I move amendment No. 92:
In page 164, before section 77, but in Chapter 4, to insert the following new section:
"77.(1) The Principal Act is amended-
(a) in Part 8 by the insertion after section 243 of the following: ’Restriction of relevant charges on income.
'243A. (1) In this section-
"relevant trading charges on income", in relation to an accounting period of a company, means the charges on income paid by the company in the accounting period wholly and exclusively for the purposes of a trade carried on by the company, other than so much of those charges as are charges on income paid for the purposes of an excepted trade within the meaning of section 21A;
"relevant trading income", in relation to an accounting period of a company, means the trading income of the company for the accounting period (not being income chargeable to tax under Case III of Schedule D) other than so much of that income as is income of an excepted trade within the meaning of section 21A;
(2) Notwithstanding section 243, relevant trading charges on income paid by a company in an accounting period shall not be allowed as deductions against the total profits of the company for the accounting period.
(3) Subject to section 454, where a company pays relevant trading charges on income in an accounting period and, apart from subsection (2), those charges would be allowed as deductions against the total profits of the company for the accounting period, those charges shall be allowed as deductions against the amount of the relevant trading income of the company for the accounting period as reduced by any amount set off against that income under section 396A.',
(b) in Part 12-
(i) by the insertion after section 396 of the following section:
'396A.-(1) In this section-
"relevant trading income" has the same meaning as in section 243A;
"relevant trading loss", in relation to an accounting period of a company, means a loss incurred in the accounting period in a trade carried on by the company, other than so much of the loss as is a loss incurred in an excepted trade within the meaning of section 21A.
(2) Notwithstanding subsection (2) of section 396, for the purposes of that subsection the amount of a loss in a trade incurred by a company in an accounting period shall be deemed to be reduced by the amount of a relevant trading loss incurred by the company in the accounting period.
(3) Subject to section 455, where in an accounting period a company carrying on a trade incurs a relevant trading loss, the company may make a claim requiring that the loss be set off for the purposes of corporation tax against its relevant trading income-
(a) of that accounting period, and
(b) if it was then carrying on the trade and if the claim so requires, of preceding accounting periods ending within the time specified in subsection (4),
and, subject to that subsection and any relief for an earlier relevant trading loss, to the extent that the trading income of any of those accounting periods consists of or includes relevant trading income, that trading income shall then be reduced by the amount of the relevant trading loss or by so much of that amount as cannot be relieved against relevant trading income of a later accounting period.
(4) For the purposes of subsection (3), the time referred to in paragraph (b) of that subsection shall be the time immediately preceding the accounting period first mentioned in subsection (3) equal in length to that accounting period; but the amount of the reduction which may be made under subsection (3) in the relevant trading income of an accounting period falling partly before that time shall not exceed such part of that relevant trading income as bears to the whole of the relevant trading income the same proportion as the part of the accounting period falling within that time bears to the whole of that accounting period.’,
and
(ii) by the insertion after section 420 of the following:
'420A.-(1) In this section-
"relevant trading charges on income" and "relevant trading income" have the same meanings, respectively, as in section 243A;
"relevant trading loss" has the same meaning as in section 396A.
(2) Notwithstanding subsections (1) and (6) of section 420 and section 421, where in any accounting period the surrendering company incurs a relevant trading loss or an excess of relevant charges on income, that loss or excess may not be set off for the purposes of corporation tax against the total profits of the claimant company for its corresponding accounting period.
(3) Subject to section 456, where in any accounting period the surrendering company incurs a relevant trading loss or an excess of relevant trading charges on income, that loss or excess may be set off for the purposes of corporation tax against the relevant trading income of the claimant company for its corresponding accounting period as reduced by any amounts allowed as deductions against that income under section 243A or set off against that income under section 396A.
(4) Group relief allowed under subsection (3) shall reduce the income from a trade of the claimant company for an accounting period-
(a) before relief granted under section 397 in respect of a loss incurred in a succeeding accounting period or periods, and
(b) after the relief granted under section 396 in respect of a loss incurred in a preceding accounting period or periods.
(5) For the purposes of this section in the case of a claim made by a company as a member of a consortium, only a fraction of a relevant trading loss or an excess of relevant charges on income may be set off, and that fraction shall be equal to that member's share in the consortium, subject to any further reduction under section 422(2).',
and
(c) in Chapter 2 of Part 14-
(i) in section 448-
(I) by the substitution of the following for subsections (3) and (4):
'(3) For the purposes of subsection (2), the "income from the sale of those goods" shall be the amount determined by-
(a) firstly, calculating such sum (in this subsection referred to as the “relevant sum”) as bears to the amount of the company’s income for the relevant accounting period from the sale in the course of the trade mentioned in that subsection of goods and merchandise the same proportion as the amount receivable by the company in the relevant accounting period from the sale in the course of the trade of goods bears to the total amount receivable by the company in the relevant accounting period from the sale in the course of the trade of goods and merchandise, and
(b) then, deducting from the relevant sum-
(i) the amount of any relief for charges allowed under section 454,
(ii) the amount of any relief for a loss in a trade allowed under section 455, and
(iii) the amount of any group relief allowed under section 456, against income of the trade in the relevant accounting period.
(4) For the purposes of subsection (3), the "company's income for the relevant accounting period from the sale in the course of the trade mentioned in that subsection of goods and merchandise" shall be determined as an amount equal to-
(a) in any case where the income from the trade is derived solely from sales of goods and merchandise, the amount of the company’s income from the trade, and
(b) in any other case, such amount of the income from the trade as appears to the inspector or on appeal to the Appeal Commissioners to be just and reasonable, but shall be so determined as if-
(i) no relief for charges had been claimed under section 243A or 454,
(ii) no relief for a loss in a trade had been claimed under section 396A or 455, and
(iii) no group relief had been allowed under section 420A or 456, for the relevant accounting period.',
and
(II) by the substitution of the following for subparagraph (i) of subsection (5A)(b):
'(i) by any amounts allowed under sections 243A, 396A, 420A, 454, 455 and 456, and',
(ii) by the substitution in section 454 for subsections (2) and (3) of the following:
'(2) Notwithstanding sections 243 and 243A, charges on income paid for the purposes of the sale of goods by a company in a relevant accounting period in the course of a trade or trades, as the case may be, shall not be allowed as deductions against the total profits, or against the relevant trading income, of the company for the relevant accounting period.
(3) Charges on income paid for the purposes of the sale of goods by a company in a relevant accounting period which charges on income would, apart from subsection (2) and section 243A(2), be allowed as deductions against the total profits of the company for the accounting period, shall be allowed as deductions against the company's income from the sale of goods, as reduced by any amount set off under section 455, for the accounting period.',
(iii) in section 455-
(I) in subsection (2) by the substitution of 'Notwithstanding sections 396(2) and 396A(2) but subject to subsections (6) and (7), for the purposes of those sections' for 'Notwithstanding section 396(2) but subject to subsections (6) and (7), for the purposes of that section', and
(II) by the deletion of subsection (5),
(iv) in section 456-
(I) by the substitution for subsection (2) of the following:
'(2) Notwithstanding subsections (1) and (6) of section 420 and sections 420A(3) and 421, where in any relevant accounting period the surrendering company incurs a loss from the sale of goods or an excess of charges on income paid for the sale of goods, that loss or excess may not be set off for the purposes of corporation tax against the total profits, or against the relevant trading income, of the claimant company for its corresponding accounting period.
(2A)(a) Where in any relevant accounting period the surrendering company incurs a loss from the sale of goods or an excess of charges on income paid for the sale of goods, that loss or excess may be set off for the purposes of corporation tax against the income from the sale of goods of the claimant company for its corresponding accounting period, as reduced by any amounts-
(i) allowed as deductions against that income under section 454, or
(ii) set off against that income under section 455.
(b) Group relief allowed under paragraph (a) shall reduce the income from a trade of the claimant company for an accounting period-
(i) before relief granted under section 397 in respect of a loss incurred in a succeeding accounting period or periods, and
(ii) after the relief granted under section 396 in respect of a loss incurred in a preceding accounting period or periods.',
and
(II) in subsection (5) by the deletion of paragraph (b),
and
(v) by the deletion of section 457.
(2) Subsection (1) applies as respects an accounting period ending on or after 6 March 2001.
(3) Sections 454, 455 and 456 shall cease to have effect as on and from 1 January 2003.
(4) For the purposes of this section-
(a) where an accounting period of a company begins before 6 March 2001 and ends on or after that date, it shall be divided into 2 parts, one beginning on the date on which the accounting period begins and ending on 5 March 2001 and the other beginning on 6 March 2001 and ending on the date on which the accounting period ends, and both parts shall be treated as if they were separate accounting periods of the company, and
(b) where an accounting period of a company begins before 1 January 2003 and ends on or after that date, it shall be divided into 2 parts, one beginning on the date on which the accounting period begins and ending on 31 December 2002 and the other beginning on 1 January 2003 and ending on the date on which the accounting period ends, and both parts shall be treated as if they were separate accounting periods of the company.”.
This amendment inserts a new section into the Bill. The new section places a ringfence on the offset of losses and charges incurred by a company in an activity which is taxable at the standard rate of corporation tax or the 10% rate.
The general corporation tax rule in relation to losses is that where in an accounting period a company incurs a loss in a trade, the loss may be offset against the company's total profits of that accounting period and of the previous accounting period. In addition, such a loss may be offset under group relief rules against the profits of a fellow group company for a corresponding accounting period. Finally, where in an accounting period a company incurs "charges on income", the charges may be offset against total profits of the company for the accounting period. Any trading losses or charges incurred for the purposes of a trade which are not offset in this way are carried forward and offset against trading income of the trade concerned in subsequent accounting periods.
The 1988 and 1992 Finance Acts ringfenced the sideways and backward offset of losses and charges incurred in a trade which was within the 10% corporation tax regime. Such losses could only be so offset against income taxable at the 10% rate and not against profits taxable at the higher corporation tax rates. However, this ringfence has not worked satisfactorily in the case of charges and group relief since the introduction in 1999 of a 25% corporation tax rate on non-trading income. The legislation concerned is being amended to ensure that the ringfence works as intended. The amendment will prevent the offset of 10% losses of an accounting period against income of the accounting period, or of the previous accounting period, which is taxed at the 25% rate. It will also prevent such losses being offset against income taxed at the 20% rate in 2001 and the 16% rate in 2002. There will be no barrier on their offset against income taxable at the 12.5% rate from 2003.
The new section also ringfences the offset of trading losses and charges incurred in the trade subject to tax at the standard corporation tax rate. Where such losses and charges incurred in an accounting period are being offset sideways in that accounting period or backwards to the previous accounting period, they may only be offset against income taxable at the standard rate or the 10% rate.
A similar restriction applies to the offset of such losses under group relief. These restrictions apply to losses in an activity taxable at 20% in 2001, 16% in 2002 and 12.5% in 2003. This change will prevent manipulation by companies which might seek to shelter income within the scope of the 25% rate. The amendment also contains consequential changes to ensure the calculations on manufacturing relief result in an effective 10% rate of tax.