5.   Paragraph (b) relates to the definition of a company owned in consortium.  It replaces a reference to the repealed section 247(1A) with a reference to new subsection (7A) of section 13. 

6.   Subsection (3) inserts a new subsection (7A), identical to section 247(1A), into section 13.  This ensures that a company is not treated as owned by a consortium if it is a 75% subsidiary of any company, or arrangements are in place whereby it could become a 75% subsidiary.

7.   Subsection (4) replaces the reference to sections 247(8) to (9A) in section 13(8AA) with a reference to the new section 13ZA.

8.   Subsection (5) introduces new section 13ZA, which reproduces, with minor amendments, the tests of group and consortium membership in sections 247(8) to (9A), to ensure that they continue to apply for the purposes of section 13.

9.   New section 13ZA(1) mirrors section 247(8)(b).  It provides that, in determining whether a company is a 51% subsidiary of another, any share capital owned indirectly and held as trading stock by its direct owner should be disregarded.

10. The provision in section 247(8)(a), whereby share capital held directly or indirectly in a non-UK resident company is disregarded in determining whether a company is a 51% subsidiary, is not reproduced in section 13ZA.  The effect is that where, for example, franked investment income is received from a UK-resident company which is a 51% subsidiary only by virtue of indirect share-holdings held via a non-UK resident company, that franked investment income will no longer be included in the measure of a company’s profits for the purposes of section 13.

11. New section 13ZA(2) reproduces section 247(8A).  This provides that a company shall not be regarded as a 51% subsidiary unless the parent is entitled to more than 50% of its profits and more than 50% of its assets.

12. New section 13ZA(3) identifies what is meant by a trading or holding company owned by a consortium and is similar to section 247(9).  Paragraphs (a) and (b) define the terms ‘holding company’ and ‘trading company’.  Paragraph (c) sets out the conditions for ownership by a consortium: 75% of the share capital must be owned by companies, each of which owns at least 5% of the share capital and is entitled to at least 5% of the profits and assets.  There will no longer be a requirement for all the members of the consortium to be UK-resident companies.

13. New section 13ZA(4) reproduces section 247(9A).  This ensures that the anti-avoidance tests in Schedule 18 of the Taxes Act continue to apply in determining entitlement to profits and assets for the purposes of section 13ZA(2) and (3)(c).

14. Subsection (6) provides that the amendments to section 13 and the insertion of section 13ZA will take effect for accounting periods ending on or after 1 April 2001.

BACKGROUND NOTE

15. Companies with profits of more than £1,500,000 pay Corporation Tax at the main rate of 30%.  For companies with profits up to this limit, sections 13 and 13AA of the Taxes Act provide lower rates of Corporation Tax and marginal relief to ease the transition between the rates.

16. Section 13 provides the profits limits for the small companies’ rate of 20% and the rules for marginal relief between this and the main rate.  Section 13AA provides the profits limits for the starting rate of 10% and the rules for marginal relief between this and the 20% rate. 

17. Section 13 also provides the rules determining the measure of profits for the purposes of both sections 13 and 13AA.