Finance Act 2006

Assets etc U.K.

113 Ring-fencing of tax-exempt business U.K.

(1) For the purposes of corporation tax, the business of C (tax-exempt) shall be treated as a separate business (distinct from—

(a) any business carried on by C (pre-entry),

(b) any business carried on by C (residual), and

(c) any business carried on by C (post-cessation)).

(2) For the purposes of corporation tax C (tax-exempt) shall be treated as a separate company (distinct from—

(a) C (pre-entry),

(b) C (residual), and

(c) C (post-cessation)).

(3) In particular—

(a) a loss incurred by C (tax-exempt) may not be set off against profits of C (residual),

(b) a loss incurred in respect of C (residual) may not be set off against profits of C (tax-exempt),

(c) a loss incurred in respect of C (pre-entry) may not be set off against profits of C (tax-exempt) (but this section does not prevent a loss of that kind from being set off against profits of C (residual)),

(d) a loss incurred by C (tax-exempt) may not be set off against profits arising to C (post-cessation) (in respect of business of any kind), and

(e) receipts accruing after entry but relating to business of C (pre-entry) shall not be treated as receipts of C (tax-exempt).

(4) In subsection (3) a reference to a loss includes a reference to a deficit, expense, charge or allowance.

(5) Section 392B of ICTA (ring-fencing of losses from overseas property business) shall not apply to business of C (tax-exempt).

(6) Paragraphs 5B and 5C of Schedule 28AA to ICTA (transfer pricing: exemption for small and medium enterprises) shall not apply to a company to which this Part applies (whether to C (tax-exempt) or to C (residual)).

114 Maximum shareholding U.K.

(1) The Treasury may make regulations that apply to a company to which this Part applies if it makes a distribution to or in respect of a person who—

(a) is beneficially entitled (directly or indirectly) to 10% or more of the dividends paid by the company,

(b) is beneficially entitled (directly or indirectly) to 10% or more of the company's share capital, or

(c) controls (directly or indirectly) 10% or more of the voting rights in the company.

(2) The regulations may, in particular—

(a) cause a sum to be charged to tax, in accordance with the regulations, (whether by reference to a person's interest, to a rate of tax or otherwise);

(b) provide that a charge does not arise, or is reduced, if the company takes or does not take action of a specified kind.

115 Profit: financing-cost ratio U.K.

(1) The Treasury may make regulations that apply to a company to which this Part applies where the result of the sum specified in subsection (2) is less than 1.25 in respect of an accounting period.

(2) That sum is—

where—

(a) Profits means the amount of the profits of C (tax-exempt) arising in the accounting period (before the offset of capital allowances), and

(b) Financing Costs means the amount of the financing costs incurred in that period in respect of the business of C (tax-exempt).

(3) The regulations may cause a sum to be charged to tax, in accordance with the regulations, by reference to that part of the financing costs as a result of which the result of the sum specified in subsection (2) is less than 1.25.

(4) In subsections (2)(b) and (3) “financing costs” means the cost of debt finance; and in calculating the costs of debt finance in respect of an accounting period the matters to be taken into account include—

(a) costs giving rise to debits in respect of debtor relationships of the company under Chapter 2 of Part 4 of FA 1996 (loan relationships), other than debits in respect of exchange losses from such relationships (within the meaning of section 103(1A) and (1B) of that Act),

(b) any exchange gain or loss from a debtor relationship within the meaning of that Chapter in relation to debt finance,

(c) any credit or debit falling to be brought into account under Schedule 26 to FA 2002 (derivative contracts) in relation to debt finance,

(d) the financing cost implicit in a payment under a finance lease, and

(e) any other costs arising from what would be considered, in accordance with generally accepted accounting practice, to be a financing transaction.

Modifications etc. (not altering text)

C1 S. 115 applied (with modifications) (1.1.2007) by The Real Estate Investment Trusts (Joint Ventures) Regulations 2006 (S.I. 2006/2866), reg. 6(4)

C2 S. 115 applied (with modifications) (31.12.2007) by The Real Estate Investment Trusts (Joint Venture Groups) Regulations 2007 (S.I. 2007/3425), reg. 12

116 Minor or inadvertent breach U.K.

(1) The Treasury may make regulations about the application of this Part to a company if a requirement in section 106(5) or (6), 107 or 108 is not satisfied (whether generally or in respect of an accounting period).

(2) A company which gave a notice under section 109 shall notify the Commissioners for Her Majesty's Revenue and Customs as soon as reasonably practicable if a requirement in section 106(5) or (6), 107 or 108 ceases to be satisfied in relation to the company.

(3) The regulations may, in particular—

(a) provide for this Part to cease to apply to a company at a time specified by or determined in accordance with the regulations (which may be before the breach of a requirement);

(b) provide for this Part to continue to apply to a company with specified modifications;

(c) provide for sums to be charged to tax, or otherwise treated, in accordance with the regulations;

(d) make provision by reference to the extent of a failure to satisfy a requirement;

(e) make provision by reference to the number of requirements not satisfied;

(f) limit the number of occasions on which a provision of the regulations may be relied upon by a company in respect of a specified period;

(g) include other provision for preventing tax avoidance;

(h) confer a discretion on the Commissioners.

(4) This section is subject to section 129.

117 Cancellation of tax advantage U.K.

(1) This section applies if the Commissioners for Her Majesty's Revenue and Customs think that a company to which this Part applies has tried to obtain a tax advantage for itself or another person.

(2) The Commissioners may give a notice to the company specifying the tax advantage.

(3) If the Commissioners give a notice to the company under subsection (2)—

(a) a tax advantage obtained by the company shall be counteracted, in accordance with the notice, by an adjustment by way of—

(i) an assessment;

(ii) the cancellation of a right of repayment;

(iii) a requirement to return a repayment already made;

(iv) the computation or recomputation of profits or gains, or liability to tax, on a basis specified by the Commissioners in the notice, and

(b) the Commissioners may (in addition to the adjustment under paragraph (a)) assess the company to such additional amount of corporation tax under Case VI of Schedule D as they think is equivalent to the value of the tax advantage.

(4) For the purposes of this section “tax advantage” has the meaning given by section 709 of ICTA (and includes, in particular, entering into arrangements the sole or main purpose of which is to avoid or reduce a charge to tax under section 112).

(5) But a company does not obtain a tax advantage by reason only of this Part applying to it, unless it does anything (whether before or during the application of this Part) which in the Commissioners' opinion is wholly or principally designed—

(a) to create or inflate or apply a loss, deduction or expense (whether or not suffered or incurred by the company), or

(b) to have another effect of a kind specified for the purposes of this subsection by regulations made by the Treasury.

(6) Where a notice is given to a company under subsection (2), the company may appeal to the Special Commissioners.

(7) An appeal must be instituted by notice given in writing to the Commissioners for Her Majesty's Revenue and Customs during the period of 30 days beginning with the date on which the notice under subsection (2) is given to the company.

Modifications etc. (not altering text)

C3 S. 117 applied (1.1.2007) by The Real Estate Investment Trusts (Joint Ventures) Regulations 2006 (S.I. 2006/2866), reg. 7(4)

S. 117 applied (1.1.2007) by The Real Estate Investment Trusts (Joint Ventures) Regulations 2006 (S.I. 2006/2866), reg. 13(5) (subject to reg. 14)

118 Funds awaiting re-investment U.K.

(1) This section applies where a company to which this Part applies—

(a) disposes of an asset used wholly and exclusively for the purposes of tax-exempt business, and

(b) holds the proceeds in cash.

(2) Profits or losses arising from a loan relationship entered into in connection with the proceeds—

(a) shall be disregarded for the purposes of section 120, and

(b) shall be treated for all tax purposes as arising from a loan relationship entered into in connection with business of C (residual).

(3) For the purposes of section 108—

(a) the proceeds shall, during the period of 24 months beginning with the date of the disposal, be treated for the purposes of Condition 2 as assets held in connection with the tax-exempt business, but

(b) any income derived from the proceeds is income from non-tax-exempt business.

(4) For the purposes of this section proceeds are held in cash if—

(a) held on deposit (whether or not in sterling),

(b) invested in stocks or bonds of any of the descriptions included in Part 1 of Schedule 11 to FA 1942 (gilts), or

(c) held or invested in such other form as the Commissioners for Her Majesty's Revenue and Customs may specify for the purposes of this section in regulations.

(5) In the case of the disposal of an asset which for one or more periods of at least a year has been used partly for the purposes of the business of C (tax-exempt) and partly for the purposes of C (residual), this section shall apply to such part of the proceeds as may reasonably be attributed to the tax-exempt business (having regard to the extent to which, and the length of the periods during which, the asset was used for the different purposes).