Finance Act 2011

Part 2 Amendment of small chargeable profits exemption

4 (1) Section 748 of ICTA (cases where apportionment of chargeable profits and creditable tax under section 747(3) does not apply) is amended as follows.

(2) In subsection (1), after paragraph (d) insert—

“(da) the relevant profits for the accounting period, after any adjustment required by subsection (3C), do not exceed—

(i) £200,000, or

(ii) if the accounting period is less than 12 months, a proportionately reduced amount; or”.

(3) After subsection (3) insert—

“(3A) The reference in subsection (1)(da) to the relevant profits for an accounting period are to the sum of—

(a) the profits of the company for that period calculated in accordance with generally accepted accounting practice (disregarding any exempt distributions and any capital gains or losses), before any adjustment required or authorised by law in calculating chargeable profits,

(b) any amount which accrues during that period to the trustees of a settlement in relation to which the company is a settlor or a beneficiary, and

(c) the company’s share of any income which accrues during that period to a partnership of which the company is a partner.

(3B) For the purposes of subsection (3A)—

(a) “exempt distribution” means a distribution (within the meaning of Part 23 of CTA 2010) which would be excluded from the company’s chargeable profits by reason of it being exempt for the purposes of Part 9A of CTA 2009 (company distributions),

(b) where there is more than one settlor or beneficiary in relation to the settlement mentioned in subsection (3A)(b), the income is to be apportioned between the company and the other settlors or beneficiaries on a just and reasonable basis, and

(c) the company’s share of any income which accrues to a partnership as mentioned in subsection (3A)(c) is to be determined by apportioning that income between the company and the other partners on a just and reasonable basis;

and in subsection (3A) and this subsection “partnership” includes an entity established under the law of a country or territory outside the United Kingdom of a similar character to a partnership; and “partner” is to be read accordingly.

(3C) For the purposes of subsection (1)(da), Part 4 of TIOPA 2010 (transfer pricing) applies in relation to the calculation of the relevant profits for the accounting period as it applies in relation to the calculation of the chargeable profits for that period.

(3D) But where the difference made in the amount of the relevant profits for the period as a result of the application of subsection (3C) would (disregarding this subsection) not exceed £50,000, no adjustment under that subsection is to be made.”

(4) In subsection (6) for “section” substitute “sections 748ZA and”.

5 After that section insert—

“748ZA Exclusion of small profits exemptions

(1) Nothing in section 748(1)(da) prevents an apportionment falling to be made as regards an accounting period (“the relevant accounting period”) of a controlled foreign company (“X”) if condition A, B or C is met.

(2) Condition A is that at any time before the end of the relevant accounting period a scheme is entered into and—

(a) in the absence of this subsection, in consequence of the scheme, section 748(1)(da) would apply to prevent an apportionment falling to be made as regards the relevant accounting period of X, and

(b) the main purpose, or one of the main purposes, of any party to the scheme in entering into the scheme is to secure that section 748(1)(da) prevents an apportionment falling to be made as regards that period, or that period and one or more other accounting periods of X.

(3) Condition B is that at any time before the end of the relevant accounting period a scheme is entered into and—

(a) in consequence of the scheme profits are shifted to X from another company (“Y”),

(b) the main purpose or one of the main purposes of any party to the scheme in entering into the scheme is to ensure that section 748(1)(da) prevents an apportionment falling to be made as regards the chargeable profits of one or more controlled foreign companies for one or more accounting periods, and

(c) the relevant accounting period of X falls wholly or partly within that accounting period or those accounting periods.

(4) For the purposes of subsection (3), profits are shifted to X from Y if it is reasonable to suppose that in the absence of the scheme, and any similar scheme, the whole or a part of the income which is reflected in X’s profits would have been reflected in Y’s profits.

(5) Condition C is that, in determining X’s chargeable profits for the relevant accounting period—

(a) section 418(5) of CTA 2009 (loan relationships involving connected debtor and creditor where debits exceed credits) has effect so as to treat X, for the purposes of Part 5 of that Act, as bringing into account for that period credits in respect of a loan relationship, or

(b) Part 21B of CTA 2010 (group mismatch schemes) has effect so as to exclude an amount from being brought into account as a debit or credit for the purposes of Part 5 of CTA 2009 (loan relationships) or Part 7 of that Act (derivative contracts).

(6) For the purposes of this section—

• “apportionment” means an apportionment under section 747(3);

• “scheme” means any scheme, arrangements or understanding of any kind whatever, whether or not legally enforceable, involving one or more transactions.”