Corporation Tax Act 2010 (c. 4)

Part 12 Real Estate Investment Trusts

Chapter 8 Breach of conditions in Chapter 2

561 Notice of breach of relevant Chapter 2 condition

(1) The principal company of a group UK REIT must notify an officer of Revenue and Customs as soon as reasonably practicable if a relevant Chapter 2 condition ceases to be met in relation to the principal company or (as the case may be) the group.

(2) A company UK REIT must notify an officer of Revenue and Customs as soon as is reasonably practicable if a relevant Chapter 2 condition ceases to be met in relation to the company.

(3) Each of the following is a “relevant Chapter 2 condition”—

• conditions C and D in section 528 (conditions for company),

• conditions A and B in section 529 (property rental business),

• the condition in section 530 (distribution of profits), and

• conditions A and B in section 531 (balance of business).

(4) A notification under subsection (1) or (2) must include—

(a) the date on which the condition first ceased to be met and the date (if any) on which it was met again,

(b) a description of the breach, and

(c) details of the steps (if any) taken by the company to prevent a recurrence of the breach.

562 Breach of conditions C and D in section 528 (conditions for company)

(1) This section makes provision about cases relating to breaches of condition C or D in section 528 (or of both those conditions) in relation to—

(a) the principal company of a group UK REIT, or

(b) a company UK REIT.

(2) If both conditions C and D are not met—

(a) as a result of the principal company of a group UK REIT becoming a member of another group UK REIT, or

(b) as a result of a company UK REIT becoming a member of a group UK REIT,

the breaches are to be ignored.

(3) If—

(a) condition D is not met as a result of anything done (or not done) by a person other than the company in question, and

(b) the company remedies the breach not later than the end of the accounting period after that in which the breach began,

the breach is to be ignored.

(4) But if, in a case within subsection (3), the breach of condition D is not remedied by the time mentioned in that subsection, the group or company (as the case may be) is to be treated as having ceased to be a UK REIT at the end of the accounting period in which the breach began.

(5) If—

(a) either condition C or D is not met in relation to an accounting period, and

(b) the case is not one within subsection (2) or (3),

the group or company (as the case may be) is to be treated as having ceased to be a UK REIT at the end of the previous accounting period.

563 Breach of conditions as to property rental business

(1) Subsection (2) applies if condition A or B in section 529 (property rental business) is not met in the case of a UK REIT throughout an accounting period of—

(a) in the case of a group UK REIT, the principal company of the group, and

(b) in the case of a company UK REIT, the company.

(2) The breach is to be ignored.

564 Breach of condition as to distribution of profits

(1) Subsection (2) applies if the condition in section 530 (distribution of profits) is not met in relation to an accounting period.

(2) The breach is to be ignored; but the amount given by section 565 (“the section 565 amount”) is charged to corporation tax under the charge to corporation tax on income.

(3) The section 565 amount is to be treated as profits of residual business—

(a) of the principal company of the group UK REIT, or

(b) of the company UK REIT,

as the case may be.

(4) Accordingly it is charged to corporation tax at the rate mentioned in section 534(3) (rate at which profits of residual business are charged).

(5) No charge to corporation tax arises under subsection (2) if—

(a) a distribution by way of dividend is made by the principal company or (as the case may be) by the company,

(b) the distribution is made within the relevant period, and

(c) as a result of the distribution the condition in section 530 is met in relation to the accounting period.

(6) In subsection (5)(b) the “relevant period” is the period of 3 months beginning with the date on which—

(a) in the case of a group UK REIT, the group’s UK profits (as defined by section 530(2)),

(b) in the case of a company UK REIT, the company’s profits from property rental business,

can no longer be altered.

(7) A distribution made as mentioned in subsection (5) is to be ignored in determining whether the condition in section 530 has been met in relation to another accounting period.

(8) Profits relating to a different accounting period are not to be taken into account in determining whether that condition has been met.

(9) No loss, deficit, expense or allowance may be set off against the section 565 amount.

565 “The section 565 amount”

(1) For the purposes of section 564 “the section 565 amount” is found by subtracting D from P.

(2) In the case of a group UK REIT—

• P is 90% of the group’s UK profits (as defined by section 530(2)) arising in the accounting period, and

• D is the gross amount of those profits distributed in respect of the period on or before—

  (a)

  the filing date referred to in section 530(1), or

  (b)

  any later date specified by an officer of Revenue and Customs.

(3) In the case of a company UK REIT—

• P is 90% of the company’s profits from property rental business arising in the accounting period, and

• D is the gross amount of those profits distributed in respect of the accounting period on or before—

  (a)

  the filing date referred to in section 530(4), or

  (b)

  any later date specified by an officer of Revenue of Customs.

566 Breach of condition B in section 531 in accounting period 1

(1) Subsection (2) applies if condition B in section 531 (balance of business: assets involved in property rental business)—

(a) is not met in relation to accounting period 1, but

(b) is met at the beginning of the next accounting period.

(2) The breach is to be ignored; but an amount of income calculated in accordance with section 567 (“the notional amount”) is charged to corporation tax under the charge to corporation tax on income.

(3) The notional amount is to be treated as profits of residual business—

(a) in the case of a group UK REIT, of the principal company of the group, and

(b) in the case of a company UK REIT, of the company.

(4) It is treated as arising at the end of accounting period 1.

(5) Accordingly it is charged to corporation tax at the rate mentioned in section 534(3) (rate at which profits of residual business are charged).

(6) No loss, deficit, expense or allowance may be set off against the notional amount or against tax charged under this section.

567 Meaning of “the notional amount”

(1) For the purposes of section 566 “the notional amount” is found by taking two steps.

(2) Step 1: find the amount obtained by the calculation—

(3) TMV is—

(a) in the case of a group UK REIT, the total market value of assets involved in—

(i) property rental business of UK members of the group, and

(ii) UK property rental business of non-UK members of the group, and

(b) in the case of a company UK REIT, the total market value of assets involved in property rental business of the company.

(4) For the purposes of subsection (3)—

(a) the market value of assets is to be determined as at the end of accounting period 1,

(b) any asset of negative market value is to be ignored, and

(c) if a percentage of the assets of a member of a group UK REIT is excluded from a financial statement in accordance with section 533(3), that percentage of those assets is to be ignored in determining the market value of assets involved in property rental business (or, as the case may be, UK property rental business) of the member.

(5) TR is the percentage rate at which the principal company of the group or (as the case may be) the company is chargeable to corporation tax on profits in respect of residual business (see section 534(3)).

(6) Step 2: subtract the entry charge notional income from the amount obtained by step 1.

(7) In step 2 “entry charge notional income” means—

(a) in the case of a group UK REIT, the sum of the amounts of notional income treated as arising under section 538 to members of the group, and

(b) in the case of a company UK REIT, the amount of notional income treated as arising to the company under section 538.

(8) But the entry charge notional income is reduced in accordance with the calculation in subsection (9) if—

(a) in the case of a group UK REIT, an asset held at the beginning of accounting period 1 by a company which is a member of the group, and

(b) in the case of a company UK REIT, an asset held by the company at the beginning of accounting period 1,

is disposed of by the company during that period.

(9) The calculation referred to in subsection (8) is—

where—

• AMV is the market value of the asset at entry,

• MV has the same meaning as in section 539(3), and

• NI is the amount of notional income treated as arising to the company under section 538.

568 Breach of balance of business conditions after accounting period 1

(1) If—

(a) condition A in section 531 (balance of business: profits) is not met in relation to an accounting period other than accounting period 1, but

(b) the profits of property rental business of the UK REIT in question are at least 50% of its aggregate profits for the period,

the breach is to be ignored.

(2) If—

(a) condition B in section 531 (balance of business: assets) is not met in relation to an accounting period other than accounting period 1, but

(b) the value of the assets involved in property rental business of the UK REIT in question is at least 50% of the total value of assets held by the UK REIT,

the breach is to be ignored.

(3) Subsections (1) and (2) are to be read in accordance with section 531.

569 Chapter subject to section 572

This Chapter is subject to section 572 (under which an officer of Revenue and Customs may terminate the UK REIT status of a group or company in certain circumstances).