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Charges on income for corporation tax purposes.
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37.— (1) The Principal Act is amended—
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(a) in section 243 by substituting the following for subsection (8):
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“(8) Subject to subsection (9), subsection (7) shall not apply to any payment of interest on a loan to a company if—
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(a) subject to subsections (2A), (4), (4A) and (4E) of that section, subsection (2) of section 247 applies to the loan, and
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(b) the conditions specified in subsection (3) of section 247 are fulfilled.”,
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(b) in section 247(1)(a) in the definition of “material interest” by substituting “company;” for “company.”,
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(c) in section 247(1)(a) by inserting the following definition after the definition of “material interest”:
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“ ‘trading stock’ has the same meaning as in section 89.”,
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(d) in section 247(1)(b) by substituting “subsections (4A) and (4E)” for “subsection (4A)”,
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(e) in section 247(2) by substituting the following for paragraph (b):
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“(b) in lending to a company referred to in paragraph (a) money which is used wholly and exclusively—
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(i) where the company is a company which exists wholly or mainly for the purpose of carrying on a trade or trades, for the purposes of that trade or those trades,
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(ii) where the company is a company whose income consists wholly or mainly of profits or gains chargeable under Case V of Schedule D, in the purchase, improvement or repair of premises to which the profits or gains relate, or
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(iii) where the company is a company whose business consists wholly or mainly of the holding of stocks, shares or securities of a company referred to in paragraph (a)(i), for the purposes of holding such stocks, shares or securities,
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(ba) in lending to a company referred to in paragraph (a) money which is used wholly and exclusively by a connected company—
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(i) where the connected company is a company which exists wholly or mainly for the purpose of carrying on a trade or trades, for the purposes of that trade or those trades,
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(ii) where the connected company is a company whose income consists wholly or mainly of profits or gains chargeable under Case V of Schedule D, in the purchase, improvement or repair of premises to which the profits or gains relate, or
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(iii) where the connected company is a company whose business consists wholly or mainly of the holding of stocks, shares or securities of a company referred to in paragraph (a)(i), for the purposes of holding such stocks, shares or securities, or”,
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(f) in section 247 by inserting the following after subsection (2):
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“(2A) Subsection (2) shall not apply to a loan to an investing company to defray money applied in subscribing for share capital of another company on the issue of share capital by that other company unless the capital is used by that other company or by a connected company wholly and exclusively—
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(a) where the company which uses the capital is a company which exists wholly or mainly for the purpose of carrying on a trade or trades, for the purposes of that trade or those trades,
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(b) where the company which uses the capital is a company whose income consists wholly or mainly of profits or gains chargeable under Case V of Schedule D, in the purchase, improvement or repair of premises to which the profits or gains relate, or
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(c) where the company which uses the capital is a company whose business consists wholly or mainly of the holding of stocks, shares or securities of a company referred to in paragraph (a)(i), for the purposes of holding such stocks, shares or securities.”,
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(g) in section 247(3)—
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(i) in paragraph (a) by substituting “and, where subsection (2)(ba) applies to the money lent in respect of which the interest is paid, in the connected company” for “or in a connected company”, and
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(ii) in paragraph (b) by substituting “and, where subsection (2)(ba) applies to the money lent in respect of which the interest is paid, of the connected company” for “or of a connected company”,
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(h) in section 247 by inserting the following after subsection (4D):
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“(4E) (a) In this subsection ‘asset’ means any asset other than—
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(i) share capital in a company,
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(ii) an asset referred to in subsection (4B) which is treated by the provisions of section 291A(2) as plant and machinery for the purposes of Chapters 2 and 4 of Part 9, or
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(iii) an asset acquired as trading stock.
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(b) Subject to paragraphs (c) to (f), subsection (2) shall not apply to a loan to the investing company to defray money applied in lending to a company money which is used directly or indirectly for the purposes of acquiring an asset from a company which, at the time of the acquiring of the asset, was connected with the investing company if the loan is made to the investing company by a person who is connected with the investing company.
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(c) (i) Where, in an accounting period, interest is paid by an investing company on a loan to defray money applied in lending to another company (in this paragraph referred to as the ‘other company’) money which is used wholly and exclusively for the purposes of acquiring a trade (in this subsection referred to as an ‘acquired trade’) which immediately before its acquisition by the other company was carried on by a company which was not within the charge to corporation tax, then paragraph (b) shall not apply to that loan and, notwithstanding subsection (3) and section 243, the amount of the relief to be given in respect of the interest paid in an accounting period by the investing company on the loan shall not exceed the amount of the profits or gains of the other company in respect of the acquired trade for the corresponding period.
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(ii) This paragraph shall apply where a company acquires part of a trade as if that part were a separate trade.
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(iii) Where the other company begins to carry on the activities of an acquired trade as part of its trade then that part of its trade shall, for the purposes of this subsection, be treated as a separate trade and any necessary apportionment shall be made so that profits or gains shall be attributed to the separate trade on a just and reasonable basis and the amount of those profits or gains shall not exceed the amount which would be attributed to a distinct and separate company, engaged in those activities, if it were independent of, and dealing at arm’s length with, the investing company.
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(d) (i) Where, in an accounting period, interest is paid by an investing company on a loan to defray money applied in lending to another company (in this paragraph referred to as the ‘other company’) money which is used wholly and exclusively for the purposes of acquiring an asset (in this paragraph referred to as an ‘acquired asset’) which is leased by the other company for that accounting period in the course of a trade (in this paragraph referred to as the ‘first-mentioned trade’) then, if immediately before that asset was acquired by the other company it was not in use for the purposes of a trade carried on by a company which was within the charge to corporation tax, paragraph (b) shall not apply to that loan and, notwithstanding subsection (3) and section 243, the amount of the relief to be given in respect of the interest paid in the accounting period by the investing company on the loan shall not exceed the amount of the profits or gains of the first-mentioned trade for the corresponding period as is attributable to the acquired asset.
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(ii) For the purposes of subparagraph (i), in arriving at the profits or gains of a trade attributable to an acquired asset, any necessary apportionment shall be made of the expenses and receipts of the trade.
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(e) For the purposes of computing any restriction of relief to be given for an accounting period required by paragraphs (c) and (d)—
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(i) where an accounting period of the investing company and an accounting period of the other company coincide then the profits or gains of the other company in respect of the acquired trade for the corresponding period shall be the amount of the profits or gains of the acquired trade, for that accounting period, which are chargeable to tax under Case I of Schedule D, and
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(ii) (I) any accounting period of the other company which, without coinciding with that accounting period, falls wholly or partly within an accounting period of the investing company shall correspond to that accounting period, and
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(II) where an accounting period of the investing company and an accounting period of the other company do not coincide then the profits or gains of the other company in respect of the acquired trade for the corresponding period shall be the aggregate of the profits or gains in respect of the acquired trade which are chargeable to corporation tax under Case I of Schedule D for accounting periods of the other company that correspond to the accounting period of the investing company as reduced in each case by applying the fraction—
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A
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B
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(if the fraction is less than unity)
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where—
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A is the length of the period common to the two accounting periods, and
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B is the length of the accounting period of the other company.
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(f) Where, as a part of, or in connection with, any scheme or arrangement for the making of a loan to the investing company by a person (in this paragraph referred to as the ‘first-mentioned person’) who is not connected with the investing company, another person who is connected with the investing company directly or indirectly makes a loan to, a deposit with, or otherwise provides funds to the first-mentioned person or to a person who is connected with the first-mentioned person, then the loan made to the investing company shall be treated for the purposes of paragraph (a) as being a loan made to the investing company by a person with whom it is connected.
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(4F) (a) In this subsection ‘relevant period’, in relation to interest paid by an investing company, means the period to which that interest relates.
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(b) Where a loan to an investing company, to which subsection (2) applies, has been applied in lending to another company (in this paragraph referred to as the ‘other company’) not within the charge to corporation tax money which is used wholly and exclusively for the purposes of the trade or business of the other company then, notwithstanding subsection (3) and section 243, the amount of the relief to be given in respect of so much of the interest paid (referred to in this paragraph as the ‘interest paid’) in an accounting period by the investing company on the loan, as exceeds the amount (including a nil amount) of any interest, arising to the investing company on the money lent to the other company, for the relevant period, shall not exceed the amount by which the interest paid exceeds the interest (if any) arising to the other company in that relevant period in respect of the money so used.
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(c) Where a loan to an investing company, to which subsection (2) applies, has been applied in lending to another company (in this paragraph referred to as the ‘other company’) money which is used wholly and exclusively for the purposes of the trade or business of a connected company not within the charge to corporation tax then, notwithstanding subsection (3) and section 243—
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(i) where the other company is within the charge to corporation tax, the amount of the relief to be given in respect of so much of the interest paid (referred to in this subparagraph as the ‘interest paid’) in an accounting period by the investing company on the loan, as exceeds the amount (including a nil amount) of any interest, arising to the investing company on the money lent to the other company, for the relevant period, shall not exceed the amount by which the interest paid exceeds the interest (if any) arising to the connected company in that relevant period in respect of the money so used, and
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(ii) where the other company is not within the charge to corporation tax, the amount of the relief to be given in respect of so much of the interest paid (referred to in this subparagraph as the ‘interest paid’) in an accounting period by the investing company on the loan, as exceeds the amount (including a nil amount) of any interest, arising to the investing company on the money lent to the other company, for the relevant period, shall not exceed the amount by which the interest paid exceeds the greater of—
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(I) the interest (if any) receivable by the other company from the connected company (in respect of the use by the other company of the money lent to it by the investing company), and
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(II) the interest receivable by the connected company in that relevant period in respect of the money so used.
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(4G) Where a loan to an investing company, to which subsection (2) applies, has been applied in lending to a company money which is used wholly and exclusively for the purposes of the trade of the company or of a connected company, the interest on the loan shall be treated for the purposes of Chapter 5 of Part 12 as relevant trading charges on income within the meaning of section 243A.”,
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and
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(i) in section 249(2) by inserting the following after paragraph (aa):
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“(ab) (i) Where—
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(I) a company (in this paragraph referred to as the ‘first-mentioned company’) issues shares to the company concerned in exchange for shares (in this paragraph referred to as the ‘original shares’) in another company,
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(II) section 584 is applied or, but for section 626B, would be applied to the exchange by section 586, and
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(III) the investing company, in the absence of an election under this subsection, would be deemed by paragraph (aa) to have, by virtue of the exchange, recovered an amount of capital from the company concerned,
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then the investing company may elect that paragraph (aa) shall not so apply.
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(ii) Where the investing company makes an election in accordance with subparagraph (i), then the first-mentioned company shall be treated for the purposes of paragraph (aa) as if it were the company concerned if the effect of so treating it is that the investing company is deemed by paragraph (aa)(i) to have recovered an amount of capital equal to the amount of capital treated by paragraph (aa)(ii)(I) as recovered in respect of the original shares by that company.
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(iii) An election under this paragraph shall be included by the investing company with the return required under section 951 for the accounting period in which the original shares are exchanged.”.
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(2) This section shall apply in respect of a loan made on or after 21 January 2011 other than any such loan made in accordance with a binding written agreement made before that date.
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