taxation of intellectual property, goodwill and other intangible...

TAXATION OF INTELLECTUAL PROPERTY, GOODWILLAND OTHER INTANGIBLE ASSETS: DRAFTLEGISLATION

A TECHNICAL NOTE BY THE INLAND REVENUE

Comments are invited on the draft clauses and the partial regulatory impactassessment set out at Annexes 1 and 3 respectively of the Technical Note. Theseshould be sent to:

Jon ShermanRevenue Policy, Business Tax4th Floor22 KingswayLondon WC2B 6NR

e-mail: [email protected]

to arrive no later than 31 January 2002.

In accordance with the Inland Revenue’s Code of Practice on consultation, oncethe outcome of the consultation is announced, we will make available, on request,responses to consultative documents, unless any respondent has asked for his orher comments to be treated as confidential. If you wish the whole of yourcomments, or your name and address, to be treated as confidential, please sayso when you return your comments.

This document is available on the internet at www.inlandrevenue.gov.uk

Published on 27 November 2001

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CONTENTS

Chapter 1 Introduction

Chapter 2 Overview of the regime

Annex 1 Draft legislation

Annex 2 Technical commentary on draft legislation

Annex 3 Partial Regulatory Impact Assessment

Annex 4 Summary of responses to March 2001 Technical Note

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Chapter 1 – introduction1. The Government published proposals for a comprehensive new regime for

intangible assets at the time of Budget 2001. These proposals weredeveloped after extensive consultation with business and were designed to:

• provide relief for the cost of acquiring intangible assets where none hadpreviously been available;

• give relief on a consistent basis, following the rate of amortisation used incompanies’ accounts;

• treat sales of intangibles consistently, with profits taxed as income butsubject to a new roll-over relief for reinvestment in new intangibles; and

• provide transitional arrangements that preserve expectations forcompanies’ existing intangible assets.

2. The new approach has been broadly welcomed by business and, subject toconsultation, the Government proposes to introduce it with effect from 1 April2002.

3. The intangibles reform will mark a further step in the Government’sprogramme of corporate tax reform, the strategy for which was set out in theJuly consultation document on large business taxation. The Government seesthe key principles for reform as:

• business competitiveness: to create the best possible location forinvestment by removing tax distortions and promoting productivity; and

• fairness: ensuring that individual businesses pay their fair share of tax inrelation to their commercial profits and compete on a level playing field.

4. In addition to the intangibles reform, the Government is:

• introducing an exemption for capital gains and losses on disposals ofcompanies’ substantial shareholdings;

• introducing a simplified and modernised regime for the taxation ofcorporate debt, financial instruments and foreign exchange gains andlosses;

• consulting further on the design of an R&D tax credit for larger companies;and

• consulting on proposals to reduce the compliance burden associated withthe requirement to deduct tax at source on cross-border royalty payments.

5. Annex 1 to this Technical Note contains detailed draft legislation which,subject to consultation, the Government intends to include in Finance Bill2002. The legislation is written in the style adopted by the Tax Law Rewrite

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project. This will make it clearer and easier to use than much existing taxlegislation. The draft provisions reflect a number of detailed changes as aresult of the latest round of consultation.

6. The development of this reform has benefited greatly from the contribution thatbusinesses, the tax profession and representative bodies have made to theconsultation process. Comments are now invited on the draft legislation.

7. This Technical Note also includes a partial Regulatory Impact Assessmentwhich reviews the benefits and costs of the reform in greater detail (Annex 3).Comments are invited on the effects of the proposals, particularly with regardto compliance costs. These comments will be taken into account in producinga full Regulatory Impact Assessment.

8. A summary of responses to the March 2001 Technical Note is included atAnnex 4.

9. Responses to this Technical Note should be sent by 31 January 2002.

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Chapter 2 – overview of the regime1. This chapter gives an overview of the new regime and highlights a number of

issues where the proposals have been further developed following the latestround of consultation.

Scope and computational approach

2. The draft legislation included in this Technical Note puts in place acomprehensive new regime for the treatment of expenditure and receipts inrespect of intangible assets. The new regime applies for corporation tax only.It follows accounting practice as closely as possible in terms of both the scopeof the regime and the computational approach.

3. Tax relief will therefore normally be available for expenditure on the full rangeof intangible assets and goodwill, broadly in line with their accountingdefinitions. Relief will generally be given on a basis that matches the write-offin companies’ accounts. And accounting profits and losses on the disposal ofgoodwill and intangible assets will be brought into account as income. Theneed for adjustments in the tax computation will be therefore be limited (andwill mainly involve cases where companies take advantage of the roll-overrelief provisions to defer profits on sale).

Scope

4. The new rules will apply to expenditure on the creation, acquisition andenhancement of intangible assets (including abortive expenditure), as well asexpenditure on their preservation and maintenance. This will ensure that therelief is available not only on the acquisition of intangible assets but also in thecase of expenditure on their internal development (where under current lawsome expenditure properly deducted in the profit and loss account may betreated as capital and disallowed).

5. Payments for the use of intangible assets will also be within the scope of thenew regime. The ‘charge on income’ rules will no longer apply to royaltypayments and relief will be given in line with the accounting treatment. Thetaxation of royalty receipts will also follow the accounts. The new approach toroyalties will apply from commencement of the regime even where theroyalties in question relate to pre-commencement intangibles.

6. The Government wishes the new regime to be as comprehensive as possiblein its scope. It therefore proposes to extend the regime to include agriculturaland fishing quotas and related rights. It will continue to discuss with therelevant industries whether any particular technical issues need to beaddressed as a result of the inclusion of these assets.

7. The Government is also considering whether it would be appropriate toincorporate finance leased assets within the new regime and if so whetherworkable rules can be devised. It will continue to discuss these issues with theleasing industry.

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Computational approach

8. The new rules will modernise and simplify the way in which receipts andexpenditure are brought into account for tax. Where an asset is held for thepurposes of a trade, these will form part of the company’s trading profit or loss.A similar approach will apply in the case of property letting businesses. In thecase of other business intangibles, the approach will follow the precedent setby the corporate debt regime. Any excess of receipts over expenditure will betaxed under Case VI of Schedule D as a single item of profit; while any excessof expenditure over receipts will be relieved as a separate item available forrelief against other profits of the company or for surrender as group relief.

9. The March 2001 Technical Note recognised that there may be a case formaking special provision for assets regarded as having an ‘indefinite economiclife’ and therefore not subject to amortisation in the accounts. This suggestionwas generally welcomed. The Government intends to allow companies toelect for relief at a fixed annual rate of 4% on a straight line basis, as analternative to following the accounting treatment. This will make reliefavailable for some of the most durable intangible assets, while in practiceensuring that the tax deductions are based on the accounting entries in thegreat majority of cases.

Reinvestment relief

10. The intangibles regime includes a relief which will allow profits on therealisation of intangible assets to be rolled over on reinvestment in newintangibles. The relief will operate broadly as follows:

• relief will be available on the excess of the realisation proceeds overoriginal cost;

• full relief will be available when the entire realisation proceeds arereinvested. Otherwise the profit eligible for relief will be reduced by theamount not reinvested;

• the amount of profit rolled over will be deducted from the expenditure onthe new intangibles (for the purposes of amortisation relief and, ifnecessary, in calculating the profit or loss on a subsequent sale);

• as under capital gains rules, reinvestment will need to take place within theperiod from one year before to three years after the old asset is realised;

• relief will be available in the case of fixed assets used for businesspurposes, regardless of their trade or non-trade status (and regardless ofwhether they have previously been recognised on the company’s balancesheet);

• it will apply on a group-wide basis in broadly the same way as capital gainsroll-over relief; and

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• it will be extended to apply in certain cases where reinvestment takes theform of a purchase of the shares in a company rather than a directacquisition of intangible assets (see paragraphs 14-15 below).

Part-disposals

11. The March 2001 Technical Note highlighted the difficulties involved in definingthe boundary between part disposals which should attract roll-over relief andtransactions involving the ordinary exploitation of an asset (for example thegranting of a licence to exploit a patent for a few years in a particular location)which should not. The receipts arising in the latter case would generally betaxed as revenue under current law.

12. The March Technical Note asked for views on a suggestion that roll-over reliefshould only be available where the book value of the part of the asset retainedimmediately after the disposal was less than 25% of the book valueimmediately prior to disposal. Respondents generally thought this approachwas too restrictive and would be difficult to operate in practice. Most preferredto leave the accounting treatment to determine where a genuine disposal hadtaken place.

13. The Government agrees that, in principle, this would be the best way forward,although it remains concerned that the accountancy rules may not alwaysdefine the boundary between the disposal and the ordinary exploitation of anasset in a way which ensures that roll-over relief is properly targeted.Therefore, where a transaction is properly reflected in a company’s accountsas a disposal of a part of an asset, roll-over relief will be available (subject tothe rules governing the relief, including the general requirement that thedisposal proceeds must exceed the original cost of the asset). But in order toensure that the Exchequer is adequately protected, roll-over relief will not beavailable in the case of a part disposal to a related party.

Roll-over relief on the acquisition of a company

14. The new regime will include a provision to allow companies to roll over profitson the disposal of intangible assets into the acquisition of a company wherethe newly acquired company has assets already attracting relief within theintangibles regime. Respondents to the March Technical Note generallywelcomed the proposal to include a provision of this sort, aimed at achievinggreater neutrality between acquisitions in asset and share form. But therewere some concerns about its potential complexity.

15. The rule has been designed to go with the grain of the new regime’s roll-overand group rules, with the relief available where a 75% interest in a company isacquired. The legislation to achieve this is short and relatively straightforward.

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Groups, related parties and safeguards

Intra-group transfers

16. A ‘stand in shoes’ approach will generally apply where intangible assets aretransferred between members of a group, defined in broadly the same termsas for capital gains purposes. The company acquiring the asset will inherit thewritten down value and tax history of the asset.

17. Special rules will apply in certain cases where intra-group transfers take placeat other than book value. The tax treatment will follow the accounting entriesbut only to the extent that:

• any increase over book value would (exceptionally) have been recognisedas a revaluation if the asset had not been transferred; or

• any decrease below book value would have been recognised as animpairment loss if the asset had not been transferred.

Other related party transfers

18. Other transfers between related parties will be treated as taking place at anarm’s length price. Such transfers are subject to the rule described atparagraph 27 below, which sets out the circumstances in which assets enterthe new regime.

Business reorganisations

19. The new regime will also incorporate a series of reliefs designed to ensure thatan immediate tax charge does not arise in the case of:

• the incorporation of a foreign branch;

• the transfer of a business as part of a scheme of reconstruction oramalgamation;

• transfers of trades between companies resident in the EU, where the ECMergers Directive applies; and

• on certain transfers involving building societies.

Safeguards

20. A degrouping charge will apply, with a relief for bona fide mergers on the linesof the existing capital gains rule.

21. The March Technical Note suggested that the degrouping charge would departfrom the capital gains model in two respects: the charge would fall on thevendor group and it would be subject to roll-over relief. These aspects of thecharge were welcomed by some of those who responded to the Technical

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Note. But others were concerned at the impact of any divergence between theintangibles and capital gains degrouping charges.

22. Since March, proposals have been put forward to reform the capital gainsdegrouping charge (section 179 TCGA 1992). The July consultation documenton large business tax included a proposal that capital gains roll-over reliefshould be extended to section 179 charges. And the follow-up Technical Notefurther proposes an elective regime whereby a section 179 gain can betreated as arising to a company elsewhere in the vendor group.

23. These proposals provide the opportunity to align the intangibles and capitalgains rules while still meeting the policy objective behind what was proposedin March. The intangibles degrouping charge will therefore fall on thedegrouping company, but with provision for an election so that the charge canbe treated as arising elsewhere in the vendor group.

24. The intangibles regime also includes an ‘exit charge’ which will apply where acompany with intangible assets changes its tax residence so that the assetsno longer remain within the charge to UK corporation tax. There will also be aprovision to defer the charge in certain cases where assets are used for thepurposes of a trade carried on outside the UK, as suggested by somerespondents to the March Technical Note. This provision will be modelled onthe equivalent capital gains relief (Section 187 TCGA).

25. The new regime includes a ‘main purpose’ test, modelled on the similar testincluded in the R&D tax credits legislation (paragraph 21 of Schedule 20Finance Act 2000) and parts of the capital allowances code. This provision willprovide a safeguard, in particular, against the artificial reduction of assetvalues (in order to accelerate amortisation deductions or to depress thetaxable proceeds on a disposal to a related party) and arrangements toconvert pre-commencement assets into new regime assets.

Transition and commencement

26. The March Technical Note explained that existing assets would be‘grandfathered’, with the new regime applying only to assets acquired orcreated after commencement day. The Government’s intention is that, subjectto consultation, the regime should commence with effect from 1 April 2002.

27. Companies will benefit from the new relief where they buy intangible assets onor after the commencement date from:

• an unrelated party; or

• a related company which was entitled to new regime treatment in respect ofthe assets transferred; or

• a related party which acquired the assets on or after the commencement datefrom an unrelated party.

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28. Sales of assets will be taxed under current rules where those assets were inexistence before the commencement date and have remained in the sameownership (that is in the hands of their existing owners or in the sameeconomic family).

29. But from commencement day, the new regime roll-over relief will applywherever intangible assets are disposed of. Goodwill and agricultural andfishing quotas acquired and disposed of by companies will no longer bequalifying assets for the purposes of capital gains roll-over relief. But anexception to this rule will apply where a company disposes of pre-commencement goodwill or quotas after the commencement date and hasacquired new assets qualifying for capital gains roll-over relief before that dateand within the 12 month period prior to the disposal. Under thesecircumstances, the option of a capital gains roll-over claim in respect of thatreinvestment will be available.

30. The March Technical Note specifically sought views on whether grandfatheringwas appropriate in the case of Lloyd’s syndicate capacity which is alreadywithin an income regime. Following consultation, the Government proposesthat existing syndicate capacity should be brought into the regime along withcertain telecommunications rights which are also already treated as revenueitems.

31. A number of respondents to the March Technical Note queried the interactionof the new rules for intangibles with the controlled foreign companies (CFC)regime. The issue arises because currently capital expenditure and receipts inrespect of intangible assets will be taxed on an income basis under the newregime and therefore be taken into account in computing the profits ofcontrolled foreign companies and in determining whether the various tests forexclusion from the regime are met. The intangibles transitional andcommencement rules will apply for these purposes as they do more generallyfor corporation tax. Currently capital expenditure and receipts in respect ofintangibles will only be taken into account for CFC purposes in the case ofwhat would be new regime assets in the hands of a company within the chargeto corporation tax.

Schedule: Intangible fixed assets

SCHEDULE: INTANGIBLE FIXED ASSETSCONSULTATION DRAFT: 27TH NOVEMBER 2001

Contents

PART A: INTRODUCTIONA1 Gains and losses in respect of intangible fixed assetsA2 Intangible assetsA3 Fixed assetsA4 GoodwillA5 Meaning of “for accounting purposes”A6 Company not drawing up correct accountsA7 Reference to consolidated group accounts

PART B: DEBITS IN RESPECT OF INTANGIBLE FIXED ASSETS

B1 IntroductionB2 Expenditure written off as it is incurredB3 Writing down on accounting basis: amortisation or impairment lossB4 Writing down: election for fixed-rate basisB5 Writing down on fixed-rate basis: calculationB6 Reversal of previous accounting credit

PART C: CREDITS IN RESPECT OF INTANGIBLE FIXED ASSETS

C1 IntroductionC2 Receipts recognised as they accrueC3 RevaluationC4 Negative goodwillC5 Reversal of previous accounting debit

PART D: REALISATION OF INTANGIBLE FIXED ASSETS

D1 IntroductionD2 Meaning of “realisation”D3 Realisation of asset written down for tax purposesD4 Realisation of asset shown in balance sheet not written down for tax purposesD5 Realisation of asset not shown in balance sheetD6 Apportionment in case of part realisationD7 Meaning of “proceeds of realisation”D8 Relief in case of reinvestmentD9 Abortive expenditure on realisation

PART E: CALCULATION OF TAX WRITTEN DOWN VALUE

E1 Asset written down on accounting basisE2 Asset written down at fixed rateE3 Effect of part realisation of asset

PART F: HOW DEBITS AND CREDITS ARE GIVEN EFFECT

F1 IntroductionF2 Asset held for purposes of trade

Consultation draft: 27th November 2001 page i


F3 Asset held for purposes of property businessF4 Asset held for purposes of mines, transport undertakings, etcF5 Non-trading credits and debitsF6 Claim to set non-trading loss against total profitsF7 Surrender of non-trading loss by way of group reliefF8 Change of ownership of company with unused non-trading loss

PART G: ROLL-OVER RELIEF IN CASE OF REINVESTMENTG1 The reliefG2 Conditions to be met in relation to the old asset and its realisationG3 Conditions to be met in relation to the expenditure on other assetsG4 Claim for reliefG5 How the relief is givenG6 Declaration of provisional entitlement to reliefG7 Disposal and reacquisitionG8 Deemed realisations and deemed acquisitions to be disregarded

PART H: GROUPS OF COMPANIES

H1 IntroductionH2 General rule: a company and its 75% subsidiaries form a groupH3 Membership of group restricted to effective 51% subisidiaries of principal

companyH4 Principal company cannot be 75% subsidiary of another companyH5 Company cannot be member of more than one groupH6 Continuity of identity of groupH7 Meaning of “effective 51% subsidiary”H8 Meaning of equity holder and profits available for distributionH9 Supplementary provisions

PART I: APPLICATION OF PROVISIONS TO GROUPS OF COMPANIES

I1 Transfers within a groupI2 Transfers within a group not at book valueI3 Roll-over relief on reinvestment: application to group memberI4 Roll-over relief on reinvestment: acquisition of company becoming member of

groupI5 Company ceasing to be a member of group (“degrouping”)I6 Degrouping: associated companies leaving group at same timeI7 Degrouping: principal company becoming member of another groupI8 Degrouping: merger carried out for bona fide commercial reasonI9 Degrouping: group member ceasing to existI10 Degrouping: supplementary provisionsI11 Degrouping: application of roll-over relief in relation to degrouping chargeI12 Reallocation of degrouping charge within groupI13 Application of roll-over relief in relation to reallocated degrouping chargeI14 Recovery of degrouping charge from other companiesI15 Recovery of degrouping charge from other companies: procedure etcI16 Recovery of degrouping charge from other companies: time limit

PART J: EXCLUDED ASSETS

J1 IntroductionJ2 Assets entirely excluded: rights over tangible assetsJ3 Assets entirely excluded: oil licencesJ4 Assets entirely excluded: financial assetsJ5 Assets entirely excluded: rights in companies, trusts, etcJ6 Assets entirely excluded: non-commercial purposes etc

Consultation draft: 27th November 2001 page ii


J7 Assets excluded except as regards royalties: life assurance or mutual businessJ8 Assets excluded except as regards royalties: films and sound recordingsJ9 Assets excluded except as regards royalties: computer software treated as part

of cost of related hardwareJ10 Assets excluded to extent specified: research and developmentJ11 Assets excluded to extent specified: election to exclude capital expenditure on

computer software

PART K: TRANSFER OF BUSINESS OR TRADEK1 Company reconstruction or amalgamationK2 Transfer of UK trade between companies resident in different EU member

StatesK3 Postponement of charge on transfer of assets to non-resident companyK4 Transfer of non-UK tradeK5 Procedure on application for clearanceK6 Transfer of business of building society to companyK7 Amalagamation of or transfer of engagements by certain societies

PART L: TRANSACTIONS BETWEEN RELATED PARTIESL1 Transfer between company and related party treated as being at market valueL2 Exclusion of roll-over relief in case of part realisation involving related partyL3 Restriction of roll-over relief in case of transfer between company and related

party at an undervalueL4 Delayed payment of royalty payable by company to related partyL5 Meaning of “related party”L6 Meaning of “control” and “major interest”L7 Rights and powers to be taken into account: generalL8 Rights and powers to be taken into account: rights and powers held jointlyL9 Rights and powers to be taken into account: partnershipsL10 Supplementary provisions

PART M: SUPPLEMENTARY PROVISIONSM1 Treatment of grants and other contributions to expenditureM2 Grants to be left out of account for tax purposesM3 Assets acquired or disposed of togetherM4 Treatment of fungible assetsM5 Asset ceasing to be chargeable intangible asset: deemed realisation at market

valueM6 Asset ceasing to be chargeable intangible asset: postponement of gain in certain

casesM7 Asset becoming chargeble intangible assetM8 Tax avoidance arrangements to be disregardedM9 Debits not allowed in respect of expenditure not generally deductible for tax

purposesM10 Delayed payment of emolumentsM11 Delayed payment of pension contributionsM12 Bad debts etcM13 Assumptions for computing chargeable profits of controlled foreign companies

PART N: COMMENCEMENT AND TRANSITIONAL PROVISIONS

N1 Commencement dateN2 Application of Schedule to assets created or acquired after commencementN3 Application of Schedule to royaltiesN4 Assets regarded as created or acquired when expenditure incurred

Consultation draft: 27th November 2001 page iii


N5 Internally-generated goodwill: whether created before or after commencementN6 Certain other internally-generated assets: whether created before or after

commencementN7 When expenditure treated as incurred: general ruleN8 When expenditure treated as incurred: chargeable gains rule to be followed in

certain casesN9 When expenditure treated as incurred: capital allowances rule to be followed

in certain casesN10 Application of Schedule to existing assets: certain telecommunication rightsN11 Application of Schedule to existing assets: Lloyd’s syndicate capacityN12 Roll-over relief: application in relation to realisation of existing assets after

commencementN13 Roll-over relief: transitory interaction with relief on replacement of business

assets

PART O: INTERPRETATION

O1 Meaning of “generally accepted accounting practice”O2 Meaning of “expenditure on” an assetO3 References to amounts recognised in “profit and loss account”O4 Meaning of “chargeable intangible asset” and “chargeable realisation gain”O5 Meaning of “royalty”O6 Meaning of “tax-neutral transfer”O7 Meaning of “the Inland Revenue”O8 Meaning of “the Taxes Acts”O9 Index of defined expressions

Consultation draft: 27th November 2001 page iv


SCHEDULE

INTANGIBLE FIXED ASSETS

PART A

INTRODUCTION

Gains and losses in respect of intangible fixed assets

A1 (1) A company’s gains in respect of intangible fixed assets are chargeable tocorporation tax as income in accordance with this Schedule.

(2) This Schedule also has effect for determining how a company’s losses inrespect of intangible fixed assets are brought into account for the purposes ofcorporation tax.

(3) Except where otherwise indicated, the amounts to be brought into account inaccordance with this Schedule in respect of any matter are the only amountsto be brought into account for the purposes of corporation tax in respect ofthat matter.

Intangible assets

A2 (1) In this Schedule "intangible asset" has the meaning it has for accountingpurposes.

(2) References in this Schedule to an intangible asset include, in particular, anyintellectual property.For this purpose “intellectual property” means—

(a) any patent, trade mark, registered design, copyright or design right,plant breeders' rights or rights under section 7 of the Plant VarietiesAct 1997,

(b) any right under the law of a country or territory outside the UnitedKingdom corresponding to, or similar to, a right within paragraph (a),

(c) any information or technique not protected by a right withinparagraph (a) or (b) but having industrial, commercial or othereconomic value, or

(d) any licence or other right in respect of anything within paragraph (a),(b) or (c).

Fixed assets

A3 (1) In this Schedule a “fixed asset”, in relation to a company, means an asset thatis held, or intended to be held, by the company for use on a continuing basisin the course of the company's activities.

(2) References in this Schedule to a fixed asset include—(a) an internally generated fixed asset; and(b) an option or other right—

(i) to acquire an asset that if acquired would be a fixed asset, or(ii) to dispose of a fixed asset.

(3) Unless otherwise indicated, the provisions of this Schedule apply to a fixedasset whether or not it is capitalised in the company's accounts.

Consultation draft: 27th November 2001 page 1


Goodwill

A4 (1) Except as otherwise indicated, the provisions of this Schedule apply togoodwill as to an intangible fixed asset.

(2) In this Schedule "goodwill" has the meaning it has for accounting purposes.

Meaning of “for accounting purposes”

A5 In this Schedule “for accounting purposes” means for the purposes ofaccounts drawn up in accordance with generally accepted accountingpractice.

Company not drawing up correct accounts

A6 (1) If a company does not draw up accounts in accordance with generallyaccepted accounting practice (“correct accounts”)—

(a) the provisions of this Schedule apply as if correct accounts had beendrawn up, and

(b) the amounts referred to in this Schedule as being recognised foraccounting purposes are those that would have been recognised ifcorrect accounts had been drawn up.

(2) If a company draws up accounts that rely to any extent on amounts derivedfrom an earlier period of account for which the company did not draw upcorrect accounts, the amounts referred to in this Schedule as being recognisedfor accounting purposes in the later period are those that would have beenrecognised if correct accounts had been drawn up for the earlier period.

(3) The provisions of this paragraph apply where the company does not draw upaccounts at all as well as where it draws up accounts that are not correct.

Reference to consolidated group accounts

A7 (1) In determining whether a company's accounts are correct, reference may bemade to any view as to—

(a) the useful life of an asset, or(b) the economic value of an asset,

taken for the purposes of consolidated group accounts prepared for anygroup of companies of which the company is a member.

(2) In sub-paragraph (1)—“consolidated group accounts” means group accounts that satisfy the

requirements of—(a) section 227 of the Companies Act 1985, or(b) in Northern Ireland, Article 235 of the Companies (Northern

Ireland) Order 1986,or the corresponding requirements of the law of a country outside theUnited Kingdom; and

“group of companies” means a group as defined in—(a) section 262(1) of the Companies Act 1985, or(b) in Northern Ireland, Article 270(1) of the Companies (Northern

Ireland) Order 1986,



or the corresponding provision of the law of a country outside the UnitedKingdom.

(3) This paragraph does not apply if or to the extent that the consolidated groupaccounts are prepared—

(a) in accordance with the requirements of the law of a country outside theUnited Kingdom, and

(b) on a basis that, in relation to the matters mentioned in sub-paragraph(1), substantially diverges from generally accepted accountingpractice.

PART B

DEBITS IN RESPECT OF INTANGIBLE FIXED ASSETS

Introduction

B1 (1) This Part provides for debits to be brought into account by a company for taxpurposes in respect of—

(a) expenditure on an intangible fixed asset that is written off foraccounting purposes as it is incurred (see paragraph B2);

(b) writing down the capitalised cost of an intangible fixed asset—(i) on an accounting basis (see paragraph B3), or

(ii) on a fixed-rate basis (see paragraphs B4 and B5); and(c) the reversal of a previous accounting credit in respect of an intangible

fixed asset (see paragraph B6).(2) This Part does not apply in relation to amounts brought into account in

connection with the realisation of an intangible fixed asset (see Part D).

Expenditure written off as it is incurred

B2 (1) Where in a period of account expenditure on an intangible fixed asset isrecognised in a company's profit and loss account, a corresponding debitshall be brought into account for tax purposes.

(2) Subject to any adjustment required for tax purposes, the amount of the debitrecognised for tax purposes is the same as the amount of the loss recognisedby the company for accounting purposes.

(3) Nothing in—section 74(1)(m) or (p) of the Taxes Act 1988 (annual payments and patent

royalties not to be deducted in computing profits under Case I or II ofSchedule D), or

section 817(1)(b) of that Act (annual payments not to be deducted inarriving at the amount of profits or gains for tax purposes),

has effect to prevent a debit being brought into account for tax purposes by acompany in accordance with this paragraph (and given effect accordinglyunder Part F).

(4) This paragraph does not apply to a loss that represents previously capitalisedexpenditure.



Writing down on accounting basis: amortisation or impairment loss

B3 (1) Where in a period of account a loss is recognised in the company's profit andloss account in respect of capitalised expenditure on an intangible fixedasset—

(a) by way of amortisation, or(b) as a result of an impairment review,

a corresponding debit shall be brought into account for tax purposes.(2) The reference in sub-paragraph (1) to an “impairment review” does not

include the valuation of an asset for the purpose of determining the amountof expenditure to be capitalised in the first place.

(3) In this paragraph “capitalised” means capitalised for accounting purposes.(4) The amount of the debit for tax purposes in respect of an accounting debit in

the period of account in which any expenditure on the asset is first capitalisedfor accounting purposes is:

where—Accounting Loss is the amount of the loss recognised for accounting

purposes,Tax Cost is the amount of expenditure on the asset that is recognised for tax

purposes, andAccounting Cost is the amount capitalised for accounting purposes in

respect of expenditure on the asset.(5) Subject to any adjustment required for tax purposes, the amount of the

expenditure on the asset that is recognised for tax purposes is the same as theamount of expenditure on the asset capitalised by the company foraccounting purposes.

(6) The amount of the debit for tax purposes in respect of an accounting debit ina subsequent period of account is:

where—Accounting Loss is the amount of the loss recognised for accounting

purposes,Tax Value is the tax written down value of the asset immediately before the

amortisation charge is made or, as the case may be, before theimpairment loss is recognised for accounting purposes, and

Book Value is the value of the asset for accounting purposes by reference towhich the amortisation charge is calculated or, as the case may be, byreference to which the impairment review is carried out.

Writing down: election for fixed-rate basis

B4 (1) A company may elect to write down the cost of an intangible fixed asset fortax purposes at a fixed rate.

Accounting Loss Tax CostAccounting Cost--------------------------------------------×

Accounting Loss Tax ValueBook Value----------------------------×



(2) An election to that effect may be made whether or not the asset is writtendown for accounting purposes.

(3) An election under this paragraph must be made—(a) in writing,(b) to the Inland Revenue,(c) no later than two years after the end of the accounting period in which

the asset is acquired or created.(4) An election under this paragraph in relation to an asset has effect in relation

to all expenditure on the asset that is capitalised for accounting purposes.(5) An election under this paragraph is irrevocable.(6) Paragraph B3 (writing down on accounting basis) does not apply to an asset

in respect of which an election has been made under this paragraph.

Writing down on fixed-rate basis: calculation

B5 (1) Where an election has been made for writing down at a fixed rate, a debitequal to—

(a) 4% of the cost of the asset, or(b) if less, the balance of the tax written down value,

shall be brought into account for tax purposes in each accounting periodbeginning with that in which the expenditure is incurred.

(2) If the accounting period is less than 12 months, the amount mentioned in sub-paragraph (1)(a) above shall be proportionately reduced.

(3) The cost of the asset means the cost recognised for tax purposes.(4) Subject to any adjustment required for tax purposes, the cost of the asset

recognised for tax purposes is the same as the amount of expenditure on theasset capitalised by the company for accounting purposes.

Reversal of previous accounting credit

B6 (1) Where in a period of account a loss is recognised in the company's profit andloss account reversing (in whole or in part) a gain recognised in a previousperiod of account in respect of which a credit was brought into account for taxpurposes under Part C (credits in respect of intangible fixed assets), acorresponding debit shall be brought into account for tax purposes.

(2) The amount of the debit to be brought into account for tax purposes is:

where-Accounting Loss is the amount of the loss recognised for accounting

purposes,Accounting Gain is the amount of the gain that is reversed (in whole or in

part), andPrevious Credit is the amount of the credit previously brought into account

for tax purposes in respect of the gain.

Accounting Loss Previous CreditAccounting Gain---------------------------------------------×



PART C

CREDITS IN RESPECT OF INTANGIBLE FIXED ASSETS

Introduction

C1 (1) This Part provides for credits to be brought into account by a company for taxpurposes in respect of—

(a) receipts in respect of intangible fixed assets that are recognised in theprofit and loss account as they accrue (see paragraph C2),

(b) revaluation of an intangible fixed asset (see paragraph C3),(c) credits recognised for accounting purposes in respect of negative

goodwill (see pararaph C4), and(d) the reversal of previous accounting debits in respect of an intangible

fixed asset (see paragraph C5).(2) This Part does not apply in relation to amounts brought into account in

connection with the realisation of an intangible fixed asset within themeaning of Part D.

Receipts recognised as they accrue

C2 (1) Where in a period of account a gain representing a receipt in respect of anintangible fixed asset is recognised in the company's profit and loss account,a corresponding credit shall be brought into account for tax purposes.

(2) Subject to any adjustment required for tax purposes, the amount of the creditrecognised for tax purposes under this paragraph is the same as the amountof the gain recognised by the company for accounting purposes.

Revaluation

C3 (1) Where in a period of account the carrying value for accounting purposes ofan intangible fixed asset is increased on a revaluation, a credit shall bebrought into account for tax purposes.

(2) The amount of the credit for tax purposes is—(a) the amount corresponding for tax purposes to the increase in value

(see sub-paragraph (3)), or(b) if less, the net aggregate amount of relevant tax debits previously

brought into account (see sub-paragraph (4)).(3) The amount corresponding for tax purposes to the increase in value is:

where—Accounting Adjustment is the amount of the increase in value for

accounting purposes,Tax Value is the tax written down value of the asset immediately before the

revaluation, andBook Value is the value of the asset for accounting purposes by reference to

which the revaluation is carried out.

Accounting Adjustment Tax ValueBook Value------------------------------×



(4) The net aggregate amount of relevant tax debits previously brought intoaccount is:

where—Previous Debits is the total amount of debits previously brought into

account for tax purposes in respect of the asset under paragraph B3(writing down: amortisation or impairment loss), and

Previous Credits is the total amount of any credits previously brought intoaccount for tax purposes in respect of the asset under this paragraph.

(5) For the purposes of this paragraph a “revaluation” includes—(a) the valuation of an asset for which a value is shown in the company’s

balance sheet but which has not previously been the subject of avaluation, and

(b) the restoration of past losses.(6) This paragraph does not apply to an asset in respect of which an election has

been made under paragraph B4 (election for writing down at fixed rate).

Negative goodwill

C4 (1) Where in a period of account a gain is recognised in the company's profit andloss account in respect of negative goodwill arising on an acquisition of abusiness, a corresponding credit shall be brought into account for taxpurposes.

(2) The amount of the credit is so much of the gain recognised for accountingpurposes as, on a just and reasonable apportionment, is attributable tointangible fixed assets.

Reversal of previous accounting debit

C5 (1) Where in a period of account a gain is recognised in the company's profit andloss account reversing (in whole or in part) a loss recognised in a previousperiod of account in respect of which a debit was brought into account for taxpurposes under Part B (debits in respect of intangible fixed assets), acorresponding credit shall be brought into account for tax purposes.

(2) The amount of the credit to be brought into account for tax purposes is:

where—Accounting Gain is the amount of the gain recognised for accounting

purposes,Accounting Loss is the amount of the loss that is reversed (in whole or in

part), andTax Debit is the amount of the tax debit brought into account in respect of

the loss.(3) This paragraph does not apply to a gain on a revaluation within the meaning

of paragraph C3.

Previous Debits Previous Credits–

Accounting Gain Tax DebitAccounting Loss----------------------------------------×



PART D

REALISATION OF INTANGIBLE FIXED ASSETS

Introduction

D1 This Part provides for credits or debits to be brought into account for taxpurposes on the realisation by a company of an intangible fixed asset.

Meaning of "realisation"

D2 (1) References in this Schedule to the realisation of an intangible fixed asset areto a transaction resulting, in accordance with generally accepted accountingpractice—

(a) in the asset ceasing to be recognised in the company's balance sheet, or(b) in a reduction in the value recognised in the company's balance sheet

in respect of the asset (the “carrying value”).For this purpose a “transaction” includes any event giving rise to a gainrecognised for accounting purposes.

(2) In relation to an intangible fixed asset that has no balance sheet value (or nolonger has a balance sheet value), sub-paragraph (1) applies as if it did havea balance sheet value.

(3) References in this Schedule to a "part realisation" are to a realisation fallingwithin sub-paragraph (1)(b).

Realisation of asset written down for tax purposes

D3 (1) This paragraph applies where there is a realisation of an intangible fixed assetin respect of which debits have been brought into account for tax purposesunder paragraph B3 (writing down on accounting basis) or under paragraphB4 (writing down at fixed rate).

(2) Where this paragraph applies—(a) if the proceeds of realisation exceed the tax written down value of the

asset, a credit equal to the excess shall be brought into account for taxpurposes;

(b) if the proceeds of realisation are less than the tax written down valueof the asset, a debit equal to the shortfall shall be brought into accountfor tax purposes; and

(c) if there are no proceeds of realisation, a debit equal to the tax writtendown value shall be brought into account for tax purposes.

(3) References in this paragraph to the tax written down value of an asset are toits tax written down value immediately before the realisation.

Realisation of asset shown in balance sheet not written down for tax purposes

D4 (1) This paragraph applies where there is a realisation of an intangible fixed assetfor which a value is shown in the company's balance sheet but which is notwithin paragraph D3.

(2) Where this paragraph applies—



(a) if the proceeds of realisation exceed the cost of the asset recognised fortax purposes, a credit equal to the excess shall be brought into accountfor tax purposes;

(b) if the proceeds of realisation are less than the cost of the assetrecognised for tax purposes, a debit equal to the shortfall shall bebrought into account for tax purposes; and

(c) if there are no proceeds of realisation, a debit equal to the cost of theasset recognised for tax purposes shall be brought into account for taxpurposes.

(3) Subject to any adjustment required for tax purposes, the cost of the assetrecognised for tax purposes is the same as the amount of expenditure on theasset capitalised by the company for accounting purposes.

Realisation of asset not shown in balance sheet

D5 (1) This paragraph applies where there is a realisation of an intangible fixed assetin relation to which neither paragraph D3 nor D4 applies.

(2) Where this paragraph applies, a credit equal to any proceeds of realisationshall be brought into account for tax purposes.

Apportionment in case of part realisation

D6 (1) In the case of a part realisation the reference in paragraph D3 to the taxwritten down value of the asset, or, as the case may be, the reference inparagraph D4 to the cost of the asset, shall be read as references to theappropriate proportion of that amount.

(2) That proportion is given by:

where—Reduction in Book Value is the difference between the carrying value for

accounting purposes immediately before the realisation compared withthat immediately after the realisation; and

Previous Book Value is the carrying value for accounting purposesimmediately before the realisation.

Meaning of "proceeds of realisation"

D7 (1) In this Schedule the “proceeds of realisation” of an asset means the amountrecognised for accounting purposes as the proceeds of realisation, reduced bythe amount so recognised as incidental costs of realisation.

(2) The amounts referred to in sub-paragraph (1) are subject to any adjustmentrequired for tax purposes.

Relief in case of reinvestment

D8 The preceding provisions of this Part have effect subject to Part G (relief incase of reinvestment).

Reduction in Book ValuePrevious Book Value

-------------------------------------------------------------



Abortive expenditure on realisation

D9 (1) Where in a period of account a loss is recognised in the company's profit andloss account in respect of expenditure by the company for the purposes of atransaction that would constitute a realisation of an intangible fixed asset, butthe transaction does not proceed to completion, a corresponding debit shallbe brought into account for tax purposes.

(2) Subject to any adjustment required for tax purposes, the amount of the debitrecognised for tax purposes is the same as the amount of the loss recognisedby the company for accounting purposes.

PART E

CALCLUATION OF TAX WRITTEN DOWN VALUE

Asset written down on accounting basis

E1 (1) For the purposes of this Schedule the tax written down value of an intangiblefixed asset to which paragraph B3 applies (writing down on accounting basis)is given by:

where—Tax Cost is the cost of the asset recognised for tax purposes;Debits is the total amount of the debits previously brought into account for

tax purposes in respect of the asset under paragraph B3; andCredits is the total amount of any credits previously brought into account

for tax purposes in respect of the asset under paragraph C3 (revaluation).(2) Subject to any adjustment required for tax purposes, the cost of the asset

recognised for tax purposes is the same as the amount of the expenditure onthe asset that is capitalised for accounting purposes.

(3) This paragraph has effect subject to paragraph E3 in the case of an asset thathas been the subject of a part realisation.

Asset written down at fixed rate

E2 (1) For the purposes of this Schedule the tax written down value of an intangiblefixed asset in respect of which an election has been made under paragraph B4(election for writing down at fixed rate) is given by:

where—Tax Cost is the cost of the asset recognised for tax purposes; andDebits is the total amount of the debits previously brought into account for

tax purposes in respect of the asset under paragraph B5 (writing downon fixed-rate basis: calculation).

(2) Subject to any adjustment required for tax purposes, the cost of the assetrecognised for tax purposes is the same as the amount of the expenditure onthe asset that is capitalised for accounting purposes.

Tax Cost Debits Credits+–

Tax Cost Debits–



(3) This paragraph has effect subject to paragraph E3 in the case of an asset thathas been the subject of a part realisation.

Effect of part realisation of asset

E3 (1) The tax written down value of an intangible asset that has been the subject ofa part realisation is determined as follows.

(2) The tax written down value of the asset immediately after the part realisationis given by:

where—Previous Tax Value is the tax written down value of the asset immediately

before the part realisation;New Book Value is the carrying value of the asset for accounting purposes

immediately after the part realisation; andPrevious Book Value is the carrying value for accounting purposes

immediately before the part realisation.(3) Subsequently, the tax written down value of the asset is determined in

accordance with paragraph E1 or E2—(a) taking the cost of the asset recognised for tax purposes to be the tax

written down value given by sub-paragraph (2) above together withthe cost recognised for tax purposes of subsequent expenditure on theasset that is capitalised for accounting purposes; and

(b) taking account only of debits and credits brought into account for taxpurposes subsequent to the part realisation.

(4) On a further part realisation, the preceding provisions of this paragraphapply again.

PART F

HOW CREDITS AND DEBITS ARE GIVEN EFFECT

Introduction

F1 (1) Credits and debits to be brought into account for tax purposes under thisSchedule are given effect in accordance with this Part.

(2) Credits and debits in respect of assets held for the purposes mentioned in—(a) paragraph F2 (assets held for purposes of trade), or(b) paragraph F3 (assets held for purposes of property business) or (c) paragraph F4 (assets held for purposes of certain concerns taxed under

Case I of Schedule D),are given effect in accordance with the paragraph in question.

(3) Other credits and debits (“non-trading credits and debits”) are given effect inaccordance with paragraphs F5 to F8 .

Previous Tax Value New Book ValuePrevious Book Value---------------------------------------------------×



(4) Any apportionment necessary where an asset is held for purposes fallingwithin more than one of the provisions mentioned above shall be made on ajust and reasonable basis.

Asset held for purposes of trade

F2 Credits and debits to be brought into account in any accounting period inrespect of an asset held by the company for the purposes of a trade carried onby it in that period are given effect by treating—

(a) credits as receipts of the trade, and(b) debits as expenses of the trade,

in calculating the profits of the trade for tax purposes.

Asset held for purposes of property business

F3 (1) Credits and debits to be brought into account in any accounting period inrespect of an asset held by the company for the purposes of a propertybusiness carried on by it in that period are given effect by treating—

(a) credits as receipts of the business, and(b) debits as expenses of the business,

in computing the profits of the business for tax purposes.(2) A “property business” means—

(a) an ordinary Schedule A business,(b) a furnished holiday lettings business, or(c) an overseas property business.

(3) In this paragraph—"ordinary Schedule A business" means a Schedule A business except in so

far as it is a furnished holiday lettings business; and"furnished holiday lettings business" means a Schedule A business in so far

as it consists of the commercial letting of furnished holidayaccommodation (as defined in section 504 of the Taxes Act 1988) in theUnited Kingdom.

(4) Section 503 of the Taxes Act 1988 (letting of furnished holidayaccommodation treated as separate, single trade) applies for the purposes ofthis Schedule.

Assets held for purposes of mines, transport undertakings, etc.

F4 Credits and debits to be brought into account in any accounting period inrespect of an asset held by the company for the purposes of a concern listedin section 55(2) of the Taxes Act 1988 (mines, transport undertakings, etc.) thatis carried on by the company in that period are given effect by treating—

(a) credits as receipts of the concern, and(b) debits as expenses of the concern,

in computing the profits of the concern under Case I of Schedule D.

Non-trading credits and debits

F5 (1) Where, or to the extent that, in an accounting period, there are—



(a) credits in respect of intangible fixed assets that are not within any ofparagraphs F2 to F4 (“non-trading credits”), or

(b) debits in respect of intangible fixed assets that are not within any ofthose paragraphs (“non-trading debits”),

the company's aggregate non-trading gain or loss on intangible fixed assetsmust be calculated.

(2) There is a non-trading gain on intangible fixed assets if—(a) there are only non-trading credits, or(b) there are both non-trading credits and non-trading debits and the

aggregate of the former exceeds the aggregate of the latter.The amount of the non-trading gain is the aggregate amount of the credits or,as the case may be, the amount of the excess.

(3) There is a non-trading loss on intangible fixed assets if—(a) there are only non-trading debits, or(b) there are both non-trading credits and non-trading debits and the

aggregate of the latter exceeds the aggregate of the former.The amount of the non-trading loss is the aggregate amount of the debits or,as the case may be, the amount of the excess.

(4) A non-trading gain on intangible fixed assets is chargeable to tax under CaseVI of Schedule D.

(5) A non-trading loss on intangible fixed assets is given effect in accordancewith the following paragraphs.

Claim to set non-trading loss against total profits

F6 (1) A company that has a non-trading loss on intangible fixed assets for anaccounting period may claim to have the whole or part of the loss set offagainst the company's total profits for that period.

(2) Any such claim must be made not later than the end of the period of two yearsimmediately following the end of the accounting period to which it relates, orwithin such further period as the Inland Revenue may allow.

(3) To the extent that the loss is not—(a) set off against total profits on a claim under sub-paragraph (1), or(b) surrendered by way of group relief (see section 403 of the Taxes Act

1988),it is carried forward to the next accounting period of the company and treatedas if it were a non-trading debit of that period.

Surrender of non-trading loss by way of group relief

F7 (1) In section 403 of the Taxes Act 1988 (amounts that may be surrendered byway of group relief)—

(a) in subsection (1)(b) (amounts that may be surrendered if available forgroup relief) for "or management expenses which are" substitute ",management expenses or a non-trading loss on intangible fixedassets";

(b) in subsection (3), in the first sentence (meaning of availability forgroup relief), for "and management expenses" substitute



"management expenses and a non-trading loss on intangible fixedassets";

(c) in subsection (3), in the second sentence (order in which amountstreated as used), for "and finally management expenses" substitute ",management expenses and finally a non-trading loss on intangiblefixed assets".

(2) In section 403ZD of the Taxes Act 1988 (further provisions as to amountsavailable for group relief), after subsection (5) insert—

“(6) A non-trading loss on intangible fixed assets means a non-trading loss onintangible fixed assets, within the meaning of Schedule (Intangible fixedassets) to the Finance Act 2002, for the surrender period.It does not include so much of any such loss as is attributable to anamount being carried forward under paragraph F6(3) of that Schedule(amounts carried forward from earlier periods).”.

Change in ownership of company with unused non-trading loss

F8 (1) Chapter 6 of Part 17 of the Taxes Act 1988 (tax avoidance: miscellaneous) isamended as follows.

(2) In section 768C after subsection (12) add—

“(13) In the application of this section in relation to an asset to which Schedule(Intangible fixed assets) to the Finance Act 2002 applies (intangible fixedassets)—

(a) for the reference to section 171(1) of the 1992 Act substitute areference to paragraph I1 of that Schedule;

(b) for any reference to a chargeable gain under that Act substitute areference to a chargeable realisation gain within the meaning ofthat Schedule that is a credit within paragraph F5(1)(a) of thatSchedule (non-trading credits);

(c) for any reference to a disposal of the asset substitute a reference toits realisation within the meaning of that Schedule;

(d) for the reference to the relevant provisions of the 1992 Actsubstitute a reference to Part F of that Schedule.”.

(3) After section 768D insert—

“768E Change in ownership of company with unused non-trading loss on intangible fixed assets

(1) Where there is a change in the ownership of an investment company andeither—

(a) paragraph (a), (b) or (c) of section 768B(1) applies, or(b) section 768C applies,

the following provisions have effect to prevent relief being given underparagraph F6 of Schedule (Intangible fixed assets) to the Finance Act 2002by setting a non-trading loss on intangible fixed assets incurred by thecompany before the change of ownership against profits arising after thechange.

(2) The accounting period in which the change of ownership occurs istreated for that purpose as two separate accounting periods, the first



ending with the change and the second consisting of the remainder of theperiod.

(3) The profits or losses of the period in which the change occurs areapportioned to those two periods—

(a) where paragraph (a), (b) or (c) of section 768B(1) applies, inaccordance with Parts 2 and 3 of Schedule 28A, or

(b) where section 768C applies, in accordance with Parts 5 and 6 ofthat Schedule,

unless in any case the specified method of apportionment would workunjustly or unreasonably in which case such other method shall be usedas appears just and reasonable.

(4) Relief under paragraph F6 of Schedule (Intangible fixed assets) to theFinance Act 2002 against total profits of the same accounting period isavailable only in relation to each of those periods considered separately.

(5) A loss made in any accounting period beginning before the change ofownership may not be set off under paragraph F6(3) of Schedule(Intangible fixed assets) to the Finance Act 2002 against—

(a) in a case where paragraph (a), (b) or (c) of section 768B(1) applies,profits of an accounting period ending after the change ofownership;

(b) in a case where section 768C applies, so much of those profits asrepresents the relevant gain within the meaning of that section.

(6) Subsections (8) and (9) of section 768 (time limits for assessment;information powers) apply for the purposes of this section as they applyfor the purposes of that section.

(7) In this section ''investment company'' has the same meaning as in Part4.”.

(4) In paragraph 6 of Schedule 28A to the Taxes Act 1988 (amounts in issue forpurposes of section 768B), after paragraph (dd) insert—

“(de) the amount of any non-trading credits or debits in respect ofintangible fixed assets that fall to be brought into account for thatperiod under paragraph F5 of Schedule (Intangible fixed assets) tothe Finance Act 2002;

(df) the amount of any non-trading loss on intangible fixed assetscarried forward to that accounting period under paragraph F6(3)of that Schedule;”.

(5) In paragraph 7 of that Schedule (apportionment for purposes of section 768B),after paragraph (f) insert—

“(g) in the case of any such credit or debit as is mentioned in paragraph6(de), by apportioning to each accounting period the credits ordebits that would fall to be brought into account in that period ifit were a period of account for which accounts were drawn up inaccordance with generally accepted accounting practice.”.

(6) In paragraph 13 of that Schedule (amounts in issue for purposes of section768C), after paragraph (ed) insert—

“(ee) the amount of any non-trading credits or debits in respect ofintangible fixed assets that fall to be brought into account for that



period under paragraph F5 of Schedule (Intangible fixed assets) tothe Finance Act 2002;

(ef) the amount of any non-trading loss on intangible fixed assetscarried forward to that accounting period under paragraph F6(3)of that Schedule;”.

(7) In paragraph 16 of that Schedule (apportionment for purposes of section768C), after paragraph (f) insert—

“(g) in the case of any such credit or debit as is mentioned in paragraph13(ee), by apportioning to each accounting period the credits ordebits that would fall to be brought into account in that period ifit were a period of account for which accounts were drawn up inaccordance with generally accepted accounting practice.”.

PART G

RELIEF IN CASE OF REINVESTMENT

The relief

G1 (1) This Part provides for relief where a company realises an intangible fixedasset (the “old asset”) and incurs expenditure on other intangible fixed assets(“other assets”).

(2) A company is entitled to relief under this Part only if—(a) the conditions in paragraph G2 are met in relation to the old asset and

its realisation,(b) the conditions in paragraph G3 are met in relation to the expenditure

on other assets, and(c) the company claims the relief in accordance with paragraph G4.

Conditions to be met in relation to the old asset and its realisation

G2 (1) The following conditions must be met in relation to the old asset and itsrealisation—

(a) the asset must have been a chargeable intangible asset of the companythroughout the period during which it was held by the company; and

(b) the proceeds of realisation of the asset must exceed the cost of the assetrecognised for tax purposes.

(2) If the asset was a chargeable intangible asset of the company—(a) at the time of its realisation, and(b) for a substantial part of, but not throughout, the period during which

it was held by the company,a part of the asset representing the time and extent to which it was achargeable intangible asset shall be treated for the purposes of this Part as ifit were a separate asset in relation to which the condition in sub-paragraph(1)(a) was wholly met.Any apportionment necessary for this purpose shall be made on a just andreasonable basis.

(3) The condition in sub-paragraph (1)(b) is necessarily met if the asset has nocost recognised for tax purposes.



Conditions to be met in relation to the expenditure on other assets

G3 (1) The following conditions must be met in relation to the expenditure on otherassets—

(a) the expenditure must be incurred in the period—(i) beginning twelve months before the date of realisation of the

old asset or at such earlier time as the Inland Revenue may bynotice allow, and

(ii) ending three years after the date of realisation of the old asset orat such later time as the Inland Revenue may by notice allow;

(b) the expenditure must be such that it is capitalised by the company foraccounting purposes; and

(c) the assets on which the expenditure is incurred must be chargeableintangible assets in relation to the company immediately after theexpenditure is incurred.

(2) For the purposes of this paragraph expenditure is regarded as incurred whenit is recognised for accounting purposes.

Claim for relief

G4 A claim by a company for relief under this Part must specify—(a) the old assets to which the claim relates, and(b) in relation to each old asset—

(i) the expenditure on other assets by reference to which relief isclaimed, and

(ii) the amount of the relief claimed.

How the relief is given

G5 (1) A company that is entitled to, and claims, relief under this Part is treated forthe purposes of this Schedule as if—

(a) the proceeds of realisation of the old asset, and(b) the cost of the other assets recognised for tax purposes,

were each reduced by the amount available for relief.(2) If the amount of qualifying expenditure on other assets is equal to or greater

than the proceeds of realisation of the old asset, the amount available for reliefis the amount by which the proceeds of realisation exceed the cost of the oldasset.

(3) If the amount of qualifying expenditure on other assets is less than theproceeds of realisation of the old asset, the amount available for relief is theamount (if any) by which the qualifying expenditure on other assets exceedsthe cost of the old asset.

(4) In this paragraph—“the cost of the old asset” means the capitalised expenditure on the asset

that has been recognised for tax purposes; and“qualifying expenditure” means expenditure in relation to which the

conditions in paragraph G3 are met.(5) The relief does not affect the treatment for any purpose of the Taxes Acts of

any other party to any transaction involved in the realisation of the old assetor the expenditure on the other assets.



Declaration of provisional entitlement to relief

G6 (1) A company realising an intangible fixed asset may make a declaration ofprovisional entitlement to relief under this Part.

(2) A declaration of provisional entitlement is a declaration by the company, inits company tax return for the accounting period in which the realisationtakes place, that the company—

(a) has realised an intangible fixed asset,(b) proposes to meet the conditions for relief under this Part, and(c) is accordingly provisionally entitled to relief of a specified amount.

(3) While the declaration continues in force, this Part applies as if the conditionsfor relief under this Part were met.

(4) A declaration of provisional entitlement ceases to have effect if, or to theextent that—

(a) it is withdrawn, or(b) it is superseded by a claim for relief under this Part.

(5) So far as not previously withdrawn or superseded, a declaration ofprovisional entitlement ceases to have effect four years after the end of theaccounting period in which the realisation took place.

(6) On a declaration of provisional entitlement ceasing to have effect, in whole orin part, all necessary adjustments shall be made, by assessment or otherwise.This applies notwithstanding any limitation on the time within whichassessments or amendments may be made.

Disposal and reacquisition

G7 This Part applies where a company realises an asset and subsequentlyreacquires it as if what is reacquired were a different asset from thatpreviously realised.

Deemed realisations and deemed acquisitions to be disregarded

G8 (1) This Part does not apply in relation to a deemed realisation of an asset exceptas provided by—

paragraph I11 (application of roll-over relief in relation to deemedrealisation as a result of degrouping), or

paragraph I13 (application of roll-over relief in relation to reallocateddegrouping charge).

(2) No account shall be taken for the purposes of this Part of any deemedreacquisition.



PART H

GROUPS OF COMPANIES

Introduction

H1 (1) This Part has effect for the purposes of this Schedule to determine whethercompanies form a group and, where they do, which is the principal companyof the group.

(2) In this Part references to a company apply only to—(a) a company within the meaning of the Companies Act 1985 or the

Companies (Northern Ireland) Order 1986;(b) a company (other than a limited liability partnership) constituted

under any other Act or by a Royal Charter or letters patent;(c) a company formed under the law of a country or territory outside the

United Kingdom;(d) a registered industrial and provident society within the meaning of

section 486 of the Taxes Act 1988;(e) an incorporated friendly society within the meaning of the Friendly

Societies Act 1992; or(f) a building society.

(3) In this Schedule the expressions “group” and “subsidiary” shall be construedwith any necessary modifications where applied to a company formed underthe law of a country outside the United Kingdom.

General rule: a company and its 75% subsidiaries form a group

H2 (1) A company (“the principal company of the group”) and all its 75%subsidiaries form a group, and if any of those subsidiaries have 75%subsidiaries the group includes them and their 75% subsidiaries, and so on.

(2) Sub-paragraph (1) has effect subject to the following provisions of this Part.

Membership of group restricted to effective 51% subsidiaries of principal company

H3 A group of companies does not include any company (other than theprincipal company of the group) that is not an effective 51% subsidiary of theprincipal company of the group.

Principal company cannot be 75% subsidiary of another company

H4 (1) A company cannot be the principal company of a group if it is itself a 75%subsidiary of another company.

(2) Notwithstanding sub-paragraph (1), where—(a) a company (“the subsidiary”) is a 75% subsidiary of another company,

and(b) those companies are prevented from being members of the same

group by paragraph H3 (the effective 51% subsidiary requirement),the subsidiary may, if the requirements of paragraphs H2 and H3 are met,itself be the principal company of another group, unless this enables a further



company to be the principal company of a group of which the subsidiarywould be a member.

Company cannot be member of more than one group

H5 (1) A company cannot be a member of more than one group.(2) If a company would otherwise be a member of two or more groups, the

group of which it is a member is determined by applying the following rules(applying the rules successively in the order shown until an answer isobtained).

(3) In the following provisions the principal company of each group is referredto as the “head of a group”.

(4) The first rule is that the company is a member of the group of which it wouldbe a member if, in applying paragraph H3 (the effective 51% subsidiaryrequirement), there were left out of account—

(a) any amount to which a head of a group is beneficially entitled of anyprofits available for distribution to equity holders of a head of anothergroup, or

(b) any amount to which a head of a group would be beneficially entitledof any assets of a head of another group available for distribution to itsequity holders on a winding up.

(5) The second rule is that the company is a member of the group the head ofwhich is beneficially entitled to a percentage of the profits available fordistribution to equity holders of the company that is greater than thepercentage of those profits to which any other head of a group is so entitled.

(6) The third rule is that the company is a member of the group the head of whichwould be beneficially entitled to a percentage of any assets of the companyavailable for distribution to its equity holders on a winding up that is greaterthan the percentage of those assets to which any other head of a group wouldbe so entitled.

(7) The fourth rule is that the company is a member of the group the head ofwhich owns directly or indirectly a percentage of the company’s ordinaryshare capital that is greater than the percentage of that capital owned directlyor indirectly by any other head of a group.The provisions of section 838(2) to (10) of the Taxes Act 1988 apply for theinterpretation of this sub-paragraph as they apply for the interpretation ofsubsection (1)(a) of that section (definition of “51% subsidiary”).

Continuity of identity of group

H6 (1) For the purposes of this Schedule—(a) a group of companies remains the same group of companies so long as

the same company is the principal company of the group, and(b) if the principal company of a group becomes a member of another

group, the first group and the other group shall be regarded as thesame (and the question whether a company has ceased to be a memberof a group shall be determined accordingly).

(2) For the purposes of this Schedule the passing of a resolution or the making ofan order, or any other act, for the winding up of a member of a group is not



regarded as the occasion of that or any other company ceasing to be a memberof the group.

Meaning of “effective 51% subsidiary”

H7 For the purposes of this Schedule a company (“the subsidiary”) is an effective51% subsidiary of another company (“the parent”) if, and only if, the parent—

(a) is beneficially entitled to more than 50% of any profits available fordistribution to equity holders of the subsidiary, and

(b) would be beneficially entitled to more than 50% of any assets of thesubsidiary available for distribution to its equity holders on a windingup.

Meaning of equity holder and profits or assets available for distribution

H8 (1) Schedule 18 to the Taxes Act 1988 (meaning of equity holder anddetermination of profits or assets available for distribution) applies for thepurposes of paragraphs H5 and H7.

(2) In that Schedule as it applies for the purposes of those paragraphs—(a) for any reference to sections 403C and 413(7) of that Act, or either of

those provisions, substitute a reference to those paragraphs;(b) omit the words in paragraph 1(4) from “but” to the end;(c) omit paragraph 5(3) and paragraphs 5B to 5F; and(d) omit paragraph 7(1)(b).

Supplementary provisions

H9 (1) In applying for the purposes of this Part the definition of “75% subsidiary” insection 838 of the Taxes Act 1988, any share capital of a registered industrialand provident society shall be treated as ordinary share capital.

(2) The provisions of section 170(12) to (14) of the Taxation of Chargeable GainsAct 1992 (application to certain statutory bodies of provisions relating togroups of companies) apply for the purposes of this Part as they apply for thepurposes of sections 171 to 181 of that Act.

PART I

APPLICATION OF PROVISIONS TO GROUPS OF COMPANIES

Transfers within a group

I1 (1) Where—(a) an intangible fixed asset is transferred from one company (“the

transferor ”) to another company (“the transferee”) at a time when bothcompanies are members of the same group, and

(b) the asset is a chargeable intangible asset in relation to the transferorimmediately before the transfer and in relation to the transfereeimmediately after the transfer,

the transfer of the asset is treated for the purposes of this Schedule as tax-neutral (see paragraph O6).



(2) Sub-paragraph (1) does not apply if the transferor or transferee is—(a) a company that is a qualifying society within the meaning of section

461A of the Taxes Act 1988 (incorporated friendly societies entitled toexemption from tax), or

(b) a dual resident investing company within the meaning of section 404of that Act (limitation of group relief).

(3) The interaction between this paragraph, paragraph I2 (transfers not at bookvalue) and paragraph K1 (company reconstruction or amalgamation) is asfollows—

(a) in the case of a transfer within this paragraph and not withinparagraph I2, this paragraph applies and paragraph K1 does notapply;

(b) in the case of a transfer within this paragraph and within paragraph I2,if paragraph K1 applies then this paragraph and paragraph I2 do notapply.

Transfers within a group not at book value

I2 (1) This paragraph applies where there is a transfer within paragraph I1(transfers within a group) that is not for a consideration equal to the value ofthe asset for accounting purposes in the hands of the transferor immediatelybefore the transfer (the “book value”).

(2) If the consideration for the transfer exceeds the book value, the transferor istreated for the purposes of this Schedule as having—

(a) revalued the asset for accounting purposes immediately before thetransfer so as to increase the book value to an amount equal to theconsideration for the transfer, and

(b) recognised a corresponding gain.(3) If the consideration for the transfer is less than the book value, the transferor

is treated for the purposes of this Schedule as having—(a) written down the book value of the asset on an impairment review

immediately before the transfer so as to reduce the book value to anamount equal to the amount of the consideration, and

(b) recognised a corresponding impairment loss.(4) Where this paragraph applies—

(a) the provisions of this Schedule (in particular, those as to conformitywith generally accepted accounting practice) apply as in relation to anactual revaluation or impairment review, and

(b) the deemed revaluation or impairment review is among the thingsdone by the transferor that are treated, after the transfer, as havingbeen done by the transferee.

Roll-over relief on reinvestment: application to group member

I3 (1) The following provisions have effect as regards the application of Part G (roll-over relief in case of realisation and reinvestment) in relation to a companythat is a member of a group.

(2) For the purposes of that Part the business or other commercial purposes ofany member of a group shall be treated as business or other commercialpurposes of every member of the group.



(3) That Part applies where—(a) the realisation of the old asset is by a company that, at the time of the

realisation, is a member of a group,(b) the expenditure on other assets is by another company that, at the time

the expenditure is incurred—(i) is a member of the same group as the company mentioned in

paragraph (a), and(ii) is not a dual resident investing company,

(c) the other assets are chargeable intangible assets in relation to thecompany mentioned in paragraph (b) immediately after theexpenditure is incurred, and

(d) the claim is made by both companies,as if both companies were the same person.

(4) That Part does not apply if the expenditure on other assets is expenditure onthe acquisition of assets acquired from another member of the same group bya tax-neutral transfer.

(5) Expressions used in this paragraph that are defined for the purposes of PartG have the same meaning in this paragraph.

Roll-over relief on reinvestment: acquisition of company becoming member of group

I4 (1) For the purposes of Part G (roll-over relief in case of realisation andreinvestment)—

(a) expenditure on the acquisition of a controlling interest in a companythat holds intangible fixed assets (“the underlying assets”) is treated asequivalent to expenditure on acquiring the assets themselves, and

(b) the requirement that the other assets be chargeable intangible assets inrelation to the company incurring the expenditure immediately afterthe expenditure is incurred is treated as met if the underlying assetsare chargeable intangible assets in relation to the company in which acontrolling interest is acquired immediately after the acquisition ofthat interest.

(2) For the purposes of this paragraph a company (“company A”) is treated asacquiring a controlling interest in a company (“company B”) if the twocompanies are not in the same group and there is an acquisition by companyA of shares in company B such that those two companies are in the samegroup immediately after the acquisition.

(3) The amount of expenditure on other assets that is treated as incurred is takento be—

(a) the tax written down value of the underlying assets immediatelybefore the acquisition, or

(b) if less, the amount or value of the consideration for the acquisition ofthe controlling interest in company B.

(4) The tax written down value of the underlying assets in the hands of companyB shall be reduced by the amount available for relief, and if—

(a) there is more than one underlying asset, and(b) the amount of expenditure on other assets that is treated as incurred

exceeds the amount available for relief,



company B may decide how the gain is to be allocated in reducing the taxwritten down values of the assets.

(5) A claim for relief under Part G made by virtue of this paragraph must bemade jointly by company A and company B.

(6) Expressions used in this paragraph that are defined for the purposes of PartG have the same meaning in this paragraph.

Company ceasing to be member of group (“degrouping”)

I5 (1) This paragraph applies where—(a) a company (“the transferor”) which is a member of a group (“the

group”) transfers an intangible fixed asset (“the relevant asset”) toanother company (“the transferee”),

(b) the relevant asset is a chargeable intangible asset in relation to thetransferor immediately before the transfer and in relation to thetransferee immediately after the transfer, and

(c) the transferee—(i) having been a member of the group at the time of the transfer,

or(ii) having subsequently become a member of the group,

ceases to be a member of the group after the transfer and before the endof the period of six years after the date of the transfer.

(2) If, when the transferee ceases to be a member of the group, the relevant assetis held by the transferee or an associated company also leaving the group, thisSchedule has effect as if the transferee, immediately after the transfer of therelevant asset to it, had realised the asset for its market value at that time andimmediately reacquired the asset at that value.

(3) Any resulting adjustments for tax purposes in relation to accounting periodsbefore that in which, or at the end of which, the transferee ceases to be amember of the group shall be made by bringing the aggregate net credit ordebit for those earlier periods into account in that accounting period.

(4) For the purposes of Part F (how credits and debits are given effect) credits ordebits brought into account by virtue of this paragraph take their characterfrom the purposes for which the relevant asset was held by the transfereeimmediately after the transfer.Provided that, in a case where—

(a) the asset was then held by the transferee for the purposes of a trade,business or concern within paragraph F2, F3 or F4, and

(b) the transferee ceased to carry on that trade, business or concern beforeit ceased to be a member of the group,

any credit or debit brought into account by virtue of this paragraph in respectof the asset shall be treated for the purposes of Part F as a non-trading creditor debit.

(5) This paragraph has effect subject to—paragraph I6 (associated companies leaving group at the same time),paragraph I7 (principal company becoming member of another group),

andparagraph I8 (merger carried out for bona fide commercial reasons).



Degrouping: associated companies leaving group at the same time

I6 (1) Where two or more associated companies cease to be members of a group atthe same time, paragraph I5 does not have effect in relation to a transfer fromone to another of those companies.

(2) But where—(a) a company (“the transferee”) that has ceased to be a member of a group

of companies (“the first group”) acquired an asset from anothercompany (“the transferor”) which was a member of that group at thetime of the transfer,

(b) sub-paragraph (1) applies in relation to the transferee’s ceasing to be amember of the first group so that paragraph I5 does not have effect,

(c) the transferee subsequently ceases to be a member of another group ofcompanies (“the second group”), and

(d) there is a connection between the two groups,paragraph I5 has effect in relation to the transferee’s ceasing to be a memberof the second group as if it were the second group of which both companieshad been members at the time of the transfer.

(3) For the purposes of sub-paragraph (2) there is a connection between the firstgroup and the second group if, at the time when the transferee ceases to be amember of the second group, the company which is the principal company ofthat group is under the control of—

(a) the company that is the principal company of the first group or, if thatgroup no longer exists, was the principal company of that group whenthe transferee ceased to be a member of it; or

(b) any person or persons who control the company mentioned inparagraph (a) or who have had it under their control at any time in theperiod since the transferee ceased to be a member of the first group; or

(c) any person or persons who have, at any time in that period, had undertheir control either—

(i) a company that would have been a person falling withinparagraph (b) if it had continued to exist, or

(ii) a company that would have been a person falling within thisparagraph (whether by reference to a company that would havebeen a person falling within paragraph (a) or by reference to acompany or series of companies falling within this sub-paragraph).

(4) The provisions of section 416(2) to (6) of the Taxes Act 1988 (meaning ofcontrol) have effect for the purposes of sub-paragraph (3) as they have effectfor the purposes of Part 11 of that Act.But a person carrying on a business of banking shall not be regarded for thosepurposes as having control of a company by reason only of having, or of theconsequences of having exercised, any rights in respect of loan capital or debtissued or incurred by the company for money lent by that person to thecompany in the ordinary course of that business.

Degrouping: principal company becoming member of another group

I7 (1) Paragraph I5 does not apply where a company ceases to be a member of agroup by reason only of the fact that the principal company of the groupbecomes a member of another group (“the second group”).



(2) But if, in a case where paragraph I5 would have applied but for sub-paragraph (1), after the transfer and before the end of the period of six yearsafter the date of the transfer—

(a) the transferee ceases to satisfy the condition that it is both a 75%subsidiary and an effective 51% subsidiary of one or more members ofthe second group (“the qualifying condition”), and

(b) at the time at which the transferee ceases to satisfy that condition, therelevant asset is held by the transferee or another company in the samegroup,

this Schedule has effect as if the transferee, immediately after the transfer toit of the relevant asset, had realised the asset for its market value at that timeand immediately reacquired the asset at that value.

(3) Any resulting adjustments for tax purposes in relation to accounting periodsbefore that in which, or at the end of which, the transferee ceases to satisfythe qualifying condition shall be made by bringing the aggregate net credit ordebit for those earlier periods into account in that accounting period.

(4) For the purposes of Part F (how credits and debits are given effect) credits ordebits brought into account by virtue of this paragraph take their characterfrom the purposes for which the relevant asset was held by the transfereeimmediately after the transfer.Provided that, in a case where—

(a) the asset was then held by the transferee for the purposes of a trade,business or concern within paragraph F2, F3 or F4, and

(b) the transferee ceased to carry on that trade, business or concern beforeit ceased to satisfy the qualifying condition,

any credit or debit brought into account by virtue of this paragraph in respectof the asset shall be treated for the purposes of Part F as a non-trading creditor debit.

(5) This paragraph is subject to paragraph I8 (merger carried out for bona fidecommercial reasons).

Degrouping: merger carried out for bona fide commercial reasons

I8 (1) Paragraphs I5 to I7 do not apply where—(a) the transferee ceases to be a member of a group of companies (“the

group”) as part of a merger, and(b) the merger is carried out for bona fide commercial reasons and the

avoidance of liability to tax is not the main or one of the main purposesof the merger.

(2) For this purpose a "merger" means an arrangement (which in this paragraphincludes a series of arrangements) whereby—

(a) one or more companies ("the acquiring company" or, as the case maybe, "the acquiring companies") none of which is a member of the groupacquires or acquire, otherwise than with a view to their disposal, oneor more interests in the whole or part of the business which, before thearrangement took effect, was carried on by the transferee, and

(b) one or more members of the group acquires or acquire, otherwise thanwith a view to their disposal, one or more interests in the whole or partof the business or each of the businesses which, before thearrangement took effect, was carried on either by the acquiringcompany or acquiring companies or by a company at least 90% of the



ordinary share capital of which was then beneficially owned by two ormore of the acquiring companies,

and in respect of which the conditions in sub-paragraph (4) below arefulfilled.

(3) For the purposes of sub-paragraph (2) a member of a group of companiesshall be treated as carrying on as one business the activities of that group.

(4) The conditions referred to in sub-paragraph (2) are—(a) that not less than 25% by value of each of the interests acquired as

mentioned in sub-paragraph (2)(a) and (b) consists of a holding ofordinary share capital, and the remainder of the interest, or as the casemay be of each of the interests, acquired as mentioned in sub-paragraph (2)(b) consists of a holding of share capital (of anydescription) or debentures or both; and

(b) that the value or, as the case may be, the aggregate value of the interestor interests acquired as mentioned in sub-paragraph (2)(a) issubstantially the same as the value or, as the case may be, theaggregate value of the interest or interests acquired as mentioned insub-paragraph (2)(b); and

(c) that the consideration for the acquisition of the interest or interestsacquired by the acquiring company or acquiring companies asmentioned in sub-paragraph (2)(a), disregarding any part of thatconsideration which is small by comparison with the total, eitherconsists of, or is applied in the acquisition of, or consists partly of andas to the balance is applied in the acquisition of, the interest or interestsacquired by members of the A group as mentioned in sub-paragraph(2)(b).

(5) For the purposes of sub-paragraph (4) the value of an interest shall bedetermined as at the date of its acquisition.

Degrouping: group member ceasing to exist

I9 References in paragraphs I5 to I8 (degrouping) to a company ceasing to be amember of a group do not include cases where a company ceases to be amember of a group in consequence of another member of the group ceasingto exist.

Degrouping: supplementary provisions

I10 For the purposes of paragraphs I5 to I8—(a) two or more companies are associated if, by themselves, they would

form a group of companies; and(b) an asset acquired by a company is treated as the same as an asset

owned at a later time by that company or an associated company if thevalue of the second asset is derived in whole or in part from the firstasset.

Degrouping: application of roll-over relief in relation to degrouping charge

I11 (1) Part G (roll-over relief in case of reinvestment) applies with the followingmodifications where a company is treated as having realised an asset byvirtue of paragraph I5 or I7 (degrouping)—



(a) in paragraph G2 (qualifying condition to be met in relation to the oldasset), for the references to the old asset being a chargeable intangibleasset in relation to the company substitute a reference to its being achargeable intangible asset in relation to the transferor;

(b) in paragraph G3(1) (the reinvestment period), for the references to thedate of realisation of the old asset substitute references to—

(i) in a case within paragraph I5, the date on which the transfereeceased to be a member of the group, and

(ii) in a case within paragraph I7, the date on which the transfereeceased to satisfy the qualifying condition;

(c) references to the proceeds of realisation shall be read as references tothe amount for which the transferee is treated as having realised theasset.

(2) A reduction of the deemed realisation proceeds as a result of a claim for reliefunder Part G does not affect the value at which the company is deemed tohave reacquired the asset.

(3) In this paragraph “the transferee” and “the transferor” have the samemeaning as in paragraph I5.

Reallocation of degrouping charge within group

I12 (1) This paragraph applies where a chargeable realisation gain accrues to acompany (“company X”) under paragraph I5 or I7 in respect of an asset (“therelevant asset”).For the purposes of this paragraph “the relevant time” is—

(a) in a case within paragraph I5, immediately before company X ceases tobe a member of the group;

(b) in a case within paragraph I7, immediately before company X ceases tosatisfy the qualifying condition.

(2) Company X and another company that is a member of the same group at therelevant time (“company Y”) may jointly elect that the gain, or such part of itas may be specified in the election, shall be treated as accruing to company Yand not to company X.

(3) An election to that effect may be made only if the following two conditionsare met.

(4) The first condition is that at the relevant time company Y—(a) is resident in the United Kingdom, or(b) carries on a trade in the United Kingdom through a branch or agency

and is not by virtue of arrangements under Part 18 of the Taxes Act1988 (double taxation relief) exempt from corporation tax in respect ofthe profits or gains of that branch or agency.

(5) The second condition is that company Y is not at the relevant time—(a) a qualifying society within the meaning of section 461A of the Taxes

Act 1988 (incorporated friendly societies entitled to exemption fromtax), or


(6) An election under this paragraph must be made—(a) by notice in writing to the Inland Revenue,



(b) not later than two years after the end of the accounting period ofcompany X in which the relevant time falls.

(7) The effect of the election is that the gain, or the part specified in the election,is treated—

(a) as if it had accrued to company Y at the relevant time as a non-tradingcredit for the purposes of Part F (how credits and debits are giveneffect), and

(b) where company Y is not resident in the United Kingdom at therelevant time, as if it had accrued in respect of an asset held for thepurposes of a branch or agency of the company in the UnitedKingdom.

Application of roll-over relief in relation to reallocated degrouping charge

I13 (1) Where an election has been made under paragraph I12, this paragraphapplies for the purpose of enabling company Y to make a claim under Part G(roll-over relief on reinvestment).

(2) For that purpose—(a) Part G applies as if the deemed realisation of the asset had been by

company Y and not company X,(b) the condition in paragraph G2 (qualifying condition for old asset) is

treated as met in relation to the asset if it would have been met if therehad been no election and company X had made the claim, and

(c) the proceeds of realisation and the cost of the old asset recognised fortax purposes are what they would have been if there had been noelection and company X had made the claim.

(3) Where the election relates to part only of the gain on the deemed realisationof an asset, Part G and this paragraph apply as if the deemed realisation hadbeen of a separate asset representing a corresponding part of the asset, andany necessary apportionments shall be made accordingly.

Recovery of degrouping charge from other companies

I14 (1) This paragraph applies where—(a) a company (“the taxpayer company”) is liable to a degrouping charge,(b) an amount of corporation tax has been assessed on the company for

the relevant accounting period, and(c) the whole or part of that amount is unpaid at the end of the period of

six months after the time when it became payable.(2) Where this paragraph applies, the following companies may be required (by

notice under paragraph I15) to pay the amount of corporation tax referable tothe degrouping charge or, if less, the amount of the unpaid tax—

(a) any relevant company that at the relevant time, or at the date on whichthe tax became payable, was a member of the same group as thetaxpayer company;

(b) any relevant company that at the relevant time, or at the date on whichthe tax became payable, held the relevant asset.

(3) For the purposes of this paragraph—



(a) the relevant accounting period is the accounting period in which thedegrouping charge falls to be brought into account by the taxpayercompany;

(b) a relevant company is a company that—(i) is resident in the United Kingdom, or

(ii) carries on a trade in the United Kingdom through a branch oragency;

(c) the relevant time is—(i) in a case within paragraph I5, when the taxpayer company

ceased to be a member of the group;(ii) in a case within paragraph I7, when the taxpayer company

ceased to satisfy the qualifying condition;(iii) where there has been an election under paragraph I12

(reallocation of degrouping charge within group), the time thatwould be the relevant time under paragraph (i) or (ii) if therehad been no election;

(d) the relevant asset is the asset in respect of which the degroupingcharge arises.

(4) The amount of corporation tax referable to a degrouping charge is thedifference between—

(a) the tax in fact payable for the relevant accounting period, and(b) the tax that would have been payable for that period in the absence of

the degrouping charge.(5) References in this paragraph to a degrouping charge are to—

(a) a credit required to be brought into account by virtue of paragraphI5(3) or I7(3), or

(b) where there has been an election under paragraph I12 (reallocation ofdegrouping charge within group), a credit required to be brought intoaccount as a result of the election.

(6) In sub-paragraph (2)(a) “group” has the meaning that would be given by PartH if in that Part for references to 75% subsidiaries there were substitutedreferences to 51% subsidiaries.

Recovery of degrouping charge from other companies: procedure etc.

I15 (1) The Inland Revenue may serve a notice on a company within paragraphI14(2) requiring it, within 30 days of the service of the notice, to pay—

(a) the amount of the tax referable to the degrouping charge, or(b) if less, the amount that remains unpaid of the corporation tax payable

by the taxpayer company for the relevant accounting period.(2) The notice must state—

(a) the amount of the tax referable to the degrouping charge,(b) the amount of corporation tax assessed on the taxpayer company for

the relevant accounting period that remains unpaid and the date whenit first become payable, and

(c) the amount required to be paid by the company on which the notice isserved.

(3) The notice has effect—



(a) for the purposes of the recovery from that company of the amountrequired to be paid and of interest on that amount, and

(b) for the purposes of appeals,as if it were a notice of assessment and that amount were an amount of taxdue from that company.

(4) In section 87A(3) of the Taxes Management Act 1970 (date from whichinterest runs in the case of an assessment of a company's tax on anotherperson), for “or Schedule 28 to the Finance Act 2000” substitute “, Schedule 28to the Finance Act 2000 or paragraph I14 of Schedule (Intangible fixed assets) ofthe Finance Act 2002”.

(5) A company that has paid an amount in pursuance of a notice under thisparagraph may recover that amount from the taxpayer company.

(6) A payment in pursuance of a notice under this paragraph is not allowed as adeduction in computing any income, profits or losses for any tax purposes.

Recovery of degrouping charge from other companies: time limit

I16 (1) Any notice under paragraph I15 must be served before the end of the periodof three years beginning with the date on which the liability of the taxpayercompany to corporation tax for the relevant accounting period is finallydetermined.

(2) Where the unpaid tax is charged in consequence of a determination underparagraph 36 or 37 of Schedule 18 to the Finance Act 1998 (determinationwhere no return delivered or return incomplete), the date mentioned in sub-paragraph (1) shall be taken to be the date on which the determination wasmade.

(3) Where the unpaid tax is charged in a self-assessment, including a self-assessment that supersedes a determination (see paragraph 40 of Schedule 18to the Finance Act 1998), the date mentioned in sub-paragraph (1) shall betaken to be the latest of—

(a) the last date on which notice of enquiry may be given into the returncontaining the self-assessment;

(b) if notice of enquiry is given, 30 days after the enquiry is completed;(c) if more than one notice of enquiry is given, 30 days after the last notice

of completion;(d) if after such an enquiry the Inland Revenue amend the return, 30 days

after notice of the amendment is issued;(e) if an appeal is brought against such an amendment, 30 days after the

appeal is finally determined.(4) If the unpaid tax is charged in a discovery assessment (see paragraph 41 of

Schedule 18 to the Finance Act 1998), the date mentioned in sub-paragraph (1)shall be taken to be—

(a) where there is no appeal against the assessment, the date when the taxbecomes due and payable;

(b) where there is such an appeal, the date on which the appeal is finallydetermined.



PART J

EXCLUDED ASSETS

Introduction

J1 (1) This Part provides for the exclusion from this Schedule of certain assets.Where or to the extent that an asset of any description is so excluded, anoption or other right to acquire or dispose of an asset of that description issimilarly excluded.

(2) This Part provides for three kinds of exclusion—(a) assets within paragraphs J2 to J6 are entirely excluded from this

Schedule;(b) assets within paragraphs J7 to J9 are excluded from the provisions of

this Schedule except as regards royalties;(c) assets within paragraph J10 or J11 are excluded from the provisions of

this Schedule to the extent specified in the paragraph concerned.(3) Where by virtue of any of those paragraphs an asset is excluded to the extent

that—(a) it represents certain rights, or(b) it is an asset of a certain description, or(c) it is held for certain purposes, or(d) it represents expenditure of a certain kind,

the provisions of this Schedule apply as if there were a separate assetrepresenting so much of the asset as is not so excluded.

(4) The other provisions of the Corporation Tax Acts have effect as if there werea separate asset representing so much of the asset as is excluded.

(5) Any apportionment necessary for the purposes of sub-paragraphs (3) and (4)shall be made on a just and reasonable basis.

Assets entirely excluded: rights over tangible assets

J2 This Schedule does not apply to an intangible fixed asset to the extent that itrepresents—

(a) rights enjoyed by virtue of an estate, interest or right in or over land, or(b) rights in relation to tangible movable property.

Assets entirely excluded: oil licences

J3 (1) This Schedule does not apply to an oil licence or an interest in an oil licence.(2) In sub-paragraph (1) an “oil licence” means a UK oil licence or a foreign oil

concession.In this paragraph—

“UK oil licence” means a licence under—(a) Part I of the Petroleum Act 1998 (“the 1998 Act”), or(b) the Petroleum Production (Northern Ireland) Act 1964 (“the

1964 Act”),authorising the winning of oil; and

“foreign oil concession” means any right which—



(a) is a right to search for or win oil that exists in its naturalcondition in a place to which neither the 1998 Act nor the 1964Act applies, and

(b) is conferred or exercisable (whether or not under a licence) inrelation to a particular area.

(3) In sub-paragraph (1) “interest in an oil licence” includes, if there is anagreement which—

(a) relates to oil from the whole of a part of the licensed area, and(b) was made before the extraction of the oil to which it relates,

any entitlement under the agreement to, or to a share of, that oil or theproceeds of its sale.

(4) In sub-paragraph (3)(a) “licensed area” means—(a) in relation to a UK oil licence, the area to which the licence applies, and(b) in relation to a foreign oil concession, the area in relation to which the

right to search for or win oil is conferred or exercisable under theconcession.

(5) In this paragraph “oil”—(a) in relation to a UK oil licence, means any substance won or capable of

being won under the authority of a licence granted under Part I of the1998 Act or the 1964 Act, other than methane gas won in the course ofmaking and keeping mines safe, and

(b) in relation to a foreign oil concession, means any petroleum (as definedby section 1 of the 1998 Act).

Assets entirely excluded: financial assets

J4 (1) This Schedule does not apply to financial assets.(2) “Financial asset” here has the meaning it has for accounting purposes.(3) The expression includes—

(a) money debts within the meaning of Chapter 2 of Part 4 of the FinanceAct 1996 (loan relationships) (see section 81(2) of that Act),

(b) qualifying contracts within Chapter 2 of Part 4 of the Finance Act 1994(financial instruments) (see sections 147 to 148 of that Act),

(c) contracts or policies of insurance or capital redemption policies, and(d) rights under a collective investment scheme within the meaning of the

Financial Services and Markets Act 2000 (see section 235 of that Act).

Assets entirely excluded: rights in companies, trusts, etc

J5 (1) This Schedule does not apply to an asset to the extent that it represents—(a) shares or other rights in relation to the profits, governance or winding

up of a company,(b) rights under a trust, or(c) the interest of a partner in a partnership.

(2) Sub-paragraph (1)(b) does not apply to rights that for accounting purposesfall to be treated as representing an interest in trust property that is anintangible fixed asset to which this Schedule applies.



(3) Sub-paragraph (1)(c) does not apply to an interest that for accountingpurposes falls to be treated as representing an interest in partnershipproperty that is an intangible fixed asset to which this Schedule applies.

Assets entirely excluded: non-commercial purposes etc

J6 This Schedule does not apply to an intangible fixed asset to the extent that itis held—

(a) for a purpose that is not a business or other commercial purpose of thecompany, or

(b) for the purpose of activities in respect of which the company is notwithin the charge to corporation tax.

Assets excluded except as regards royalties: life assurance or mutual business

J7 Except as regards royalties, this Schedule does not apply to an asset to theextent that it is held for the purposes of—

(a) life assurance business (within the meaning of Chapter 1 of Part 12 ofthe Taxes Act 1988), or

(b) any mutual trade or business.

Assets excluded except as regards royalties: films and sound recordings

J8 (1) Except as regards royalties, this Schedule does not apply to an asset held bya company to the extent that it represents expenditure by the company on theproduction or acquisition of a master version of a film or sound recording.

(2) For this purpose “master version”—(a) in relation to a film has the meaning given by section 40A(5) of the

Finance (No.2) Act 1992 (revenue nature of expenditure on masterversion of films); and

(b) in relation to a sound recording means a master tape or master audiodisc of the recording.

Assets excluded except as regards royalties: computer software treated as part of cost of related hardware

J9 Except as regards royalties, this Schedule does not apply to an asset held bya company to the extent that it represents expenditure by the company oncomputer software that falls to be treated for accounting purposes as part ofthe costs of the related hardware.

Assets excluded to extent specified: research and development

J10 (1) This paragraph applies to an asset held by a company to the extent that itrepresents expenditure by the company on research and development.

(2) The following provisions of this Schedule do not apply to such an asset—(a) Part B does not apply, except for paragraph B6 (debit on reversal of

previous accounting credit) so far as it relates to credits previouslybrought into account under paragraph C2;

(b) Part C does not apply, except for paragraph C2 (receipts recognised asthey accrue).



(3) Part D (debits and credits on realisation of intangible fixed asset) applies as ifthe cost of the asset did not include any expenditure on research anddevelopment.

(4) In this paragraph "research and development" has the meaning given bysection 837A of the Taxes Act 1988 and includes oil and gas exploration andappraisal.

Assets excluded to extent specified: election to exclude capital expenditure on computer software

J11 (1) This paragraph applies to an asset held by a company to the extent that itrepresents capital expenditure by the company on computer software inrespect of which the company has made an election under this paragraph.

(2) The following provisions of this Schedule do not apply to such an asset—(a) Part B does not apply, except for paragraph B6 (debit on reversal of

previous accounting credit) so far as it relates to credits previouslybrought into account under paragraph C2;

(b) Part C does not apply, except for paragraph C2 (receipts recognised asthey accrue).

(3) Part D (debits and credits on realisation of intangible fixed asset) applies as ifthe cost of the asset did not include any expenditure in respect of which anelection under this paragraph has been made.

(4) A credit shall be brought into account under this Schedule in respect of suchan asset only to the extent that the receipts to which the credit relates do notfall to be taken into account in computing disposal values under section 72 ofthe Capital Allowances Act 2001.

(5) Any election under this paragraph must specify the expenditure to which itrelates, and must be made—

(a) in writing,(b) to the Inland Revenue,(c) not more than two years after the end of the accounting period in

which the expenditure was incurred.(6) An election under this paragraph is irrevocable.(7) The references in this paragraph—

(a) to capital expenditure, and(b) to the time when such expenditure is incurred,

have the same meaning as if this paragraph were contained in the CapitalAllowances Act 2001.

PART K

TRANSFER OF BUSINESS OR TRADE

Company reconstruction or amalgamation

K1 (1) This paragraph applies where—



(a) a scheme of reconstruction or amalgamation involves the transfer ofthe whole or part of the business of one company (“the transferor”) toanother company (“the transferee”), and

(b) the transferor receives no part of the consideration for the transfer(otherwise than by the transferee taking over the whole or part of theliabilities of the business).

For this purpose a "scheme of reconstruction or amalgamation" means ascheme for the reconstruction of any company or companies or theamalgamation of any two or more companies.

(2) If the assets included in the transfer include intangible fixed assets that arechargeable intangible assets in relation to the transferor immediately beforethe transfer and in relation to the transferee immediately after the transfer, thetransfer of those assets is treated for the purposes of this Schedule as tax-neutral (see paragraph O6).

(3) For the interaction between this paragraph and paragraphs I1 and I2(transfers within a group), see paragraph I1(3).

(4) This paragraph does not apply if the transferor or the transferee is—(a) a qualifying society within the meaning of section 461A of the Taxes

Act 1988 (incorporated friendly societies entitled to exemption fromtax), or


(5) This paragraph applies only if the reconstruction or amalgamation—(a) is effected for bona fide commercial reasons, and(b) does not form part of a scheme or arrangements of which the main

purpose, or one of the main purposes, is avoidance of liability to tax.(6) The requirements of sub-paragraph (5) are treated as met where, before the

transfer, the Inland Revenue have, on the application of the transferee,notified that company that they are satisfied that the requirements of thatsub-paragraph will be met.For the procedure on such an application, see paragraph K5.

Transfer of UK trade between companies resident in different EU member states

K2 (1) This paragraph applies where—(a) an EU company resident in one member State (“the transferor”)

transfers the whole or part of a trade carried on by it in the UnitedKingdom to an EU company resident in another member State (“thetransferee”),

(b) the transfer is wholly in exchange for securities issued by thetransferee to the transferor, and

(c) a claim is made under this paragraph by the transferor and thetransferee.

(2) If the transfer includes intangible fixed assets that are chargeable intangibleassets in relation to the transferor immediately before the transfer and inrelation to the transferee immediately after the transfer, the transfer of thoseassets is treated for the purposes of this Schedule as tax-neutral (seeparagraph O6).



(3) For the purposes of this paragraph a company is regarded as resident in amember State if it is within a charge to tax under the law of the State becauseit is regarded as resident for the purposes of the charge.For this purpose a company is treated as not within a charge to tax under thelaw of a member State if it falls to be regarded for the purposes of any doubletaxation relief arrangements to which the State is a party as resident in aterritory which is not within any of the member States.

(4) This paragraph applies only if the transfer of the trade or part—(a) is effected for bona fide commercial reasons, and(b) does not form part of a scheme or arrangements of which the main


transfer, the Inland Revenue have, on the application of the transferor and thetransferee, notified those companies that they are satisfied that therequirements of that sub-paragraph will be met.For the procedure on such an application, see paragraph K5.

(6) In this paragraph—“EU company” means a body incorporated under the law of a member

State; and“securities” includes shares.

Postponement of charge on transfer of assets to non-resident company.

K3 (1) This paragraph applies where—(a) a company resident in the United Kingdom and carrying on a trade

outside the United Kingdom through a branch or agency (“thetransferor”) transfers that trade, or part of it, together with the wholeassets of the company used for the purposes of the trade or part (ortogether with the whole of those assets other than cash) to a companynot resident in the United Kingdom (“the transferee”),

(b) the trade or part is so transferred wholly or partly in exchange forsecurities consisting of shares, or of shares and loan stock, issued bythe transferee to the transferor, and

(c) the shares so issued, either alone or taken together with any othershares in the transferee already held by the transferor, amount in all tonot less than one quarter of the ordinary share capital of the transferee.

(2) If the transfer includes intangible fixed assets that are chargeable intangibleassets in relation to the transferor immediately before the transfer (“relevantassets”), the transferor may claim that this Schedule shall have effect inaccordance with the following provisions.

(3) If the proceeds of realisation of a relevant asset exceed the cost of the assetrecognised for tax purposes, the proceeds of realisation are treated asreduced—

(a) if the securities are the whole consideration for the transfer, by theamount of the excess, and

(b) if the securities are not the whole of that consideration, by theappropriate proportion of the excess.

For this purpose “the appropriate proportion” means the proportion that themarket value of the securities at the time of the transfer bears to the marketvalue of the whole of the consideration at that time.



(4) If at any time after the transfer the transferor realises the whole or part of thesecurities held by it immediately before that time, the transferor shall bringinto account for tax purposes a credit equal to the whole or the appropriateproportion of the aggregate deferred gain.For this purpose—

"the appropriate proportion" means the proportion that the market value ofthe part of the securities disposed of bears to the market value of thesecurities held immediately before the disposal; and

“the aggregate deferred gain” means the aggregate of the amounts bywhich the proceeds of realisation of relevant assets were reduced undersub-paragraph (3), so far as not already taken into account under thissub-paragraph or sub-paragraph (5).

(5) If at any time within six years after the transfer the transferee realises any ofthe relevant assets held by it immediately before that time, the transferor shallbring into account for tax purposes a credit equal to the whole or theappropriate proportion of the aggregate deferred gain.For this purpose—

"the appropriate proportion" means the proportion that the deferred gainattributable to the relevant assets disposed of bears to the deferred gainattributable to the relevant assets held immediately before the time of therealisation;

“the aggregate deferred gain” means the aggregate of the amounts bywhich the proceeds of realisation of relevant assets were reduced undersub-paragraph (3), so far as not already taken into account under thissub-paragraph or sub-paragraph (4); and

“the deferred gain attributable to” any relevant assets means the aggregateof the amounts by which the proceeds of realisation of those assets werereduced under sub-paragraph (3).

(6) There shall be disregarded—(a) for the purposes of sub-paragraph (4), any disposal within section 171

of the Taxation of Chargeable Gains Act 1992 (transfers within agroup); and

(b) for the purposes of sub-paragraph (5), any disposal by one member ofa group (within the meaning of Part H) to another.

(7) Where a person acquires securities or an asset on a disposal disregardedunder sub-paragraph (6) (and without there having been a previous disposalnot so disregarded), a subsequent disposal of the securities or asset by thatperson shall be treated as a disposal by the transferor or, as the case may be,the transferee.



transfer, the Inland Revenue have, on the application of the transferor,notified that company that they are satisfied that the requirements of thatsub-paragraph will be met.For the procedure on such an application, see paragraph K5.



(10) No claim may be made under this paragraph as regards a transfer in relationto which a claim is made under paragraph K4 (transfer of non-UK trade).

Transfer of non-UK trade

K4 (1) This paragraph applies where—(a) an EU company resident in the United Kingdom (“the transferor”)

transfers to an EU company resident in another member State (“thetransferee”) the whole or part of a trade that, immediately before thetime of the transfer, the transferor carried on in a member State otherthan the United Kingdom (“the other member State”) through a branchor agency,

(b) the transfer—(i) includes the whole of the assets of the transferor used for the

purposes of the trade or part (or the whole of those assets otherthan cash), and

(ii) is wholly or partly in exchange for securities issued by thetransferee to the transferor,

(c) the transfer includes intangible fixed assets—(i) that are chargeable intangible assets in relation to the transferor

immediately before the transfer, and(ii) in the case of one or more of which the proceeds of realisation

exceed the cost recognised for tax purposes, and(d) the transferor makes a claim under this paragraph.

(2) Where tax would have been chargeable under the law of the other memberState in respect of the transfer of those assets but for the Mergers Directive,Part 18 of the Taxes Act 1988 (double taxation relief), including anyarrangements having effect by virtue of section 788 of that Act (bilateralrelief), shall apply as if the amount of tax, calculated on the required basis,that would have been payable under that law in respect of the transfer ofthose assets but for that Directive, were tax payable under that law.

(3) For this purpose “the required basis” is that—(a) so far as permitted under the law of the other member State, any losses

arising on the transfer are set against any gains so arising, and(b) any relief available to the transferor under that law has been duly

claimed.(4) In this paragraph—

“EU company” means a body incorporated under the law of a memberState;

“the Mergers Directive” means the Directive of the Council of the EuropeanCommunities dated 23rd July 1990 on the common system of taxationapplicable to mergers, divisions, transfers of assets and exchanges ofshares concerning companies of different member States (No. 90/434/EEC);

“securities” includes shares.(5) For the purposes of this paragraph a company is regarded as resident in

another member State if it is within a charge to tax under the law of the Statebecause it is regarded as resident for the purposes of the charge.For this purpose a company shall be treated as not within a charge to taxunder the law of a member State if it falls to be regarded for the purposes of



any double taxation relief arrangements to which the State is a party asresident in a territory which is not within any of the member States.

(6) No claim may be made under this paragraph as regards a transfer in relationto which a claim is made under paragraph K3 (postponement of charge ontransfer of assets to non-resident company).



transfer, the Inland Revenue have, on the application of the transferor,notified that company that they are satisfied that the requirements of thatsub-paragraph will be met.For the procedure on such an application, see paragraph K5.

Procedure on application for clearance

K5 (1) This paragraph applies in relation to an application under paragraph K1(6),K2(5), K3(9) or K4(8).

(2) The application must be in writing and must contain particulars of theoperations that are to be effected.

(3) The Inland Revenue may, within 30 days of the receipt of the application orof any further particulars previously required under this sub-paragraph, bynotice require the applicant to furnish further particulars for the purpose ofenabling the Inland Revenue to make their decision.If any such notice is not complied with within 30 days or such longer periodas the Inland Revenue may allow, the Inland Revenue need not proceedfurther on the application.

(4) The Inland Revenue shall notify their decision to the applicant within 30 daysof receiving the application or, if they give a notice under sub-paragraph (3),within 30 days of the notice being complied with.

(5) If the Inland Revenue notify the applicant that they are not satisfied asmentioned in paragraph K1(6), K2(5), K3(9) or K4(8) or do not notify theirdecision to the applicant within the time required by sub-paragraph (4), theapplicant may within 30 days of the notification or of that time require theInland Revenue to transmit the application, together with any notice givenand further particulars furnished under sub-paragraph (3), to the SpecialCommissioners.In that event any notification by the Special Commissioners shall have effectfor the purposes of paragraph K1(6), K2(5), K3(9) or K4(8) as if it were anotification by the Inland Revenue.

(6) If any particulars furnished under this paragraph do not fully and accuratelydisclose all facts and considerations material for the decision of the InlandRevenue or the Special Commissioners, any resulting notification by theInland Revenue or the Commissioners is void.

Transfer of business of building society to company

K6 (1) Where—



(a) there is a transfer of the whole of a building society’s business to acompany (“the successor company”) in accordance with section 97 andthe other applicable provisions of the Building Societies Act 1986, and

(b) the assets included in the transfer include intangible fixed assets thatare chargeable intangible assets in relation to the society immediatelybefore the transfer and in relation to the successor companyimmediately after the transfer,

the transfer of those assets is treated for the purposes of this Schedule as tax-neutral (see paragraph O6).

(2) If because of the transfer a company ceases to be a member of the same groupas the society, that event shall not cause paragraph I5 or I7 (deemedrealisation and reacquisition) to have effect as respects any asset acquired bythe company from the society or any other member of the same group.

(3) Where the society and the successor company are members of the same groupat the time of the transfer but later cease to be so, that later event shall notcause paragraph I5 or I7 to have effect as respects—

(a) any asset acquired by the successor company on or before the transferfrom the society or any other member of the same group, or

(b) any asset acquired from the society or any other member of the samegroup by a company other than the successor company that is amember of the same group at time of the transfer.

(4) Where a company which is a member of the same group as the society at thetime of the transfer—

(a) ceases to be a member of that group and becomes a member of thesame group as the successor company, and

(b) subsequently ceases to be a member of that group,paragraph I6 has effect on that later event as respects any asset to which thissub-paragraph applies that is acquired by the company otherwise than fromthe successor company as if it had been acquired from the successorcompany.

(5) Sub-paragraph (4) applies to any asset acquired by the company from thesociety, or from another company which is a member of the same group at thetime of the transfer, when the company and the society, or the company, thesociety and the other company, were members of the same group.

(6) Sub-paragraph (4) does not apply where—(a) the company which acquired the asset is a 75% subsidiary of the

company from which it was acquired, or vice versa, and(b) those companies cease simultaneously to be members of the same

group as the successor company but continue to be members of thesame group as one another.

Amalgamation of or transfer of engagements by certain societies

K7 (1) Where—(a) there is an amalgamation of two or more societies to which this

paragraph applies or a transfer of engagements from one such societyto another, and

(b) in the course of or as part of the amalgamation or transfer ofengagements, there are transferred from one society (“the transferor”)to another (“the transferee”) intangible fixed assets that are chargeable



intangible assets in relation to the transferor immediately before thetransfer and in relation to the transferee immediately after thetransfer,

the transfer of those assets is treated for the purposes of this Schedule as tax-neutral (see paragraph O6).

(2) The societies to which this paragraph applies are—(a) a building society,(b) a registered industrial and provident society within the meaning of

section 486 of the Taxes Act 1988, and(c) a co-operative association in relation to which subsections (1) and (8)

of that section have effect as they have effect in relation to a registeredindustrial and provident society.

PART L

TRANSACTIONS BETWEEN RELATED PARTIES

Transfer between company and related party treated as being at market value

L1 (1) Where there is a transfer of an intangible asset from a company to a relatedparty or to a company from a related party and, in either case, the asset is achargeable intangible asset—

(a) in relation to the transferor immediately before the transfer, or(b) in relation to the transferee immediately after the transfer,

the transfer is treated for all purposes of the Taxes Acts (as regards both thetransferor and the transferee) as being at market value.This is subject to the following exceptions.

(2) Sub-paragraph (1) does not apply to a transfer where the amount that wouldbe recognised as the consideration for the transfer of the asset is subject toadjustment (in computing the profits of either party to the transfer) underparagraph 1(1) of Schedule 28AA to the Taxes Act 1988 (provision not atarm’s length).

(3) Sub-paragraph (1) does not apply to a transfer that by virtue of any provisionof this Schedule is tax-neutral.

(4) In this paragraph “market value” means the price the asset might reasonablybe expected to fetch on a sale in the open market.

Exclusion of roll-over relief in case of part realisation involving related party

L2 Part G (roll-over relief in case of reinvestment) does not apply in relation tothe part realisation by a company of an intangible fixed asset if a person whois a related party in relation to the company acquires an interest of anydescription—

(a) in that asset, or(b) in an asset whose value is derived in whole or in part from that asset,

as a result of, or in connection with, the part realisation.



Restriction of roll-over relief in case of transfer between company and related party at an undervalue

L3 (1) This paragraph applies where—(a) an intangible asset is transferred by a company to a related party,(b) the asset is a chargeable intangible asset in relation to the transferor

immediately before the transfer and is not a chargeable intangibleasset in relation to the transferee immediately after the transfer, and

(c) the amount that would be recognised for tax purposes as the proceedsof realisation of the asset is, by virtue of Schedule 28AA to the TaxesAct 1988 (provision not at arm’s length), greater than the amountrecognised by the transferor for accounting purposes.

(2) Where this paragraph applies the amount of the proceeds of realisation of theasset shall be taken for the purposes of Part G (roll-over relief onreinvestment) to be the amount recognised by the transferor for accountingpurposes.

Delayed payment of royalty payable by company to related party

L4 If or to the extent that a royalty—(a) is payable by a company to or for the benefit of a related party, and(b) is not paid within the period of twelve months after the end of the

period of account in which a debit in respect of it is recognised by thecompany for accounting purposes,

it shall be brought into account for the purposes of this Schedule on theassumption that it does not accrue due until it is paid.

Meaning of “related party”

L5 (1) For the purposes of this Schedule a person (“P”) is a “related party” in relationto a company (“C”) in the following cases:Case OneP is a company and either—

(a) P has control of, or holds a major interest in, C, or(b) C has control of, or holds a major interest in, P.

Case TwoP is a company and P and C are both under the control of the same person.This is subject to sub-paragraph (2).Case ThreeC is a close company and P is—

(a) a participator in C, or(b) an associate of a participator in C.

Case FourP is a close company and C is—

(a) a participator in P, or(b) an associate of a participator in P.

(2) Case Two does not apply if the person controlling both P and C is—the Crown,a Minister of the Crown or a government department,



the Scottish Ministers,the National Assembly for Wales,a Minister within the meaning of the Northern Ireland Act 1998 or a

Northern Ireland department,a foreign sovereign power, oran international organisation.

Meaning of “control” and “major interest”

L6 (1) For the purposes of this Part “control”, in relation to a company, is the powerof a person to secure—

(a) by means of the holding of shares or the possession of voting power inor in relation to the company or any other company, or

(b) by virtue of any powers conferred by the articles of association or otherdocument regulating the company or any other company,

that the affairs of the company are conducted in accordance with his wishes.(2) For the purposes of this Part, a person has a “major interest” in a company

if—(a) it and one other person, taken together, have control of that other

company, and(b) the rights and powers by means of which they have such control

represent, in the case of each of them, at least 40% of the total.The reference in paragraph (a) to two persons together having control of acompany is to two persons who, taken together, have the power mentionedin sub-paragraph (1).

(3) Paragraphs L7 to L9 (rights and powers to be taken into account) apply inrelation to the determination for the purposes of this Part whether a personhas control of, or a major interest in, a company.

Rights and powers to be taken into account: general

L7 (1) There shall be attributed to each relevant person—(a) rights and powers that he is entitled to acquire at a future date or will,

at a future date, become entitled to acquire;(b) rights and powers of other persons, to the extent that they are required,

or may be required, to be exercised in any one or more of the followingways—

(i) on his behalf;(ii) under his direction;

(iii) for his benefit;(c) rights and powers of a person connected with him;(d) rights and powers that would be attributed to a person connected with

him if that person were a relevant person.(2) Sub-paragraph (1)(b) does not apply, in a case where a loan has been made by

one person to another, to rights and powers conferred in relation to propertyof the borrower by the terms of any security relating to the loan.

(3) In sub-paragraphs (1)(b) to (d), the references to a person’s rights and powersinclude rights or powers that he is entitled to acquire at a future date or will,at a future date, become entitled to acquire.



(4) In sub-paragraph (1)(d), the reference to rights and powers that would beattributed to a connected person includes rights and powers that would, byapplying that paragraph wherever one person is connected with anotherperson, be so attributed to him through a number of persons each of whom isconnected with at least one of the others.

(5) In this paragraph a “relevant person” means a person whose rights or powersare relevant to the determination of the question whether a person has controlof or a major interest in a company.

Rights and powers to be taken into account: rights and powers held jointly

L8 (1) References in this Part of this Schedule—(a) to rights and powers of a person, or(b) to rights and powers that a person is or will become entitled to acquire,

include rights or powers that are exercisable by that person, or when acquiredwill be exercisable, only jointly with one or more other persons.

(2) Sub-paragraph (1) has effect subject to paragraph L9 (partnerships).

Rights and powers to be taken into account: partnerships

L9 (1) The rights and powers of a person as a member of a partnership shall bedisregarded unless he has control of or a major interest in the partnership.

(2) Whether a person has control of or a major interest in a partnership shall bedetermined in accordance with paragraphs L6 to L8 as in relation to acompany.For this purpose references in those paragraphs to any other company shallbe read as including any other partnership.

Supplementary provisions

L10 (1) In this Part “participator” and “associate” have the meanings given by section417 of the Taxes Act 1988.

(2) Section 839 of the Taxes Act 1988 (connected persons) applies for thepurposes of this Part, but with the omission of—

(a) subsection (4) (partners), and(b) subsection (7) (persons acting together to secure control etc).

PART M

SUPPLEMENTARY PROVISIONS

Treatment of grants and other contributions to expenditure

M1 (1) This paragraph applies where a grant or other payment is intended by thepayer to meet, directly or indirectly, expenditure of a company on anintangible fixed asset.

(2) A gain recognised in the company’s profit and loss account in respect of thegrant or other payment is treated for the purposes of paragraph C2 (receipts



giving rise to corresponding credit for tax purposes) as a gain representing areceipt in respect of the intangible fixed asset.

(3) This paragraph does not apply to a grant within paragraph M2 (grants to beleft out of account for tax purposes).

Grants to be left out of account for tax purposes

M2 (1) This paragraph applies to—(a) grants under Part 2 of the Industrial Development Act 1982 (regional

development grants); and(b) grants made under Northern Ireland legislation and declared by the

Treasury by order to correspond to a grant under that Part.These are referred to below in this paragraph as “exempt grants”.

(2) Any gain recognised in the company’s profit and loss account in respect of anexempt grant shall be disregarded for the purposes of this Schedule.

(3) Where as a result of an exempt grant being brought into account by acompany there is a reduction—

(a) in the amount of a loss recognised in the company’s profit and lossaccount, or

(b) in the amount of expenditure on an intangible fixed asset that iscapitalised for accounting purposes,

the amount of the reduction shall be added back for the purposes of thisSchedule.

(4) References in this Schedule to adjustments required for tax purposes includeany adjustment required by this paragraph.

Assets acquired or disposed of together

M3 (1) Any reference in this Schedule to the acquisition or disposal of an assetincludes the acquisition or disposal of that asset together with other assets.

(2) For the purposes of this Schedule assets acquired or disposed of as a result ofone bargain are treated as acquired or disposed of together even though—

(a) separate prices are, or purport to be, agreed for separate assets, or(b) there are, or purport to be, separate acquisitions or disposals of

separate assets.(3) Where assets are acquired together—

(a) any values allocated to particular assets by the company in accordancewith generally accepted accounting practice shall be accepted for thepurposes of this Schedule;

(b) if no such values are allocated by the company, so much of theexpenditure as on a just and reasonable apportionment is properlyattributable to each asset shall be treated for the purposes of thisSchedule as referable to that asset.

(4) Where assets are disposed of together, so much of the disposal proceeds as ona just and reasonable apportionment is properly attributable to each assetshall be treated for the purposes of this Schedule as proceeds of the disposalof that asset.



Treatment of fungible assets

M4 For the purposes of this Schedule fungible assets of the same kind held by thesame person in the same capacity shall be treated as indistinguishable partsof a single asset, growing or diminishing as additional assets of the same kindare created or acquired or some of the assets are disposed of.“Fungible assets” here means assets of a nature to be dealt in withoutidentifying the particular assets involved.

Asset ceasing to be chargeable intangible asset: deemed realisation at market value

M5 (1) Where an asset ceases to be a chargeable intangible asset in relation to acompany—

(a) on the company ceasing to be resident in the United Kingdom, or(b) in the case of a company that is not resident in the United Kingdom, in

any circumstances not involving the realisation of the asset by thecompany, or

(c) on the asset beginning to be held for the purposes of a mutual trade orbusiness,

this Schedule has effect as if the company had, immediately before the assetceased to be a chargeable intangible asset in relation to it, realised the asset forits market value at that time and immediately reacquired it at that value.

(2) Sub-paragraph (1) has effect subject to paragraph M6 (postponement of gainin certain cases).

Asset ceasing to be chargeable intangible asset: postponement of gain in certain cases

M6 (1) Where—(a) paragraph M5 (asset ceasing to be chargeable asset: deemed realisation

at market value) applies by reason of a company (“company A”)ceasing to be resident in the United Kingdom,

(b) immediately before company A ceases to be resident in the UnitedKingdom the asset is held by it for the purposes of a trade carried onby it outside the United Kingdom through a branch or agency,

(c) the proceeds of the deemed realisation of the asset exceed the originalcost of the asset recognised for tax purposes,

(d) immediately after company A ceases to be resident in the UnitedKingdom it is a 75% subsidiary of another company (“company B”)that is resident in the United Kingdom, and

(e) company A and company B so elect by notice given to the InlandRevenue not later than two years after the date when company Aceased to be resident in the United Kingdom,

this Schedule has effect as if the proceeds of the deemed realisation of theasset were reduced by the amount of the excess referred to in paragraph (c).The amount of the reduction is referred to below as “the postponed gain”.

(2) If company A subsequently realises the asset before the end of the period ofsix years after the date on which the company ceased to be resident in theUnited Kingdom, company B shall bring into account for tax purposes acredit equal to the postponed gain or, in the case of a part realisation, theappropriate proportion of the postponed gain.



The appropriate proportion is given by:

where—Old Value is the market value of the asset immediately before the part

realisation, andNew Value is the market value of the asset immediately after the part

realisation.This sub-paragraph does not apply if the postponed gain has already beenbrought into account under sub-paragraph (3).

(3) If at any time after company A ceases to be resident in the United Kingdom—(a) it ceases to be a 75% subsidiary of company B on the disposal by that

company of ordinary shares of company A, or(b) after it has ceased to be such a subsidiary otherwise than on such a

disposal, company B disposes of such shares, or(c) company B ceases to be resident in the United Kingdom,

company B shall bring into account for tax purposes a credit equal to thepostponed gain.This sub-paragraph does not apply if, or to the extent that, the postponed gainhas already been brought into account under sub-paragraph (2).

(4) Any credit falling to be brought into account under sub-paragraph (3)(c) shallbe brought into account immediately before company B ceases to be residentin the United Kingdom.

(5) A credit brought into account by company B under this paragraph is treatedas a non-trading credit for the purposes of Part F (how debits and credits aregiven effect).

Asset becoming chargeable intangible asset

M7 (1) This paragraph applies where an asset becomes a chargeable intangible assetin relation to a company—

(a) on the company becoming resident in the United Kingdom, or(b) in the case of a company that is not resident in the United Kingdom, on

beginning to be held for the purposes of a trade carried on in theUnited Kingdom through a branch or agency, or

(c) on the asset ceasing to be held for the purposes of a mutual trade orbusiness.

(2) Where this paragraph applies this Schedule has effect as if the company hadacquired the asset, immediately after it became a chargeable intangible assetin relation to the company, for its book value at that time.

(3) For this purpose “book value” means the asset’s carrying value foraccounting purposes.

Tax avoidance arrangements to be disregarded

M8 (1) Tax avoidance arrangements shall be disregarded in determining—(a) whether debits are to be brought into account under paragraph B3

(writing down on accounting basis) or the amount of such debits, or

Old Value New Value–Old Value

----------------------------------------------------------



(b) whether a credit is to be brought into account under Part D(realisation) or the amount of any such credit.

(2) Arrangements are “tax avoidance arrangements” if their main object or one oftheir main objects is to enable a company—

(a) to obtain a debit under paragraph B3 to which it would not otherwisebe entitled or of a greater amount than that to which it wouldotherwise be entitled, or

(b) to avoid having to bring a credit into account under Part D or to reducethe amount of any such credit.

(3) In this paragraph—“arrangements” includes any scheme, agreement or understanding,

whether or not legally enforceable; and“brought into account” means brought into account for tax purposes.

Debits not allowed in respect of expenditure not generally deductible for tax purposes

M9 (1) No debit may be brought into account for tax purposes under this Schedulein respect of expenditure that is not generally deductible for tax purposes.

(2) Expenditure is “not generally deductible for tax purposes” if, or to the extentthat, revenue expenditure of that description incurred for the purposes of atrade would be non-deductible by virtue of—

(a) section 577 of the Taxes Act 1988 (expenditure on businessentertainment or gifts),

(b) section 577A of that Act (crime-related expenditure),(c) section 578A of that Act (expenditure on expensive hired cars), or(d) section 76(1) to (3) of the Finance Act 1989 (expenditure on providing

non-approved non-taxable retirement benefits).

Delayed payment of emoluments

M10(1) This paragraph applies where—(a) a debit in respect of emoluments is recognised by a company for

accounting purposes, and(b) the emoluments are not paid until after the end of the period of nine

months beginning with the end of the period of account in which thedebit is recognised.

(2) Where this paragraph applies, the emoluments shall be brought into accountfor the purposes of this Schedule on the assumption that they do not accruedue until they are paid.

(3) For the purposes of this paragraph—(a) “emoluments” means emoluments allocated either—

(i) in respect of particular offices or employments (or both), or(ii) generally in respect of offices or employments (or both); and

(b) emoluments are paid when they are treated as received (applying therules in section 202B of the Taxes Act 1988 as for the purposes ofsection 202A(1)(a) of that Act (receipts basis of assessment forSchedule E)).

(4) This paragraph applies to potential emoluments as it applies to emoluments.For this purpose—



(a) potential emoluments are amounts or benefits reserved in the accountsof an employer, or held by an intermediary, with a view to theirbecoming emoluments, and

(b) potential emoluments are regarded as paid when they becomeemoluments that are paid.

(5) Any adjustment required by this paragraph of an accounting debit that ispartly referable to an amount to which this paragraph applies and partly toother matters shall be made on a just and reasonable basis.


Delayed payment of pension contributions

M11(1) This paragraph applies where—(a) a debit in respect of pension contributions is recognised by a company

for accounting purposes, and(b) the contributions are not paid until after the end of the period of

account in which the debit is recognised.(2) Where this paragraph applies, the contributions shall be brought into account

for the purposes of this Schedule on the assumption that they do not accruedue until they are paid.

(3) For the purposes of this paragraph “pension contributions” means—(a) sums paid by an employer by way of contributions under a scheme to

which section 592 of the Taxes Act 1988 applies (exempt approvedschemes),

(b) sums paid to the trustees of such a scheme that are treated for thepurposes of that section as employer’s contributions (see subsection(6A) of that section), or

(c) expenses within section 76(5) or (6) of the Finance Act 1989 (expensesof providing benefits under non-approved retirement benefit scheme).

(4) Any adjustment required by this paragraph of an accounting debit that ispartly referable to an amount to which this paragraph applies and partly toother matters shall be made on a just and reasonable basis.


Bad debts etc

M12(1) For the purposes of this Schedule a debt shall be brought into account on theassumption that the amount payable will be paid in full when it becomes due,except to the extent that—

(a) the debt is bad,(b) the debt is estimated to be bad, or(c) the debt is released as part of a statutory insolvency arrangement.

(2) In sub-paragraph (1)(c) a “statutory insolvency arrangement” means—(a) a voluntary arrangement that has taken effect under or by virtue of the

Insolvency Act 1986 or the Insolvency (Northern Ireland) Order 1989,or



(b) a compromise or arrangement that has taken effect under section 425of the Companies Act 1985 or Article 418 of the Companies (NorthernIreland) Order 1986.

(3) Where a debt is released as mentioned in sub-paragraph (1)(c) any gain inrespect of the release brought into account for accounting purposes by thedebtor shall be disregarded for the purposes of this Schedule.

(4) Any other gain in respect of an unpaid debt in respect of an intangible fixedasset that is brought into account by the debtor for accounting purposes istreated for the purposes of paragraph C2 (receipts recognised as they accrue)as a gain in respect of an intangible fixed asset .

(5) Any adjustment required by this paragraph of an accounting credit or debitthat is partly referable to an amount affected by this paragraph and partly toother matters shall be made on a just and reasonable basis.

Assumptions for computing chargeable profits of controlled foreign companies

M13(1) In computing the amount mentioned in section 747(6) of the Taxes Act 1988(chargeable profits of controlled foreign company) the following assumptionsshall be made for the purpose of applying the provisions of this Schedule.

(2) It shall be assumed that any intangible fixed asset acquired or created by thecompany before the beginning of the first accounting period—

(a) in respect of which an apportionment under section 747(3) falls to bemade, or

(b) which is an ADP exempt period,was acquired or created by the company at the beginning of that accountingperiod at a cost equal to its value recognised for accounting purposes at thattime.

(3) Notwithstanding paragraph 4(1) of Schedule 24 of the Taxes Act 1988(assumption that all available reliefs have been claimed), it shall be assumedthat the company has not claimed any relief under Part G (roll-over relief incase of reinvestment) or made any provisional declaration of entitlement tosuch relief.But this assumption does not apply, if notice is given in accordance withparagraph 4(2) of that Schedule requesting that it should not apply, to suchclaims, and to such extent, as may be specified in the notice.

(4) Expressions used in this paragraph that are defined for the purposes ofChapter 4 of Part 17 of the Taxes Act 1988 (controlled foreign companies)have the same meaning in this paragraph.

(5) The assumption in sub-paragraph (2) above does not affect the determinationof the question whether this Schedule applies to an asset in accordance withparagraph N2 (application of Schedule to assets created or acquired aftercommencement).



PART N

COMMENCEMENT AND TRANSITIONAL PROVISIONS

Commencement date

N1 (1) The commencement date for the purposes of this Schedule is [1st April 2002].(2) In this Part—

“after commencement” means on or after that date and “beforecommencement” means before that date; and

"the existing law" means the law as it was before commencement .

Application of Schedule to assets created or acquired after commencement

N2 (1) Except as otherwise expressly provided, the provisions of this Schedule applyonly to intangible fixed assets of a company that are—

(a) created after commencement, or(b) acquired by the company after commencement from a person who at

the time of the acquisition was not a related party in relation to thecompany, or

(c) acquired by the company after commencement from a company inrelation to which the asset was a chargeable intangible assetimmediately before the acquisition, or

(d) acquired by the company after commencement from a person (“theintermediary”) who acquired the asset after commencement from athird person who—

(i) where the intermediary was a company, was not at the time ofthat acquisition a related party in relation to the intermediary,or

(ii) where the intermediary was not a company, was not at thattime a company in relation to which the intermediary was arelated party,

and who is not at the time of the acquisition by the company a relatedparty in relation to the company.

As to when assets are regarded as created or acquired, see paragraphs N4 toN9.

(2) Intangible fixed assets to which, by virtue of sub-paragraph (1), this Scheduledoes not apply in the absence of express provision to that effect are referredto in this Schedule as “existing assets”.

(3) The following paragraphs contain provision for the application of thisSchedule in relation to certain existing assets—

paragraphs N10 and N11 (application of Schedule to certain existingassets);

paragraph N12 (roll-over relief: application in relation to existing assets).(4) Nothing in this paragraph shall be read as restricting the application of this

Schedule in accordance with paragraph N3 (application of Schedule toroyalties).



Application of Schedule to royalties

N3 (1) This Schedule—(a) applies to royalties recognised for accounting purposes after

commencement, and(b) does not apply to royalties recognised for accounting purposes before

commencement,subject to the following provisions.

(2) To the extent that royalties have been brought into account beforecommencement, they shall not be brought into account again under thisSchedule after commencement.

(3) To the extent that royalties would have been brought into account beforecommencement if the provisions of this Schedule had been in force, and werenot so brought into account, they shall be brought into account immediatelyafter commencement.

(4) For the purposes of this paragraph an amount is “brought into account” if-(a) it is brought into account for tax purposes, or(b) it would have been so brought into account if the person concerned

had been within the charge to corporation tax.

Assets regarded as created or acquired when expenditure incurred

N4 (1) This paragraph has effect for the purposes of paragraph N2 (application ofSchedule to assets created or acquired after commencement) and applies to allintangible assets except those to which paragraph N5 or N6 applies (certaininternally-generated assets).

(2) An intangible asset to which this paragraph applies is regarded as acquiredor created after commencement to the extent that expenditure on itsacquisition or creation is incurred after commencement.As to whether expenditure on the acquisition or creation of the asset wasincurred after commencement, see paragraphs N7 to N9.

(3) If only part of the expenditure on the acquisition or creation of the asset isincurred after commencement—

(a) this Schedule has effect as if there were a separate asset representingthe expenditure so incurred, and

(b) the enactments that apply where this Schedule does not apply haveeffect as if there were a separate asset representing the expenditure notso incurred.

Any apportionment necessary for this purpose shall be made on a just andreasonable basis.

Internally-generated goodwill: whether created before or after commencement

N5 For the purposes of paragraph N2 (application of Schedule to assets createdor acquired after commencement) internally-generated goodwill is regardedas created before (and not after) commencement if the business in questionwas carried on at any time before commencement by the company or a relatedparty.



Certain other internally-generated assets: whether created before or after commencement

N6 (1) This paragraph has effect for the purposes of paragraph N2 (application ofSchedule to assets created or acquired after commencement) and applies to aninternally-generated asset representing expenditure that under the existinglaw is not qualifying expenditure for the purposes of any allowance under theCapital Allowances Act 2001 (“non-qualifying expenditure”).

(2) If only part of the expenditure on the acquisition or creation of the asset isnon-qualifying expenditure—

(a) this Schedule has effect as if there were separate assets representingthe non-qualifying expenditure and the other expenditure, and

(b) if this Schedule does not apply to the former, the enactments that applywhere this Schedule does not apply also have effect as if there were aseparate asset representing the non-qualifying expenditure.

Any apportionment necessary for this purpose shall be made on a just andreasonable basis.

(3) An asset to which this paragraph applies is regarded for the purposes ofparagraph N2 as created before (and not after) commencement if the asset inquestion was held at any time before commencement by the company or arelated party.

When expenditure treated as incurred: general rule

N7 (1) For the purposes of paragraph N4 (assets regarded as created or acquiredwhen expenditure incurred) the general rule is that expenditure on thecreation or acquisition of an asset is treated as incurred when it is recognisedfor accounting purposes.

(2) This is subject to—paragraph N8 (chargeable gains rules to be followed in certain cases), andparagraph N9 (capital allowances rule to be followed in certain cases).

When expenditure treated as incurred: chargeable gains rule to be followed in certain cases

N8 For the purposes of paragraph N4 (assets regarded as created or acquiredwhen expenditure incurred) expenditure on the acquisition of the asset that—

(a) does not qualify for any form of tax relief against income under theexisting law, and

(b) would be treated as incurred after commencement under the generalrule in paragraph N7,

shall be treated as incurred before commencement if the asset is (or would be)treated as disposed of (and thus acquired) before commencement for thepurposes of the Taxation of Chargeable Gains Act 1992.

When expenditure treated as incurred: capital allowances general rule to be followed in certain cases

N9 For the purposes of paragraph N4 (assets regarded as created or acquiredwhen expenditure incurred) expenditure on the creation or acquisition of anasset that under the existing law is qualifying expenditure for the purposes ofany allowance under the Capital Allowances Act 2001 is treated as incurredwhen an unconditional obligation to pay it comes into being.



For this purpose there may be an unconditional obligation to pay althoughthe whole or part of the expenditure is not required to be paid until a laterdate.

Application of Schedule to certain existing telecommunication rights

N10(1) This Schedule applies to existing assets consisting of licences or other rightswithin Schedule 23 to the Finance Act 2000 (certain telecommunicationrights).

(2) This Schedule has effect in relation to such assets—(a) as regards amounts to be brought into account for tax purposes in

accounting periods ending after commencement, and(b) as if amounts brought into account for tax purposes in earlier

accounting periods under Schedule 23 to the Finance Act 2000 hadbeen so brought into account under this Schedule.

(3) Schedule 23 to the Finance Act 2000 shall cease to have effect for the purposesof corporation tax as regards accounting periods ending aftercommencement.

Application of Schedule to existing Lloyd’s syndicate capacity

N11(1) This Schedule applies to existing assets consisting of the rights of a memberof Lloyd’s under a syndicate within the meaning of Chapter 5 of Part 4 of theFinance Act 1994 (taxation of corporate members of Lloyd’s).

(2) This Schedule has effect in relation to such assets as regards amounts to bebrought into account for tax purposes in accounting periods ending aftercommencement.

(3) For the purposes of paragraph B3(5) (writing down on accounting basis) as itapplies to the first accounting period to which this Schedule applies inrelation to such an asset, the tax written down value of the asset shall becomputed as if the debits to be deducted under paragraph E1 included allaccounting losses previously recognised in respect of the asset, whether ornot they gave rise to a deduction for tax purposes.

(4) Class 8 (rights of Lloyd’s members) in section 155 of the Taxation ofChargeable Gains Act 1992 shall cease to have effect for the purposes ofcorporation tax as regards accounting periods ending after commencement

Roll-over relief: application in relation to realisation of existing asset after commencement

N12(1) Where a company realises an existing asset after commencement, Part G (roll-over relief in case of reinvestment) applies with the following adaptations—

(a) for references to the realisation of the old asset substitute references toits disposal within the meaning of the Taxation of Chargeable GainsAct 1992;

(b) for references to its being a chargeable intangible asset substitute, inrelation to any time before commencement, references to its being achargeable asset within that Act;

(c) for references to the proceeds of its realisation substitute references tothe amount or value of the consideration for its disposal within themeaning of that Act; and



(d) for reference to its cost recognised for tax purposes substitutereferences to its acquisition cost for the purposes of that Act.

(2) For the purposes of sub-paragraph (1)(b) an asset is a chargeable asset withinthe Taxation of Chargeable Gains Act 1992 in relation to a company at anytime if, were the asset to be disposed of at that time, any gain accruing to thecompany on the disposal would be a chargeable gain within the meaning ofthat Act, and either-

(a) at that time the company is resident or ordinarily resident in theUnited Kingdom, or

(b) the gain would form part of the company’s chargeable profits forcorporation tax purposes by virtue of section 10(3) of that Act,

unless the company (were it to dispose of the asset at that time) would fall tobe regarded for the purposes of any double taxation relief arrangements asnot liable in the United Kingdom to tax on any gain accruing to it on thedisposal.

(3) A company entitled to relief under Part G by virtue of this paragraph istreated for the purposes of the Taxation of Chargeable Gains Act 1992 as if theconsideration for the disposal of the old asset were reduced by the amountavailable for relief.This does not affect the treatment for any purpose of the Taxes Acts of theother party to any transaction involved in the disposal of the old asset or theexpenditure on other assets.

Roll-over relief: transitory interaction with relief on replacement of business asset

N13(1) In relation to the disposal after commencement of an asset that is both—(a) an asset of a class specified in section 155 of the Taxation of Chargeable

Gains Act 1992 (assets qualifying for roll-over relief on replacement ofbusiness asset), and

(b) an intangible fixed asset,the period specified in section 152(3) of the Taxation of Chargeable Gains Act1992 (period within which new assets must be acquired) does not include,and may not be extended so as to include, any period after commencement.

(2) Subject to that, relief may be claimed in such a case either under Part G of thisSchedule (roll-over relief on realisation and reinvestment) or under section152 or 153 of the Taxation of Chargeable Gains Act 1992, or partly under PartG and partly under section 152 or 153.

(3) For the purposes of any such claim under section 152 or 153 any expenditureon other assets within the meaning of Part G shall be treated as if it were anamount applied as mentioned in section 152(1).

(4) For the purposes of any such claim under Part G any amount applied asmentioned in section 152(1) shall be treated as if it were expenditure incurredon other assets.

(5) Subject to the preceding provisions of this paragraph, Classes 4 to 7 in section155 of the Taxation of Chargeable Gains Act 1992 (goodwill and various typesof quota) shall cease to have effect for the purposes of corporation tax asregards disposals (within the meaning of that Act) after commencement.



PART O

INTERPRETATION

Meaning of “generally accepted accounting practice”

O1 (1) In this Schedule “generally accepted accounting practice”—(a) means generally accepted accounting practice with respect to accounts

of UK companies that are intended to give a true and fair view, and(b) has the same meaning in relation to—

(i) entities other than companies, and(ii) companies that are not UK companies,

as it has in relation to UK companies.(2) In sub-paragraph (1) “UK companies” means companies incorporated or

formed under the law of a part of the United Kingdom.

Meaning of “expenditure on” an asset

O2 (1) References in this Schedule to expenditure on an asset are to any expenditure(including abortive expenditure)—

(a) for the purpose of acquiring or creating, or establishing title to, theasset, or

(b) by way of royalty in respect of the use of the asset, or(c) for the purpose of maintaining, preserving or enhancing, or defending

title to, the asset.(2) No account shall be taken of capital expenditure on tangible assets in

determining for the purposes of this Schedule the amount of expenditure onan intangible asset.“Capital expenditure” here has the same meaning as in the CapitalAllowances Act 2001.

(3) Any necessary apportionment shall be made on a just and reasonable basis ina case where expenditure is incurred partly as mentioned in sub-paragraph(1) or (2) and partly otherwise.

References to amounts recognised in “profit and loss account”

O3 References in this Schedule to an amount recognised in a company’s profitand loss account for a period include—

(a) an amount recognised in a statement of total recognised gains andlosses or other statement of items brought into account in computingthe company’s profits and losses for that period; and

(b) an amount that would have been so recognised if a profit and lossaccount or other such statement as is mentioned in paragraph (a) hadbeen drawn up for that period in accordance with generally acceptedaccounting practice.

Meaning of “chargeable intangible asset” and “chargeable realisation gain”

O4 (1) For the purposes of this Schedule—



(a) an asset is a “chargeable intangible asset” in relation to a company atany time if, were it to be realised by the company at that time, any gainon its realisation would be a chargeable realisation gain;

(b) there is a “chargeable realisation gain” if a gain on the realisation of anasset gives rise to a credit required to be brought into account for taxpurposes under Part D (realisation of intangible fixed asset).

(2) For the purposes of sub-paragraph (1)—(a) there is a gain on the realisation of an asset in any case if the

circumstances are such that paragraph D3(2)(a), D4(2)(a) or D5(2)applies, and

(b) the availability of relief under—(i) Part G (roll-over relief on realisation and reinvestment), or

(ii) any provision of this Schedule under which a transfer of anasset is to be treated as tax-neutral,

shall be disregarded in determining whether there is such a gain.

Meaning of “royalty”

O5 In this Schedule a “royalty” means any payment in respect of the enjoymentor exercise of rights that are an intangible fixed asset.

Meaning of “tax-neutral transfer”

O6 (1) This paragraph applies to a transfer of an asset that is, by virtue of anyprovision of this Schedule, to be treated as a “tax-neutral” transfer.

(2) Where this paragraph applies—(a) the transfer is regarded for the purposes of this Schedule as not

involving any realisation of the asset by the transferor or anyacquisition of that asset by the transferee, and

(b) the transferee is treated for the purposes of this Schedule as havingheld the asset at all times when it was held by the transferor and ashaving done all such things in relation to the asset as were done by thetransferor.

(3) This means, in particular—(a) that the original cost of the asset in the hands of the transferor is treated

as the original cost in the hands of the transferee, and(b) that all such debits and credits in relation to the asset as have been

brought into account for tax purposes by the transferor under thisSchedule are treated as if they had been so brought into account by thetransferee.

The reference in paragraph (a) to the cost of the asset is to the cost recognisedfor tax purposes.

Meaning of “the Inland Revenue”

O7 (1) Functions under these provisions are functions of the Board—paragraph F6(2) (group relief: power to allow longer period for claim),paragraph G3(1)(a) (roll-over relief: power to allow longer reinvestment

period),



paragraphs K1(5), K2(5), K3(9), K4(8) and K5 (transfers treated as tax-neutral, etc: clearance procedure).

These functions are within section 4A of the Inland Revenue Regulation Act1890 (functions of Board exercisable by officer acting with their authority).

(2) Subject to sub-paragraph (1), references in this Schedule to “the InlandRevenue” are to any officer of the Board.

(3) In this paragraph “the Board” means the Commissioners of Inland Revenue.

Meaning of “the Taxes Acts”

O8 In this Schedule “the Taxes Acts” means the enactments relating to incometax, corporation tax or chargeable gains.

Index of defined expressions

O9 The expressions listed below are defined or otherwise explained by theprovisions indicated:

accounting purposes (for) paragraph A5

chargeable intangible asset paragraph O4

chargeable realisation gain paragraph O4

company (in Part H) paragraph H1(2)

control (in Part L) paragraphs L6(1) and (3) and L7 to L9

effective 51% subsidiary paragraph H7

expenditure on an asset paragraph O2

fixed asset paragraph A3

generally accepted accounting practice

paragraph O1

goodwill paragraph A4

group (of companies) paragraph H1(1) and (3) (and Part H generally)

the Inland Revenue paragraph O7

intangible asset paragraph A2

major interest (in Part L) pargraphs L6(2) and (3) and L7 to L9

non-trading credits or debits paragraph F5(1)

non-trading gain (or loss) on intangible fixed assets

paragraph F5(2) or (3)

old asset (in Part G) paragraph G1(1)



other assets (in Part G) paragraph G1(1)

part realisation (of asset) paragraph D2(3)

principal company (of group) paragraph H1(1) (and Part H generally)

proceeds of realisation paragraph D7

profit and loss account (amounts recognised in)

paragraph O3

realisation (of asset) paragraph D2

related party paragraphs L5 to L10

royalty paragraph O5

subsidiary (in relation to company formed outside UK)

paragraph H1(3)

the Taxes Acts paragraph O8

tax-neutral transfer paragraph O6


Annex 2 - Technical Commentary on draft ScheduleStyle and structure1. The draft Schedule sets out a comprehensive set of rules to apply to all

transactions in goodwill and intangible assets within its scope for thepurposes of corporation tax. Except to the specific and limited extentstated, the Schedule overrides general computational rules, such as thosein section 74 of the Taxes Act. The approach generally is to reproducerules needed from elsewhere with whatever adaptations are necessary,rather than to attract them by reference. This process has allowed theserules to be recast in the modern style developed by the Tax Law Rewriteproject used elsewhere in the Schedule. As a result the Schedule is ratherlonger but, it is hoped, distinctly clearer than it may otherwise have been.

2. The provisions in the Schedule are organised as follows. Part Aintroduces the Schedule, identifies the accounting practice on which itsprovisions are heavily reliant and defines generally the intangible assetswithin its scope. The definition in Part A is subject to the exclusions set outin Part J.

3. Parts B-E set out the main computational rules. Part B identifies the debitswhich are deductible for corporation tax purposes under the Schedule.Part C deals with the credits which are taxable and Part D with the specialcase of the realisation of intangible assets, which may give rise either to adebit or a credit. The rules in Part D are in turn subject to the reinvestmentrelief set out in Part G. These computations require the tax value of anasset at any time to be identified. The necessary definition is in Part E.Part F then explains how the debits and credits are taken into account forcorporation tax.

4. Parts H, I and K deal with the rules needed for intra-group transactionsand for various forms of corporate reorganisation. Part L coverstransactions between “related parties” and defines the circumstances inwhich a company is related to another person. Part M is concerned withvarious other situations where the general rules in the Schedule need tobe adapted or supplemented. Part N sets out the commencement andtransitional rules. Finally, Part O defines terms used throughout theSchedule and provides an index of defined expressions.

5. A small number of further provisions will be needed to complete the newregime. One example is the proposed tax exemption for paymentsbetween members of a group of companies in connection withreinvestment relief (see paragraphs 174 to 176 below). Others concern“fungible” assets (see paragraphs 278 to 283) and leased assets (followingthe discussions with the leasing industry mentioned in Chapter 2). Rulesneed also to be considered on the relationship of the provisions in theSchedule with existing legislation giving relief for foreign tax and for lifeassurance business. These would be on the lines of those enacted as partof the corporate debt code enacted in 1996.

6. Are rules needed to govern the interaction of the Schedule with any otherprovisions of the corporation tax code?

Part A - Introduction7. The introductory provisions in this part of the Schedule -

• set out in general terms the effect of the Schedule;

• establish how the provisions interact with other legislation affectingintangible assets;

• define “intangible assets”, subject to the exceptions in Part J; and

• identify the accounting treatment which is to be followed for tax.Paragraph A1 – gains and losses in respect of intangible fixed assets8. Paragraph A1(1) and A1(2) provide that a company’s gains and losses in

respect of intangible fixed assets are to be brought into account as incomematters in accordance with the Schedule. That is solely for the purposes ofcorporation tax. The terms “gains” and “losses” are not defined but thedetailed rules make it clear that they are gains and losses for accountingpurposes. The Accounting Standards Board’s Statement of Principles forFinancial Reporting uses the term “gains” to encompass not only profits onthe disposal of assets but also revenues derived from the exploitation ofthose assets. Similarly, a “loss” includes a simple debit entry as well as anexcess of expenditure over income.

9. Paragraph A1(3) sets out the interaction of the provisions in the Schedulewith other tax rules. In setting out how amounts are to be brought intoaccount in respect of any matter the provisions in the Schedule haveexclusive effect. Provisions which would cause different amounts (positiveor negative) to be brought to account are overridden.

10. This rule is subject to an exception where it is indicated that otherprovisions take priority. For example, paragraph M9 preserves existingrules which disallow certain expenses for tax purposes generally, such asthose on entertaining or gifts. See paragraphs 295 and 296 below.

11. There are broadly similar rules to those in paragraph A1 in the corporatedebt legislation – see section 80(5), Finance Act 1996.

Paragraph A2 – definition of intangible assets12. The effect of this and the following two paragraphs is essentially to bring

within the Schedule assets which are within the scope of the AccountingStandards Board’s Financial Reporting Standard 10, Goodwill andIntangible Assets. These provisions are subject to the exclusions set out inPart J.

13. Paragraph A2(1) sets out the basic rule: “intangible asset” takes themeaning it has for accounting purposes. The expression “for accountingpurposes” is in turn defined in paragraph A5, as adherence to generallyaccepted accounting practice – see paragraph 25 below.

14. Paragraph A2(2) provides that an intangible asset includes (but is notconfined to) “intellectual property” as defined in the sub-paragraph.

15. The definition covers specified intellectual property rights which arerecognised and protected under UK law, together with equivalent rightsunder foreign law. Patents, trade marks, registered design, copyright ordesign rights, and rights in respect of plant varieties are specified in thisway. Also included is any information or technique having economic value,for example knowledge of an industrial process that is not generallyavailable. Finally, the definition covers any licence or right in respect of theproperty within the earlier part of the definition.

16. Are there any other types of intangible asset which need to be specificallybrought within the schedule?

Paragraph A3 – fixed asset17. Paragraph A3(1) defines a “fixed asset” as one that is held, or intended to

be held, for continuing use in the course of a company’s activities. Theintangible assets within the scope of Financial Reporting Standard 10 aresimilarly “fixed” assets. The term “fixed” is not defined in the Standard butthe definition in the sub-paragraph is on the same lines as that usedelsewhere in accounting standards, for example Financial ReportingStandard 15, concerned with tangible assets. Intangible assets which forexample are held as trading stock would be outside this definition.

18. Paragraph A3(2) clarifies and extends the definition in two respects.19. First, A3(2)(a) puts it beyond doubt that intangible assets, which are not

acquired from another party but rather are created by the company itself,can count as “fixed”. That is so long as they meet the definition of a fixedasset in sub-paragraph 1.

20. Secondly, A3(2)(b) addresses the status of options to acquire or disposeof intangible fixed assets. Expenditure on such options may well be acapital matter under existing law even if the option has a relatively shortlife. On the other hand, in some circumstances they could be regarded ascurrent assets for accounting purposes. In order to ensure that suchexpenditure comes within the new rules (rather than remains inadmissiblecapital expenditure), options to acquire or dispose of intangible fixedassets are themselves to be treated as intangible fixed assets.

21. Options in respect of tangible assets, on the other hand, are outside theSchedule whatever their accounting treatment. See paragraph 202 below.

22. Paragraph A3(3) provides confirmation that it is not necessary for an assetwhich is within the definition of an intangible fixed asset to be capitalised ina company’s balance sheet in order to fall within the Schedule. Forexample, a licence to exploit an intangible asset may well fall within thatdefinition even though the consideration wholly takes the form of thepayment of royalties.

A4 - goodwill23. The effect of paragraph A4(1) is that, unless otherwise indicated,

reference in the Schedule to an intangible fixed asset is to be read asincluding a reference to goodwill. References in this commentary tointangible fixed assets should be read in the same way.

24. Paragraph A4(2) provides that “goodwill” takes its accountancy meaning.The specific inclusion of goodwill in this way is necessary becausegoodwill, though within the scope of Financial Reporting Standard 10, isnot itself an intangible fixed asset as a matter of accountancy.

Paragraph A5 – meaning of “for accountancy purposes”25. The paragraph provides that the accounting purposes in question are

those of accounts drawn up under generally accepted accounting practice.Generally accepted accounting practice is defined in paragraph O1. Seeparagraph 334 below. References to generally accepted accountingpractice are to the practice in the accounts of United Kingdom companiesintended to give a true and fair view.

Paragraph A6 – company not drawing up correct accounts26. This paragraph is concerned with the consequences which flow from the

exceptional case where a company fails to draw up accounts which are inaccordance with generally accepted accounting practice. For convenience,the draft refers to such a failure as a failure to draw up “correct” accounts.There is no implication here that for any set of facts there will necessarilybe a single ‘correct’ accounting treatment, for example in the choice of therate at which an asset is amortised. There may well be a range ofjudgements all of which are in accordance with generally acceptedaccounting practice and in particular represent a tenable view of what ismost appropriate to the circumstances of the company.

27. Paragraph A6(1) sets out the basic rule: if the accounts drawn up are“incorrect”, the provisions of the Schedule apply as if correct accounts hadbeen drawn up. In such cases, references to accounting entries (“gains”and “losses”) in the Schedule and in this commentary are to the entrieswhich would have been made if correct accounts had been drawn up, notto the actual entries.

28. Paragraph A6(2) is concerned with cases where the accounts for a periodare “incorrect” but the accounts actually drawn up for subsequent periodsare in themselves correct. It ensures that subsequent accounts can beadjusted to give effect to the assumption that correct accounts were drawnup for a previous period. An illustration of the effect of this rule is where anasset is written off immediately in the accounts but it is established thatamortisation over five years would have been correct. A deduction of 20%of the value of the asset can be allowed for tax in years 2 to 5 even thoughthere is no equivalent deduction in the accounts (because as a matter offact the asset was wholly written off in year 1).

29. Paragraph A6(3) deals with a further exceptional case, where a companydoes not draw up accounts at all, perhaps because it is not required to doso under the foreign law to which it is subject. This case is to be handled inthe same way as that where “incorrect” accounts are drawn up.

Paragraph A7 – consolidated group accounts30. In determining whether company-level accounts are correct paragraph

A7(1) enables one to take into consideration the judgement made of theuseful life or economic value of an asset in any consolidated group

accounts which have been prepared. If such accounts are not in factdrawn up, this provision is of no application. Like paragraph A6, this is aback-stop provision for the exceptional case where the view taken of theuseful life or economic value of an asset diverges in the company-leveland consolidated accounts. The provision stops short of requiring the viewtaken in the consolidated accounts to prevail.

31. Paragraph A7(2) defines consolidated group accounts as group accountssatisfying the United Kingdom Companies Act or corresponding overseasrequirements.

32. Paragraph A7(3) prevents recourse to consolidated accounts drawn upunder foreign law if they are on a basis which, in the relevant respects,substantially diverges from generally accepted accounting practice (asdefined – see paragraph 334 above).

Part B – debits in respect of intangible assetsIntroduction33. This part of the schedule provides for “debits” corresponding to “losses”,

that is accounting losses (see paragraph 8 above), to be brought intoaccount for corporation tax. Accounting losses are not therefore madeimmediately deductible for tax but instead give rise to deductions via thenotion of a corresponding debit. Very often, however, no adjustment to theaccounting loss will be necessary in calculating the amount of the debit.

Paragraph B1 - introduction34. Paragraph B1(1) is an introductory provision which sets out the three types

of debit to be brought into account in accordance with Part B. They aredebits representing expenditure written off as incurred, those representingexpenditure written off assets capitalised in the balance sheet and thosereversing previous credits within the Schedule. Debits representingexpenditure written off a capitalised asset may either track the relevantaccounting entries, whether in respect of amortisation or impairmentlosses. Alternatively, it may be allowed at a fixed rate (4%), where acompany elects that this treatment should apply to a newly acquired asset.

35. To come within the provisions of Part B expenditure must fall within the(widely drawn) definition in paragraph O2 – see paragraphs 338 to 344below.

36. Paragraph B1(2) provides that Part D takes priority over Part B. This willapply for example where expenditure on the acquisition of an asset iswritten off on the realisation of that asset.

Paragraph B2 – expenditure written off as incurred37. This paragraph deals with expenditure which is never capitalised in the

accounts but is written off to the profit and loss account as it is incurred.38. The effect of paragraph B2(1) and (2) is that a company is to have a tax

deduction (a debit) equal to the accounting loss charged in its profit andloss account in respect of expenditure on an intangible fixed asset. This is

subject to any adjustment required for tax purposes, for example underparagraphs M9 to M12 of the schedule (see paragraphs 295 to 302below).

39. References to amounts recognised in the profit and loss account here andelsewhere in the Schedule are to be understood in the expanded senseset out in paragraph O3 (see paragraph 345 below).

Paragraph B3 – writing down on accounting basis: amortisation andimpairment losses40. Paragraph B3(1) sets out the basic rule, similar to that in B2(1): a

company is to have for a period of account a tax deduction (a debit)corresponding to the amortisation or impairment loss in respect ofexpenditure, charged in its profit and loss account, on a capitalisedintangible fixed asset.

41. Paragraph B3(2) puts beyond doubt that the exercise in allocating “fairvalues” to assets under Financial Reporting Standard 7 cannot give rise toimpairment losses within the previous sub-paragraph. This is because thestarting point in calculating the tax deductions under B3(1) is itself the fairvalue of the assets, worked out under the standard. See paragraph M3(3)and paragraph 275.

42. Paragraph B3(3) identifies the amount of the debit in the period in whichan asset is first capitalised. This is achieved by multiplying the accountingcharge in the ratio which the cost of the asset for tax bears to thecapitalised cost of the asset in the accounts. Paragraph B3(4) providesthat in the absence of any adjustment for tax purposes to the capitalisedcost of the asset in the accounts, the tax cost is the same as the sumcapitalised. The effect of these sub-paragraphs is that in the ordinary case,where there is no tax adjustment to the amount capitalised, the debit fortax will be the same as the amortisation or impairment charge in theaccounts.

43. The sum capitalised for accounting purposes is not confined toexpenditure on the acquisition of the asset but can also include otherexpenditure on the asset, for example on improving or enhancing it. Thetax cost will also include that expenditure.

44. The most common circumstances in which the cost of any asset for taxpurposes and the amount capitalised for accounting purposes may divergeis where the cost of the asset for tax is reduced by reinvestment reliefunder Part G. In these circumstances, the application of the formuladescribed in paragraph 42 will lead to a debit for tax which is smaller thanthe accounting charge.

45. For example, an asset is acquired at a capitalised cost of 1000 andamortised over ten years on a straight line basis. For tax that cost isreduced by 200 to 800, as a result of a reinvestment claim under Part G onthe disposal of another asset. The charge in the accounts in year 1 of 10 ismultiplied by 800/1000 to arrive at a debit for tax of 80.

46. Paragraph B3(5) applies a parallel formula for periods of account after theperiod in which the asset is first capitalised. Where tax and accounting

values have not diverged the debit will again simply be equal to theaccounting charge.

47. In other cases the accounting charge will be adjusted in the ratio which thetax written down value of the asset bears to its book value for accountingpurposes. “Tax written down value” for this purpose is defined inparagraph E1 (see paragraph 95 below). In essence it is the original costof the asset recognised for tax purposes adjusted for relevant debits (andcredits).

48. The percentage of the accounting charge to be allowed for tax for periodsof account after that in which an asset is first capitalised (paragraph 44above) may not be the same as that in the first period, for examplebecause of enhancement expenditure. Assume in the example inparagraph 45 above that enhancement expenditure on the asset of 300 iscapitalised in year 2 and the revised carrying value of the asset of 1200(900 + 300) is amortised over a further ten years (at 120 a year). The taxwritten down value of the asset therefore becomes 1020 (720 + 300), thedebit for tax for year 2 will be 120 multiplied by 1020/1200, that is 102. Ifno further expenditure is incurred on the asset annual tax debits of 102 willbe available over the remaining life of the asset.

Paragraph B4 – writing down: election for fixed rate basis49. This paragraph sets out the circumstances in which a company can opt for

fixed rate deductions in respect of an intangible fixed asset, regardless ofits accounting treatment. This provision therefore makes tax reliefavailable for the cost of acquiring the most durable types of intangibleasset, such as a very strong brand-name which is either not amortised atall in the accounts or is amortised over a very long period.

50. A company may elect, regardless of the accounting treatment, that all thecapitalised expenditure on an intangible fixed asset should be the subjectof fixed rate deductions rather than deductions on the accounting basis.The election is irrevocable. (Paragraph B4(1),(2) and (4) to (6)).

51. Paragraph B4(3) provides that the election must be made in writing withintwo years of the end of the accounting period in which the asset isacquired.

52. Where an asset is acquired on a “tax-neutral” transfer, as defined inparagraph O6 (see paragraphs 350 to 352 below), an election by thetransferee would not be possible. But an election by the transferor wouldcontinue to apply in these circumstances. The most common example of atax-neutral transfer would be an intra-group transfer within paragraph I1 ofthe Schedule.

Paragraph B5 – writing down on fixed rate: calculation53. Paragraph B5(1) and (2) provide that the fixed rate deduction is to be 4%,

reduced proportionately where the accounting period is less than 12months, or the amount not yet written off the asset if that is less. Thatamount is termed the “tax written down value” and is defined in paragraphE2 (see paragraph 97 below).

54. Paragraphs B5(3) and (4) provide that the 4% deduction is to becalculated by reference to the cost of the asset recognised for taxpurposes. That is the amount of the expenditure capitalised subject to anynecessary tax adjustments, such as a reduction as a result of reinvestmentrelief.

Paragraph B6 – reversal of previous accounting credit55. This paragraph ensures that debits can be brought to account for tax

where, exceptionally, they represent the reversal of a taxable credit for aprevious period. The converse provision is in paragraph C5 (seeparagraph 72 onwards below).

56. Paragraph B6(1) provides that, where an accounting loss recognised for aperiod represents, wholly or partly, the reversal of a credit for an earlierperiod within Part C of the Schedule, a debit corresponding to that loss isbrought into account for tax.

57. The debit will usually be the same as the accounting loss. For the casewhere the credit brought to account under Part C for the earlier period wasdifferent from the accounting gain, paragraph B6(2) supplies a formulaparallel to those in paragraph B3. The debit to be recognised is theaccounting loss adjusted in the ratio which the earlier credit bears to theearlier accounting gain.

58. For example, if the earlier accounting gain was 100 but the taxable creditwas only 80 and half that gain was reversed in the current period (givingan accounting loss of 50), then the allowable debit would be 40; that is80/100 x 50.

Part C – credits in respect of intangible fixed assetsParagraph C1 introduction59. Paragraph C1(1) lists the four circumstances in which taxable credits are

brought to account under Part C. As well as credits corresponding toreceipts, Part C covers those in respect of revaluation, negative goodwilland the reversal of earlier deductible debits.

60. Paragraph C1(2) ensures that credits on the realisation of an asset arebrought into account under Part D rather than Part C. There is a similarrule ceding priority to Part D in paragraph B1(2) (see paragraph 35 above).

Paragraph C2 – receipts recognised as they accrue61. By virtue of Paragraph C2(1) an accounting gain, recognised in a

company’s profit and loss account in respect of an intangible fixed asset,gives rise to a corresponding taxable credit. Paragraph C2(2) goes on toprovide that the credit is equal to the gain subject to any necessary taxadjustments.

62. This provision encompasses all kinds of receipts from the exploitation ofintangibles, apart from those falling within Part D. They will mostly be of arevenue nature and in those circumstances the question whether a

particular receipt is within the new rules by virtue of this paragraph willrarely be an issue of great practical consequence.

Paragraph C3 – revaluation 63. The revaluation of an intangible asset is permitted under Financial

Reporting Standard 10, though only in very limited circumstances. Thisparagraph provides in particular that where an asset is revalued (definedin paragraph C3(5)) the taxable credit to be recognised is restricted to thedebits previously deducted.

64. In the first instance paragraph C3(1) provides that an increase in thecarrying cost of an asset as a result of its revaluation give rise to a taxablecredit. Under paragraph C3(2) this credit is subject to two types ofadjustment.

65. Paragraph C3(3) deals with the case where the tax value of the asset priorto revaluation and the book value in the accounts have diverged, forexample because of reinvestment relief under Part G of the Schedule. Inthese circumstances the increase in value for accounting purposes isadjusted in the ratio which the tax value bears to the book value.

66. Paragraph C3(4) is concerned with the second adjustment, which placesan overriding limit on the amount of the credit which is taxable. That limit isequal to the aggregate tax deductions given in respect of sums written offthe asset prior to the revaluation. For this purpose the aggregate taxdeductions are net of any taxable credits on earlier revaluations.

67. Paragraph C3(5) is concerned with the concept of a “revaluation”. It makesit clear that for this purpose an asset in a company’s balance sheet doesnot need to have been the subject of a previous valuation exercise. Thesub-paragraph also puts beyond doubt that the “restoration of past losses”(an expression used in Financial Reporting Standard 10) is to be regardedas a type of revaluation. On the other hand, the definition does not extendto the exceptional circumstances where an internally-generated asset witha readily ascertainable market value is capitalised at that value.

68. Finally, paragraph C3(6) ensures that the paragraph does not apply to arevaluation for accounting purposes of an asset subject to a fixed rateelection under paragraph B5 (see paragraph 49 above). In thesecircumstances therefore none of the uplift in value can be taxable.

Paragraph C4 – negative goodwill69. This paragraph is concerned with the rare case where negative goodwill,

recognised under Finance Reporting Standard 7 on the acquisition of abusiness, is attributable to intangible assets. Negative goodwill ariseswhere the fair value of the assets and liabilities acquired exceeds the pricepaid for the business. The accounting rules ensure that the only intangibleassets to which negative goodwill can be attributable are those which havea “readily ascertainable market value” as defined, a very narrow category.

70. Where negative goodwill is so attributable it is necessary to regard theaccounting gains which arise when the goodwill is written back to the profitand loss account as a taxable credit. That is because the value placed on

the intangible assets in question for tax will follow the fair value foraccounting purposes in accordance with B3(3) (see paragraph 275 below).

71. The effect of paragraph C4 is that, where a company recognises anaccounting gain in respect of negative goodwill, a taxable credit arises ofso much of the gain as is attributable on a reasonable basis to intangiblefixed assets.

Paragraph C5 – reversal of previous accounting debit72. This paragraph is concerned with the calculation of the taxable credit

which arises on the reversal in the current period of a previous accountingloss within Part B. It is the mirror image of paragraph B6 (see paragraphs55 to 58 above).

73. Paragraph C5(1) provides that where an accounting gain is recognised bya company to reverse an accounting loss arising in a previous period thereis to be a corresponding taxable credit.

74. Under paragraph C5(2), where the deductible debit in the previous periodwas not the same figure as the accounting loss, the credit on the reversalof the loss is the accounting gain adjusted in the ratio which the debitbears to the loss.

75. Paragraphs C5(3) provides that the specific rules on revaluation inparagraph C3 (see paragraphs 63 to 68 above) take priority over this moregeneral provision. This is to ensure that paragraph C5 cannot override therestriction on the extent to which the accounting gain on revaluation givesrise to a taxable credit.

Part D – realisation of intangible fixed assetsParagraph D1 - introduction76. This sets out the purpose of Part D: to identify the debits and credits to be

brought into account on the realisation of an intangible fixed asset. Inbroad terms that is the difference between the realisation proceeds of theasset and the tax value of the asset, or part of the asset, realised.

Paragraph D2 – meaning of realisation77. This paragraph builds on the notion of realising an asset for accounting

purposes in defining the subject matter of Part D. The borderline betweentransactions within Part D and those within Part C is particularly importantin that only those within Part D qualify for reinvestment relief. Manyrespondents to the Budget Day Technical Note argued that the accountingtreatment should determine when a receipt was within the scope of thereinvestment relief provisions. And they were concerned that theapproach suggested in the Technical Note (paragraph 3.12) was toorestrictive.

78. Paragraph D2 adopts the relatively wide approach suggested byrespondents. But, as explained in Chapter 2, concerns remain thataccountancy rules may not always define the boundary between thedisposal and the ordinary exploitation of an asset in a way which ensures

that roll-over relief is properly targeted. As part of the revised approach,therefore, paragraph L2 prevents reinvestment relief from being availableon a part realisation where the person acquiring the asset is a relatedparty (see paragraph 255 below).

79. Paragraph D2(1) sets out the core of the definition. There is a realisationof an asset for the purpose of the new rules in either of two situations. Thatis where, in accordance with generally accepted accounting practice, atransaction results either in an asset ceasing to be recognised or in areduction in its carrying value in a company’s balance sheet. The lattercase is termed a “part-realisation” (paragraph D2(3)).

80. In this context a “transaction” is given an extended meaning, to include an“event”. As a result, for example, an insurance recovery on the destructionof an asset would be a receipt within Part D.

81. Paragraph D2(2) deals with the realisation of an asset which has nobalance sheet value. That may be because it has been wholly written off orbecause it is an internally-generated asset which cannot be capitalisedunder the rules in Financial Reporting Standard 10. In thesecircumstances, it is necessary to apply the test in D2(1) hypothetically:would the transaction have been treated as the realisation of the asset foraccounting purposes if it had had a balance sheet value? Again thepractical importance of this issue lies in whether reinvestment relief isavailable.

Paragraph D3 – realisation of asset written down for tax purposes82. This paragraph provides that the difference between the proceeds of

realisation and the tax written down value of the asset immediately prior tothe realisation is brought into account as a taxable credit or, as the casemay be, a deductible debit. The proceeds of realisation are defined in D7(see paragraph 91 below) and the tax written down value in Part E (seeparagraphs 94 to 103 below).

Paragraph D4 – realisation of asset shown in balance sheet but not writtendown for tax purposes83. This paragraph provides that the taxable credit or deductible debit in this

case is the difference between the realisation proceeds and the cost of theasset recognised for tax purposes. That cost will be the same as thecapitalised expenditure on the asset for accounting purposes, subject toany tax adjustments (for example as a result of reinvestment relief). Therealisation of an asset may fall into this category where for example theasset is never brought into use.

Paragraph D5 – realisation of asset not shown in the balance sheet84. The remaining case is where the asset has never been capitalised in the

balance sheet, most commonly because it is internally generated. In thatcase the taxable credit is simply the realisation proceeds.

85. This rule also applies to determine the taxable credit where an asset isrealised in the period in which it is acquired and for that reason neverappears in the balance sheet. In those circumstances the acquisition cost

of the asset will be, as a separate matter, a deductible debit by virtue ofthe provisions of paragraph B2 (see paragraphs 37 to 39 above).

Paragraph D6 – apportionment in case of partial realisation86. In the case of a part realisation of an asset defined in paragraph D2 (see

paragraph 79 above) this paragraph identifies the proportion of the taxwritten down value (paragraph D3) or else the cost of the asset (paragraphD4) to be set off. That figure is adjusted in the ratio which the reduction inthe carrying value of the asset in the accounts bears to the valueimmediately before the realisation.

87. In the simple case, where the tax written down value has not divergedfrom the book value in the accounts, the taxable credit or deductible debitwill always be equal to the profit or loss on sale recognised for accountingpurposes. Paragraph D6(2) provides a formula to deal both with the simplecase and that where the tax and book values have diverged. Under theformula the tax value of the asset prior to the realisation is adjusted in theratio which the reduction in the book value prior to the realisation bears tothat value.

88. Assume that an asset with a carrying value of 1000 is partially realised for750 and the carrying value of the part of the asset retained is 375. Theprofit on sale for accounting purposes is 125 (750 - (1000-375 = 625)). Inthe case where the tax and book values prior to the realisation are thesame the tax value of the asset to be set off against the proceeds of 750 issimply the book value 1000 x 625/1000, giving 625 to be set off againstthe 750 proceeds.

89. If in the above example the tax written down value of the asset was, not1000, but 800 the sum to be set off against the proceeds of 750 would bethe tax value adjusted under the formula in the ratio which the reduction inthe book value bears to the book value prior to the realisation. That is 800x 625/1000, which is 500, giving a taxable credit of 250.

90. Paragraph E1(3) (see paragraph 98 below) identifies the sum to beallowed on a subsequent realisation.

Paragraph D7 – meaning of proceeds of realisation91. The proceeds of realisation are, subject to tax adjustments, the amount

recognised for accounting purposes, net of the incidental costs.Paragraph D8 – relief in case of reinvestment of proceeds of realisation92. This paragraph makes it clear that any taxable credit identified by applying

the rules in Part D is subject to the rules in Part G (roll-over relief onreinvestment).

Paragraph D9 – abortive expenditure on realisation93. Under this paragraph a debit is deductible to the extent that it corresponds

to an accounting loss in respect of abortive expenditure in connection withthe attempt to realise an asset. That is expenditure for the purpose of atransaction which would have amounted to the realisation of an asset if ithad proceeded to completion. The debit is the same as the accountingloss, subject to any adjustment required for tax purposes.

Part E – calculation of tax written down value94. Part E defines the tax written down value of an asset for the purpose of

calculating deductible debits under Part B, whether on the accounting orfixed rate basis, in respect of an intangible fixed asset. This tax value isalso used in computing the debit or credit under paragraph D3 on therealisation of an asset which has been written down for tax (see paragraph82 above).

Paragraph E1 – asset written down on accounting basis95. Paragraph E1(1) sets out the basic calculation. The tax written down

value is the “tax cost” of the asset (the cost recognised for tax purposes)less previously deducted debits in respect of sums written off the assetplus any taxable credits on revaluation under paragraph C3 (seeparagraph 63 to 68 above).

96. Paragraph E1(2) provides that the cost recognised for tax purposes is, aselsewhere in the Schedule, the expenditure on the asset capitalised in theaccounts, subject to any tax adjustments (for example as a result ofreinvestment relief).

Paragraph E2 – asset written down at fixed rate97. Paragraph E2 provides a parallel rule for the identification of the tax written

down value of an asset written down at a fixed rate under paragraph B4(see paragraph 49 to 54 above). Since taxable credits cannot arise on arevaluation of such an asset (by virtue of C3(6) – see paragraph 68 above)the tax written down value is simply the cost recognised for tax purposesless the fixed rate debits already deducted.

Paragraph E3 – effect of part realisation of asset98. Both paragraphs E1 and E2 are made expressly subject, by their

respective sub-paragraphs 3, to the rules in paragraph E3. These rulesdeal with the calculation of the tax written down value of an asset followinga partial realisation to which paragraph D6 applies (see paragraph 86).

99. Paragraph E3(1) and E3(2) provide that the tax written down valueimmediately after the realisation is the previous value reduced in the ratiowhich the carrying value of the asset in the accounts immediately after therealisation bears to the carrying value immediately before.

100. In the case where the tax written down value of an asset has notdiverged from the carrying value in the accounts the effect of the formula issimply that the tax value after the realisation remains the same as therevised carrying value.

101. Paragraph 88 gives an example of the calculation under Part D on apartial realisation where these values have diverged. The tax written downvalue of the asset in that example, immediately after its realisation, is itstax value immediately before (800 in the example) adjusted in the ratiowhich the new carrying value (375) bears to the pre-realisation carryingvalue (1000). That is 800 x 375/1000 = 300.

102. Paragraph E3(3) sets out how the tax written down value of the assetafter the part realisation is calculated subsequently. To the tax writtendown value immediately after the part realisation are added furthercapitalised costs to the extent they are recognised for tax. Andadjustments are made for subsequent debits (and credits) only.

103. Paragraph E3(4) provides that on a subsequent part realisation therules in paragraph E3 are applied again.

Part F – how debits and credits are given effect104. This Part of the Schedule explains how the debits and credits identified

under Parts B – D find their way into the corporation tax computation.Paragraph F1 - introduction105. This paragraph outlines the process. Paragraph F1(1) provides that

credits and debits are to be brought into account for tax purposes inaccordance with the rules which follow.

106. Paragraph F1(2) provides that debits and credits in respect of assetswhich are held for purposes respectively connected with a trade, propertybusiness or certain other businesses are brought into account incomputing the profits from those activities.

107. Paragraph F1(3) provides that other debits and credits are brought intoaccount together in accordance with F5 to F8. The purpose for which theassets in question must be held is not set out here but there is anoverriding requirement in paragraph J6 (see paragraphs 211 to 212 below)that only intangible fixed assets which are held for a business or othercommercial purpose are within the Schedule.

108. Paragraph F1(4) provides for a reasonable apportionment of debits andcredits in respect of assets held for more than one purpose.

109. These rules are broadly similar to those which apply for the purposesof the corporate debt legislation in Finance Act 1996.

Paragraph F2 – assets held for purposes of a trade110. This paragraph requires credits or debits in respect of an asset held for

the purposes of a trade carried on by a company in an accounting periodto be treated respectively as receipts or expenses of the trade for thatperiod.

Paragraph F3 – assets held for purposes of a property business111. Paragraph F3(1) sets out a similar rule in respect of assets held for the

purposes of a “property business”.112. Paragraph F3(2) and F3(3) set out the necessary definitions. “Property

business” is defined as either an “ordinary Schedule A business, afurnished holiday letting business or an overseas property business.”These terms are further defined on similar lines to those in sections 15 to17 Capital Allowances Act 2001.

113. Paragraph F3(4) attracts the provisions of section 503 of the TaxesAct, concerned with the computation of the profits from furnished holidaylettings.

Paragraph F4 – assets held for the purposes of mines, transport undertakingsetc114. This paragraph puts beyond doubt the position of a business within

section 55(2) of the Taxes Act by setting out a similar rule to those inparagraphs F2 and F3. Credits and debits in respect of an asset held forthe purposes of such a business carried on by a company in anaccounting period are treated respectively as receipts and expenses incomputing its profits under Case I of Schedule D.

Paragraph F5 – non-trading credits and debits115. Paragraph F5(1) to F5(3) requires credits and debits which do not fall

within paragraphs F2 to F4 to be aggregated to arrive at an overall “non-trading gain” or “non-trading loss” for an accounting period. A similarprocess of aggregation is required under the corporate debt rules inFinance Act 1996.

116. Where a company’s period of account is not the same as its accountingperiod, for example because it is longer than twelve months, the gain orloss will need to be adjusted. No special provisions are set out for thispurpose in the Schedule, except as a result of the rules on change ofownership in paragraph F8 – see paragraphs 123 onwards below. Hencethe general rules for corporation tax apply whereby adjustments are made,if necessary, on a time basis. See section 834(4) ICTA.

117. Paragraph F5(4) provides that a non-trading gain is taxed under CaseVI of Schedule D.

118. Paragraph F5(6) requires the rules in paragraphs F6 and F7 to haveeffect in relation to non-trading losses. The basic scheme is that lossesmay be set-off against total profits or surrendered as group relief for theaccounting period in which they arise. Unused losses may be carriedforward to be set off against the total profits of the company (but notsurrendered as group relief) for subsequent accounting periods.

Paragraph F6 – claim to set non-trading loss against total profits119. Paragraph F6(1) and (2) provide that a company may make a claim

within two years of the end of the accounting period to which it relates (orwithin such further period as the Inland Revenue may allow) to set a “non-trading loss” calculated under paragraph F5 above against its total profitsfor that accounting period.

120. Paragraph F6(3) provides that a non-trading loss which is not thesubject of such a claim nor surrendered as group relief under paragraphF7 is carried forward, without the need for a claim, to the next accountingperiod and treated as a non-trading loss of that period.

Paragraph F7 – surrender of non-trading loss by way of group relief121. Paragraph F7(1) adds references to non-trading losses under the

Schedule to section 403 of the Taxes Act, which permits various amounts

to be surrendered by way of group relief. It provides that non-tradinglosses, like management expenses, Schedule A losses and charges onincome, can only be surrendered to the extent they exceed the company’s“gross profits” for the surrender period. In order to determine in which ofthese four categories a surrendered loss falls, sums are allocated to theother categories in priority.

122. Paragraph F7(2) inserts in section 403ZA the necessary definition ofthe expression “non-trading loss”, used in the amended section 403. It alsoensures that the non-trading loss to be surrendered cannot include anysums representing the non-trading loss brought forward from an earlierperiod.

Paragraph F8 – change in ownership of company123. This paragraph limits the extent to which reliefs such as management

expenses arising before the change of ownership of a company can be setagainst a taxable credit arising on the realisation of intangible assetsafterwards. Paragraph F8 also adds “non-trading losses” under theSchedule to the various corporation tax reliefs (trading losses,management expenses, loan relationship deficits and Schedule A losses)already subject to the anti-avoidance rules aimed at various forms of “loss-buying”.

124. Paragraph F8(1) is introductory. Paragraph F8(2) amends section768C of the Taxes Act by adding a further sub-section. Broadly speaking,section 768C counters schemes whereby the new owners of aninvestment company arrange for an asset, shortly to generate a capitalgain on disposal, to be transferred to it under cover of the no gain/no losscapital gains rules for intra-group transfers. The intention is to set unusedmanagement expenses against the gain. The amendments to section768C ensure that the counteraction set out in the section also applieswhere the asset transferred to the investment company in question is anintangible fixed asset which it acquires on “tax-neutral” terms underparagraph I1 (see paragraph 154 below).

125. Paragraph F8(3) inserts a new section 768E into the Taxes Act. Thisaddresses the situation where the investment company whose ownershipchanges has an unused “non-trading loss” under the Schedule, referableto periods prior to the change of ownership. The conditions which triggerthe operation of the section are the same as those which trigger parallelrules in respect of surplus management expenses and Schedule A losses.

126. Paragraph F8(4) to (7) amends the rules in Schedule 28A of the TaxesAct which allocate sums to the periods before and after the change ofownership (where that occurs during an accounting period). As far aspossible the allocation of sums within the Schedule proceeds by referenceto the time when sums would be recognised under generally acceptedaccounting practice.

Part G – relief in case of reinvestment127. This Part of the Schedule sets out a form of roll-over relief, as outlined

in Chapter 2. This enables some or all of a taxable credit arising underPart D on the realisation of an intangible asset (including goodwill) to bedeferred. The relief works by deducting the credit from the company’sexpenditure on other assets within the Schedule, thereby reducing thedeductible debits for sums written off the assets under Part B (and ifnecessary the expenditure to be taken into account on the realisation ofthose assets under Part D).

128. Relief may also be available where the reinvestment is made byanother group member (under paragraph I3 – see paragraph 163 onwardsbelow). It may also be available where the reinvestment is in the shares ofanother company which becomes a group member as a result where thatcompany holds assets within the Schedule (under paragraph I4 – seeparagraph 168 to 173 below).

129. The relief is not available where taxable credit arises on the partrealisation of an asset where the person acquiring the interest in the assetis a “related party” (by virtue of paragraph L2 – see paragraph 255 below).

130. By virtue of paragraph N12, capital gains on the disposal of goodwilland intangible assets which are existing assets (and therefore outside theSchedule by virtue of the commencement rule in paragraph N2) may alsobe rolled over against expenditure on assets within the Schedule. Seeparagraph 330 below.

Paragraph G1 – the relief131. Paragraph G1(1) sets out the basic structure of the relief (see

paragraph 127 above). Paragraph G1(2) provides that relief is onlyavailable if the company meets the conditions relating to the “old asset”and to the expenditure on “other assets” set out in paragraphs G2 and G3.The company must also claim the relief in accordance with G4.

Paragraph G2 – conditions to be met in relation to the old asset and itsrealisation132. Paragraph G2(1) set out the two conditions which must be satisfied in

relation to the old asset.133. First, it must have been a “chargeable intangible asset” of the company

throughout the period the company held the asset. The term “chargeableintangible asset” is defined in paragraph O4 – see paragraph 347 below.In broad terms it is an asset within the computational rules of theSchedule. The relief is not restricted to assets used for a trade. But anasset must be used for business or other commercial purposes to count asa “chargeable intangible asset” in the first place (by virtue of the rule inparagraph J6 – see paragraph 211). There is a special apportionment rulein paragraph G2(2) for assets which do not meet this requirementthroughout the period of ownership (see paragraph 135 below).

134. Secondly, the proceeds of realisation of the old asset must exceed itscost recognised for tax purposes. The purpose of this requirement is toprevent a taxable credit from being rolled over to the extent it representsthe recovery of deductions for sums written off an asset under Part B,which turn out to be excessive. This requirement will always be satisfiedon the realisation of assets, such as internally generated goodwill, whichhave no cost for tax purposes (see Paragraph G2(3)).

135. Paragraph G2(2) in certain circumstances permits an asset which wasa chargeable intangible asset for only part of the period it was held to meetthe condition in G2(1). Where the asset was a chargeable intangible assetat the time of its realisation, and for a substantial part of the period it washeld, a reasonable apportionment may be used to identify a separateasset meeting that condition. Compare section 152(6) and (7) TCGA.

Paragraph G3 – conditions to be met in relation to the expenditure on otherassets136. Paragraph G3(1) sets out the three conditions that the expenditure on

the other assets must satisfy.137. First, the expenditure must have been incurred in the period extending

from 12 months before to 3 years after the time the old asset is realised.That is subject to any extension of the time limits in a particular caseallowed by the Inland Revenue. The period allowed for reinvestment isthus similar to that under the capital gains roll-over provisions. But the datean asset is realised will be the date it ceases to be recognised foraccounting purposes (which will not necessarily be the same date as thatdetermined under section 28 TCGA). Similarly, the date expenditure isincurred on the new assets will be the date it is recognised for accountingpurposes (see paragraph G3(2)).

138. Secondly, only capitalised expenditure can be taken into account(rather than expenditure written off as incurred under paragraph B2).

139. Thirdly, the assets in question must be chargeable intangible assetsimmediately after the expenditure is incurred.

140. A fourth condition, implicit in the computational rules in paragraph G5,is that no relief will be available unless the expenditure on other assetsexceeds the cost recognised for tax purposes of the old asset.

Paragraph G4 – claim for relief141. This paragraph requires a claim by a company to specify the old

assets to which the claim relates and, in relation to each old asset, theexpenditure on other assets leading to the deferral and the amount of reliefclaimed.

Paragraph G5 – how the relief is given142. Paragraph G5(1) sets out the basic rule: the proceeds from the

realisation of the old asset and the expenditure on other assets are bothreduced by the amount available for relief, as defined in the following sub-paragraphs.

143. Paragraph G5(2) provides that where the expenditure on other assetsexceeds the realisation proceeds of the old asset the amount available forrelief is the excess of the proceeds over the cost recognised for taxpurposes of the old asset. See paragraph 134 above. If the realisationproceeds do not exceed the cost of the old asset no relief will be due.

144. Paragraph G5(3) deals with the case where the expenditure on otherassets is less than the realisation proceeds. In those circumstances theamount available for relief is limited to the excess of the expenditure overthe cost recognised for tax purposes of the old asset. If there is no suchexcess there is no relief.

145. Assume an asset is purchased for £100 and sold for £120 when its taxvalue (and carrying value in the accounts) is £30. In these circumstancesthere will be a Part D credit of £90 (realisation proceeds (£120) minus taxwritten down value (£30)). Expenditure on replacement assets is £130.Since that expenditure exceeds the realisation proceeds the amountavailable for relief is calculated under paragraph G5(2), namely theamount by which the realisation proceeds (£120) exceed the cost of theold asset (£100). That is £20.

146. Assume now that the expenditure on replacement assets this time is£110 but the facts are otherwise unchanged. Since that expenditure is nowless than the realisation proceeds the amount available for relief iscalculated under paragraph G5(3). The relief is therefore the amount bywhich the expenditure (£110) exceeds the cost for tax of the old asset(£100), that is £10. If the expenditure on the new assets had not exceeded£100 there would have been no amount available for relief.

Paragraph G6 – declaration of provisional entitlement to relief147. This paragraph sets out procedures for relief on a provisional basis

where a company intends to incur expenditure on other assets within thetime limit. This is broadly based on the mechanics of the capital gainsrelief under section 153A TCGA.

Paragraph G7 – disposal and reacquisition148. This paragraph enables relief to be given where a company realises an

asset but subsequently reacquires it, for example as a result of a changeof business plans. Compare extra-statutory concession D16 for capitalgains roll-over relief.

Paragraph G8 – deemed realisations and deemed reacquisitions to bedisregarded149. Paragraph G8(1) prevents reinvestment relief from being available

where the Schedule deems an asset to be realised (though in fact it isnot). That is except in relation to those degrouping charges to whichparagraphs I11 and I13 apply (see paragraph 185 onwards below).

150. Paragraph G8(2) ensures that, without exception, deemed expenditureunder the Schedule on the reacquisition of an asset, for example underparagraph M5 (see paragraph 284 below) cannot be taken into account incalculating the relief available under Part G.

Part H – groups of companies151. This Part of the Schedule sets out the rules for determining whether

companies are grouped. Part I sets out the computational consequences.152. For the purposes of the Schedule the notion of a group for capital gains

has been adopted. These rules therefore have essentially the same effectas those in section 170 TCGA. The opportunity, however, has been takento rewrite them as clearly as possible. In these circumstances theprovisions have not been made the subject of a detailed commentary.

Part I – application of provisions to groups of companiesParagraph I1 – transfers within a group153. These rules are broadly similar, but not identical, to those for capital

gains (section 171(1)-(2) TCGA).154. Paragraph I(1) sets out the circumstances in which the paragraph

applies. That is where an intangible fixed asset is transferred between twocompanies which are group members and the asset is a “chargeableintangible asset” both in the hands of the transferor immediately before thetransfer and in the hands of the transferee immediately afterwards. Theterm “chargeable intangible asset” is defined in paragraph O4 – seeparagraph 347 below. In broad terms it is an asset within thecomputational rules of the Schedule.

155. The sub-paragraph goes on to provide that in these circumstances thetransfer is treated as “tax-neutral”. This concept is defined in paragraph O6– see paragraphs 350 to 352 below. Essentially the transferee takes overthe tax history of the asset while it was held by the transferor. Transferswithin paragraph I1 which are not at book value are subject to theadditional rules set out in paragraph I2 (see paragraph 158 to 162 below).

156. Paragraph I1(2) provides that transfers involving friendly societiesentitled to certain tax exemptions and dual resident investing companiesare outside the rule described in the previous sub-paragraph. That isbecause their tax treatment is not on all fours with that of ordinary groupmembers. There is a similar exception for capital gains purposes whichextends also to investment companies and venture capital trusts. But sincethese entities are not subject to special tax rules in other respects underthe Schedule, there is no need to apply the exception to them here.

157. Paragraph I1(3) deals with the transfer of intangible assets whichpotentially fall both within the rules for intra-group transfers in this and thenext paragraph and within those for company reorganisations in paragraphK1 (see paragraphs 231 to 236 below). Where the transfer is for aconsideration equal to book value, paragraph I1 takes priority. Where it isnot, paragraph K1 takes priority.

Paragraph I2 – transfers within a group: transfers not at book value158. Paragraph I2(1) applies the subsequent provisions of the paragraph to

certain intra-group transfers of intangible fixed assets within paragraph I1.That is where they are for a consideration which is different from the valueof the asset for accounting purposes in the hands of the transferorimmediately before the transfer (the “book value”). The purpose of thisspecial rule is to enable the accounting treatment of an asset to be trackedfor tax to the extent that this is consistent with the notion of a tax-neutraltransfer (and in particular with the proposition that no realisation of theasset is to be regarded as taking place on the transfer).

159. Paragraph I2(2) deals with the case where the consideration is morethan book value. The transferor is treated as if it revalued the assetimmediately before the transfer and recognised a corresponding gain. Theextent to which that gain gives rise to a taxable credit will then depend onthe operation of paragraph C3 (see paragraphs 63 to 68 above).

160. Paragraph I2(3) deals with the case where the consideration for thetransfer is less than book value. The transferor is treated as if it wrotedown the value of the asset on an impairment review immediately beforethe transfer and recognised a corresponding impairment loss withinparagraph B3 (see paragraphs 40 to 48 above).

161. Paragraph I2(4) provides that the rules of Schedule apply to a deemedrevaluation or impairment loss under the paragraph as they do to an actualloss. In particular those in paragraphs A5 to A7 on conformity withaccounting practice (see paragraphs 25 to 32 above) have to be applied. Itis therefore necessary to consider what entries would have been inaccordance with generally accepted accounting practice if the asset hadnot been transferred.

162. In addition, paragraph I2(4) puts beyond doubt that the revaluation orimpairment review required under the paragraph is among the thingsdeemed to have been done by the transferee on the assumptions requiredby the notion of “tax-neutrality”. See paragraph O6 (paragraphs 350 to 352below).

Paragraph I3 – roll-over relief on reinvestment: application to group member163. Paragraph I3(1) provides that the rules in Part G (reinvestment relief)

are subject to those in this paragraph where a company is a member of agroup.

164. Paragraph I3(3) extends the availability of relief to the case whereexpenditure on new assets is incurred by a company which is a member ofthe same group as the company realising the old assets. Where thespecified conditions (see below) are satisfied, the company realising theasset and the company incurring the expenditure on the new assets aretreated as if they were the same company.

165. The conditions for this treatment are as follows:

• a company must be a member of a group at the time it realises the oldasset;

• the expenditure on other assets is by another company which at thetime of the acquisition is a member of the same group and not a “dualresident investing company” (see paragraph 235 for the thinking behindthis exclusion);

• the new assets must be “chargeable intangible assets” (defined inparagraph O4 – see paragraph 347 below) immediately after theexpenditure is incurred;

• the claim must be made by both companies.166. Paragraph I3(4) prevents expenditure on acquiring assets from

counting for the purpose of Part G if the acquisition is from another groupmember by way of tax-neutral transfer (as defined in paragraph O6 – seeparagraphs 350 to 352 below).

Paragraph I4: roll-over relief on reinvestment: acquisition of companybecoming member of group167. This paragraph extends reinvestment relief under Part G to

reinvestment in shares in a company where the assets of that companyinclude intangible assets within the Schedule.

168. Paragraph I4(1) applies the provisions of Part G to this situation bymaking the acquisition of a “controlling interest” in a company holding“chargeable intangible assets” (referred to as the “underlying assets”)equivalent to acquiring the assets themselves. For this purpose therequirement that the new assets should be “chargeable intangible assets”is met if that condition is satisfied in relation to the underlying assets in thehands of the company which holds them. The test is applied immediatelyafter the acquisition of the controlling interest in it.

169. Paragraph I4(2) explains what is meant by the acquisition of acontrolling interest in a company: company A acquires a controllinginterest in company B if the two companies are not in the same group (asdefined in Part H) but become so on the acquisition of shares in companyB by company A. There is no restriction in the relief where the controllinginterest is less than 100%.

170. Paragraph I4(3) defines the cost of acquiring the new assets as thelesser of the tax value of the underlying (intangible) assets immediatelyprior to the acquisition of the controlling interest and the cost of thatacquisition. The effect is that to qualify for the maximum relief availableunder paragraph G5 both the tax value of the underlying assets and thecost of the newly acquired shares must exceed the realisation proceedsfor the old asset.

171. Paragraph I4(4) sets out the consequence: the tax value of theunderlying assets is reduced by the amount available for relief underparagraph G5 (see paragraphs 142 to 146 above). Where there is morethan one underlying asset the company holding them may allocate theamount available as it sees fit.

172. Paragraph I4(5) requires a joint claim by the two companies.

173. ExampleTax valueold assetprior todisposal

Originalcost oldasset

Disposalproceeds

Cost ofshares

Tax valueunderlyingassets

Realisationproceedsrolled over

80 100 150 200 90 None (a)

80 100 150 200 180 50 (b)

80 100 150 200 140 40 (c)

80 100 150 140 200 40 (d)

80 100 150 130 140 30 (e)

Notes

(a) tax value of underlying assets less than original cost of old asset; no reliefavailable – paragraphs I4(3) and G5(3).

(b) tax value of underlying assets and cost of shares exceed disposalproceeds; all profit over original cost rolled over – paragraphs I4(3) andG5(2).

(c) tax value of underlying assets less than realisation proceeds of old asset;not all disposal proceeds reinvested; profit to be rolled over restricted tothe excess of that tax value over the cost of the old asset – paragraphsI4(3) and G5(2).

(d) cost of shares less than realisation proceeds and tax value of underlyingassets (which exceeds the proceeds); relief restricted as if the cost of theshares is equal to the tax value of the underlying assets – paragraphsI4(3) and G5(2).

(e) as (d) but tax value of underlying assets does not exceed disposalproceeds; relief again restricted as if the cost of shares is the tax value ofthe underlying assets.

Further provision – payments for reinvestment relief to be left out of accountfor tax174. A number of those responding to the March Technical Note urged that

certain payments should be left out of account for corporation tax. Theseare payments made to compensate a group member (X) for the reductionin the amount of its expenditure on new assets under the new rules as aconsequence of reinvestment relief being given to another group member(Y). The Government is content to proceed on these lines.

175. What is envisaged is a rule on the lines of those in section 403(6) ICTAand section 171A(5) TCGA. A payment from Y to X as part of their

agreement concerning reinvestment relief would be left out of account forcorporation tax purposes so long as it did not exceed the reduction in X’sexpenditure on new assets. This would apply where reinvestment reliefwas given by virtue of paragraph N12 (capital gains on existing assets -see paragraphs 330 below) or under I4 above (acquisition of companybecoming member of group) as well as under paragraph I3. And where areinvestment relief claim took into account expenditure by more than onegroup member non-taxable payments could be made to each.

176. Are respondents content that a measure making intra-group paymentsfor reinvestment relief non-taxable in these circumstances successfullyaddresses their concerns?

Paragraph I5 – company ceasing to be member of group (“degrouping”)177. This and subsequent paragraphs of Part I provide for recognition of a

taxable credit or deductible debit under the Schedule in line with thecapital gains degrouping rule in section 179 TCGA. These rules take intoaccount the proposed changes arising from the substantial shareholdingconsultation.

178. Paragraph I5(1) sets out the circumstances in which a degroupingevent arises. In essence, a company, to which a “chargeable intangibleasset” has been transferred, in circumstances attracting “tax-neutral”treatment, leaves a group within six years of the transfer. A “chargeableintangible asset” is defined in paragraph O4 (see paragraph 347 below)and a “tax-neutral” transfer in paragraph O6 (see paragraphs 350 to 352below).

179. Paragraph I5(2) provides that where the company leaving the group, oran associated company also leaving the group, still holds that asset theSchedule has effect as if the first company realised and reacquired theasset immediately after the transfer for its market value at that time.

180. Paragraph I5(3) aggregates the adjustments for tax purposes for earlieraccounting periods as a result of the market value realisation andreacquisition and brings them into account for the accounting period inwhich the company leaves the group. As well as the debit or credit on thedeemed realisation those adjustments are likely to reflect the revision ofdeductions for sums written off the asset under Part B following thesubstitution of market value for a tax-neutral figure as its original cost fortax.

181. Assume an intangible asset with an estimated ten year life, ispurchased by group company A for 10,000 and tax deductions foramortisation are allowed to it following the accounts for accounting periods(‘APs’) 1-3 of 1000 per AP. At the beginning of AP4 the asset istransferred to group company B for its book value of 7000 (though it has amarket value of 9000 at the time). B continues to write down the asset inAPs 4 and 5 by 1000 per AP and obtains tax deductions accordingly, onthe basis of the tax-neutral treatment directed by paragraph I1. B leavesthe group at the end of AP 5.

182. In these circumstances B is deemed to have realised and reacquiredthe asset for 9000. That gives rise to a taxable credit of 2000, representingthe excess of the market value at the time of the transfer (9000) over thetax written down value at that time (7000). B’s amortisation deduction forAP4 is adjusted to reflect an acquisition cost of 9000, not 7000. So,applying the formula in paragraph B3(4), the deduction due for AP4 is1000 x 9000/7000 = 1286. The extra deduction for that period of 286(1286-1000) and the taxable credit of 2000 are netted off (under paragraphI5(3)) and brought to account for AP5. That is along with the deductibledebit for AP5 itself of 1286 (computed under paragraph B3(6) – 7714/6000x 1000). Over the life of the asset, therefore, the taxable credit triggered byB’s departure from the group is balanced by extra deductions for sumswritten off the asset.

183. Paragraph I5(4) sets out how the credit or debit calculated under theprevious sub-paragraph is brought into account for tax. The general rule isthat it takes its character from the purposes for which the company leavingthe group held the asset immediately after the transfer of the asset to it. If,however, the company carried on at the time of the transfer an activitywithin paragraphs F2 to F4 (trades etc – see paragraphs 110 to 114above), but ceased to do so prior to departure from the group, a credit ordebit is regarded as a non-trading item within paragraph F5 (seeparagraph 117 above).

Paragraphs I6 to I10 – further degrouping rules 184. The provisions in these paragraphs are the equivalents of existing

provisions in the capital gains code as follows.

Provision ofschedule

Capital gainsequivalent in

TCGA

Subject

Paragraph I6 Section 179(2) to(2D)

Associated companies leaving groupat same time

Paragraph I7 Section 179(5) to(8)

Principal company becomesmember of another group

Paragraph I8 Section 181 Merger carried out for bona fidecommercial reasons

Paragraph I9 Section 179(1),last sentence

Group member ceasing to exist

Paragraph I10 Section 179(10) Supplementary provisions

185. For capital gains purpose a degrouping calculation is necessary notonly where an asset transferred on no gain/no loss terms is held by acompany leaving a group but also in a further set of circumstances. That iswhere the asset held by the company leaving the group is not the assettransferred but another asset used to frank a gain arising on the disposal

outside the group of the first asset under the capital gains roll-over reliefrules. There is no equivalent rule under the Schedule.

Paragraph I11 – degrouping: application of roll-over relief in relation todegrouping charge186. This paragraph adapts the provisions of Part G (reinvestment relief) to

make it possible for the deemed realisation of an asset under thedegrouping rules to be the subject of a reinvestment relief claim.

187. Paragraph I11(1) provides that Part G applies in these circumstanceswith a number of modifications:

• the requirement in paragraph G2 that the old asset must be a“chargeable intangible asset” of the company making the realisationapplies instead to the company which transferred the asset on tax-neutral terms;

• the time limits in paragraph G3 run from the date of the event whichtriggers the degrouping charge not from the date of the transfer of theold asset;

• the references to the proceeds of realisation in Part G are to be read asreferences to the deemed proceeds on the transferee’s realisation atmarket value.

188. Paragraph I11(2) ensures that the reacquisition cost of the assetfollowing its deemed realisation is not affected by the reduction of theproceeds as a result of reinvestment relief.

Paragraph I12 – reallocation of degrouping charge within group189. This paragraph enables a member of the group, which a company

leaves in circumstances which trigger a degrouping charge, to elect jointlywith that company for a taxable credit on degrouping to be brought toaccount by that member and not by the departing company.

190. Paragraph I12(1) provides that the paragraph applies where acompany makes a “chargeable realisation gain” under the degroupingrules. A “chargeable realisation gain” is defined in paragraph O4 (seeparagraphs 347 and 348 below).

191. Paragraph I12(2) provides that the company (A) making the gain andanother member of the same group (B), at the time of the event whichtriggers the degrouping charge, may jointly elect that some or all of A’sgain is to be treated as B’s. That is so long as B satisfies the twoconditions in sub-paragraphs (4) and (5).

192. The first condition is that B must either be resident in the UK orcarrying on a trade in the UK through a branch or agency (and not exemptfrom tax on the profits of the branch or agency by virtue of some provisionin a tax treaty). The second condition is that B is neither a friendly societyentitled to certain tax exemptions or a dual resident investing company(see paragraph 156 above).

193. Paragraph I12(6) requires the election to transfer the chargeablerealisation gain to be made in writing not later than two years from the end

of the accounting period of the company leaving the group in which theevent triggering the degrouping charge falls.

194. Paragraph I12(7) sets out the detailed consequences of the election.The chargeable realisation gain is regarded as a non-trading credit (underparagraph F5 – see paragraph 115 onwards above) at the time the eventwhich triggers the degrouping charge occurs. Where the company (‘B’ inthe example above) which joins in the election with the company leavingthe group, is not resident in the UK (see paragraph 192 above) the creditis regarded as arising from an asset held for the purpose of its UK branchor agency.

Paragraph I13 – application of roll-over relief in relation to reallocateddegrouping charge195. This paragraph makes the necessary adaptation to the reinvestment

relief rules to enable the company, which elects under paragraph I12 totake over a degrouping charge, to make a claim to reinvestment reliefunder Part G. In outline, it stands in the shoes of the company leaving thegroup taking over for example the cost and realisation proceeds of thatasset.

Paragraphs I14: recovery of degrouping charge from other companies196. These paragraphs provide for alternative rights of recovery from other

companies where any of the corporation tax attributable to the charge isnot paid within six months of its falling due. The tax attributable to thecharge is the difference between the tax actually payable and the tax thatwould have been payable in the absence of the taxable credit within Part Das a result of degrouping (paragraph I14(4) and (5)).

197. The companies from which the tax can be recovered are defined byparagraph I14(2) in broadly similar terms to those set out in section 190(3)and in what was section 179(11) TCGA (repealed when the more generalprovisions now in section 190 were enacted). They may fall into one orother of two categories.

198. First, they may be members of the same group as the company due topay the tax, either at the date of the event triggering the degroupingcharge (typically the taxpayer company’s departure from the group) or atthe date the tax becomes due. For this purpose the group definition in PartH is extended by the inclusion of companies which are 51% (as against75%) subsidiaries (paragraph I14(6)). Compare section 190(13) TCGA.

199. Secondly, the unpaid tax may be recovered from a company whichholds the asset, in respect of which the degrouping charge arises, either atthe time of the event triggering the charge or at the date the tax becomespayable. Compare the superseded section 179(11)(b).

I15-I16: recovery degrouping charge from other companies: procedures andtime limits200. These rules are modelled on those in section 190(4) onwards TCGA.

Part J – excluded assets201. This Part of the Schedule restricts the scope of the Schedule as initially

set out in paragraphs A2 to A4 (see paragraphs 12 to 24).Paragraph J1 - introduction202. Paragraph J1(1) provides that where an asset is excluded by Part J so

is an option or other right to acquire or dispose of that asset. This rule isthe counterpart of that in paragraph A3(2)(b) which ensures that options toacquire or dispose of intangible fixed assets are within the Schedule (seeparagraph 20 above).

203. Paragraph J1(2) identifies the three kinds of exclusion for which Part Jprovides. That is to say complete exclusion within J2 to J6, exclusionexcept as regards royalties within J7 to J9 and the special cases withinJ10 and J11.

204. Paragraphs J1(3) to (5) are aimed at cases where an asset is excludedonly to a limited extent. The rule is that the provisions of the Schedule andthe rest of the corporation tax code apply as if there were two separateassets, one within and one outside the Schedule. Any apportionmentnecessary to achieve that outcome is to be on a reasonable basis.

Assets entirely excluded205. The general effect of the provisions in this section of Part J is to put

beyond doubt the treatment of sums which would mostly be regarded asoutside the scope of Financial Reporting Standard 10 in any event.

Paragraph J2 – assets representing rights over tangible assets206. This paragraph makes it explicit that rights arising out of land and those

in relation to tangible movable property are outside the Schedule. Thus forexample an option to acquire land or a chattel, though arguably anintangible asset as a matter of general law, is excluded whatever theaccounting treatment.

Paragraph J3 – oil licences207. Oil licences are excluded from the scope of Financial Reporting

Standard 10 and are subject instead to their own industry reportingstandard. This paragraph excludes them also from the Schedule. Theseexclusions reflect their potentially transitory status as intangible assets inthat they may subsequently be charged to a tangible asset accountrepresenting successful exploration costs.

208. Paragraph J3 defines an oil licence (including an interest in an oillicence) in essentially the same terms as section 155 TCGA (roll-overrelief).

Paragraph J4 – financial assets209. This paragraph similarly excludes financial assets. ‘Financial asset’ is

given its accountancy meaning. The term is defined in Financial ReportingStandard 13. The paragraph specifically brings within the term moneydebts, financial instruments, insurance contracts and rights undercollective investment schemes, drawing on definitions in tax and prudential

legislation as necessary. The references to the legislation on financialinstruments in Finance Act 1994 may need to be updated in due course(see the Inland Revenue’s consultative document of 26th July 2001).

Paragraph J5 – assets representing rights in companies, trusts etc210. The third specific exclusion of this type comprises shares and other

rights in companies, rights under a trust and the interest of a partner in apartnership. The last two categories are themselves subject to anexception to the extent that the right or interest in question is treated foraccounting purposes as an interest in an intangible fixed asset. That mayarise where the assets of the partnership business or the property subjectto the trust are themselves intangible fixed assets.

Paragraph J6 – assets not held for business or other commercial purposes211. This paragraph excludes intangible fixed assets to the extent they are

not held for business or other commercial purposes. In particular, theparagraph provides that the purposes of activities outside the charge tocorporation tax are not to be regarded as business purposes.

212. The Schedule does not attract as a matter of course generalcomputational rules, such as that prohibiting tax deductions forexpenditure not incurred wholly and exclusively for the purposes of atrade. In particular, Part F does not impose any test of purpose orcommerciality on non-trading gains and losses. The rule in Paragraph J6fills this gap.

Assets excluded except as regards royalties213. The effect of including incoming or outgoing royalties in respect of

intangible fixed assets within the Schedule is simply one of timing. Suchroyalties are currently recognised for example when they arise (typicallywhen they fall due) or when they are paid, which is not the basis normallyused for accounting purposes. The limited nature of this change oftreatment means that it is feasible to bring royalties into the Schedule evenwhere on balance it is appropriate to exclude more generally the intangibleasset in question. For the same reason it is possible to apply the accountsbasis to such royalties even where they are in respect of pre-commencement assets (see paragraph N3 and paragraphs 312 to 313below).

Paragraph J7 – assets held for purposes of certain businesses214. This paragraph excludes intangible fixed assets to the extent they are

held for the purpose of life assurance business or a mutual trade orbusiness.

215. Life assurance business is subject to special tax rules of its own. Inparticular, the tax computations are based to a great extent on informationdrawn up to meet prudential requirements and not on accounts intended toshow a “true and fair view”. Paragraphs 26 above and 334 below explainthe fundamental role of such accounts under the new rules.

216. Case-law has established that the surplus or deficit from the conduct ofa trade or business on a mutual basis is not to be taken into account for

tax. But mutual concerns remain subject to the capital gains code inrespect of capital transactions, including the disposal of goodwill andintangible assets of a capital character. Arguably, gains on suchtransactions would become exempt if they were reclassified as tradingtransactions under the Schedule. And in any event tax deductions foramortisation would be of no practical benefit to a mutual concern. Thisparagraph therefore preserves the status quo.

Paragraph J8 – films and sound recordings217. Film assets are subject to the special rules in sections 40A-43 Finance

(No 2) Act 1992 and section 48 Finance (No 2) Act 1997, includingincentive reliefs. By extra-statutory concession free-standing audio tapesand discs attract some of these special rules. To preserve the effect ofthese rules these assets are excluded from the Schedule.

218. Paragraph J9 – expenditure on computer software treated as part ofcosts of related hardware

219. Software acquired with the related hardware is not treated as anintangible asset under Financial Reporting Standard 10 and is thereforeexcluded from the Schedule by this paragraph.

Assets excluded to extent specifiedParagraph J10 – expenditure on research and development 220. This paragraph preserves the effect of existing rules for relieving

expenditure in respect of research and development (R & D), including theprovisions for special deductions and credits for smaller companiesenacted last year. The proceeds derived from R & D, however, are withinthe Schedule.

221. Paragraph J10(1) provides that the paragraph applies to an asset heldby a company representing expenditure on R & D.

222. To preserve the effect of existing rules giving tax relief for expenditure,paragraph J10(2) provides that Part B of the Schedule, which deals withexpenditure on an intangible fixed asset, should not apply to research anddevelopment. The sub-paragraph also disapplies those provisions in PartC concerned with the revaluation of assets, with negative goodwill andwith the reversal of previous accounting debits. But the rules in paragraphC2 (see paragraphs 61 and 62 above) are not switched off in this way.Therefore proceeds derived from the exploitation of R & D are brought intoaccount under the Schedule.

223. Paragraph J10(3) ensures that Part D of the Schedule, dealing with therealisation intangible assets, also has effect without regard to expenditureon R & D (which will have been relieved under current law). This ruleprevents double counting of the same expenditure.

224. Paragraph J10(4) attracts the definition of R & D in section 837A ICTAwhich applies generally for tax, with the addition of oil and gas explorationand appraisal.

Paragraph J11 – election to exclude capital expenditure on computer software225. The purpose of this paragraph is to enable companies to preserve the

benefit of existing rules permitting capital allowances, particularly first yearallowances, to be claimed on computer software expenditure.

226. Paragraph J11(1) provides that the paragraph applies to capitalexpenditure on computer software in respect of which a company hasmade an election under the paragraph.

227. Paragraph J11(2) preserves the effect of the capital allowances ruleson expenditure within the election in the same way as they are preservedby paragraph J10(2) in respect of R & D expenditure (see paragraph 222above). That is by disapplying those provisions of the Schedule whichwould otherwise override the capital allowance rules.

228. Paragraph J11(3) and (4) ensure that the Schedule brings into accountreceipts from the realisation of software in excess of those which count asdisposal values under the provisions dealing with software in the capitalallowances code.

229. Paragraph J11(5) and (6) set out the necessary procedural rules.Elections have to specify the capital expenditure to which they relate andhave to be made in writing within two years of the end of the accountingperiod in which the expenditure is incurred. They are irrevocable.Paragraph J11(7) applies the meanings given for capital allowances to thetime expenditure is incurred and to what constitutes capital expenditure.

Part K – transfer of business or trade230. This Part of the Schedule sets out rules, equivalent to those for capital

gains purposes, to ensure some form of continuity of treatment whereintangible fixed assets change ownership in the course of a businessreorganisation.

Paragraph K1 – company reconstruction or amalgamation involving transfer ofbusiness231. This paragraph and K5 (clearance procedure in respect of anti-

avoidance rule) set out provisions equivalent to those in section 139TCGA. The interaction between this paragraph and the intra-group transferrules in Part I is addressed in paragraph I1(3) – see paragraph 157 above.

232. Paragraph K1(1) sets out the circumstances in which the paragraphapplies. First, there must be a “scheme of reconstruction or amalgamation”involving the transfer of the whole or part of a business from one companyto another. Such a scheme largely takes its meaning from case-law. TheInland Revenue’s interpretation of that case-law for capital gains purposeswill also apply for the Schedule.

233. Secondly, the transferor company itself must receive no part of theconsideration for the transfer other than through the assumption by thetransferee of business liabilities. (Typically the consideration will goinstead to the shareholders of the transferor company by way of the issueof shares in the transferee.)

234. Paragraph K1(2) provides that, where an intangible fixed assettransferred in these circumstances is a “chargeable intangible asset” in thehands of the transferor immediately before the transfer and in the hands ofthe transferee immediately afterwards, the transfer takes place on “tax-neutral” terms. The expression “chargeable intangible asset” is defined inparagraph O4 (see paragraph 347 below) and “tax-neutral” transfers inparagraph O6 (see paragraphs 350 to 352 below).

235. Paragraph K1(4) ensures that tax-neutral treatment does not applywhere either the transferor or the transferee is a friendly society entitled tocertain tax exemptions or a dual resident investing company. That isbecause their tax treatment is not on all fours with that of ordinary groupmembers. There is a similar exception for capital gains purposes whichextends also to investment companies and venture capital trusts. But sincethese entities are not subject to special tax rules in other respects underthe Schedule, there is no need to apply the exception to them here.

236. Paragraph K1(5) reproduces in simpler language the rule in section139(5) TCGA. It confines the application of paragraph K1 to cases wherethe reconstruction or amalgamation is for bona fide commercial reasonsand is not part of a scheme or arrangements with a main purpose ofavoiding tax. Paragraph K1(6) provides for pre-transaction clearance inaccordance with the procedure in paragraph K5 (see paragraph 245below).

Paragraph K2 – transfer of UK trade237. This paragraph is the equivalent of sections 140A and 140B TCGA

which give effect to some of the provisions in the European Union MergersDirective (No 90/434/EEC), dealing with cross-border businessreorganisations.

238. Paragraph K2(1) sets out the circumstances in which the paragraphapplies (on a claim by the parties to the transfer). There must be a transferof the whole or part of a trade carried on in the UK wholly in considerationof securities issue by the transferee. Both transferor and transfereecompany must be EU companies resident for tax in a member State andone of those states must not be the UK.

239. Paragraph K2(2) provides that in these circumstances the transfer ofan intangible fixed asset which is a “chargeable intangible asset” in thehands of the transferor immediately before the transfer takes place on“tax-neutral” terms, as defined in paragraph O6 (see paragraphs 350 to352 below). The term “chargeable intangible asset” is defined in paragraphO4 – see paragraph 347 below. In broad terms it is an asset within thecomputational rules of the Schedule.

240. Paragraph K2(3) explains what is meant by being resident in a memberState. A company must be within the charge to tax under its law because itis resident for the purpose of the charge (not simply because it has asource of income there) and not treated as resident in a non-memberState by virtue of a tax treaty.

241. Paragraph K2(4) and (5) set out an anti-avoidance rule and a facility forclearance in advance which are in similar terms to those in K1(5) and (6).(see paragraph 236 above).

242. Paragraph K2(6) defines an “EU company” as one incorporated underthe law of a member State and “securities” as including shares.

Paragraphs K3 and K4: transfer of assets of overseas branch243. Paragraph K3 is equivalent to section 140 TCGA. In broad terms, it

allows taxable credits representing profits over the original cost ofintangible fixed assets transferred from a UK company’s overseas branchto a company not resident in the UK to be deferred, potentially indefinitely.The next paragraph, K4, is the equivalent of section 140C TCGA (whichgives effect to parts of the European Union Mergers Directive (No90/434/EEC) on cross-border business reorganisations and gives relief inrespect of similar profits where the trade is carried on through a branch oragency in another EU member State. In this case relief takes the form ofan allowance for notional foreign tax. In both cases the transfer must be inexchange for shares or loan stock.

244. Claims to relief in respect of the same transfer cannot be made underboth provisions. See paragraphs K3(10) and K4(6). Both reliefs are subjectto an anti-avoidance rule, with a facility for clearance in advance, similar tothose in K1(5) and (6) (see paragraph 236 above). These rules are inparagraph K3(8)-(9) and K4 (7)-(8).

Paragraph K5 – procedure on application for clearance245. This paragraph sets out the detailed procedure for obtaining advance

clearance for a transaction under paragraphs K1- K4. The procedures arethe same as those which currently apply for the equivalent clearanceunder the capital gains rules, set out in section 138(2)-(5) TCGA.

Paragraph K6 – transfer of business of building society to company246. This paragraph contains provisions broadly equivalent to those in

section 216 TCGA 1992.247. Paragraph K6(1) provides that, where the business of a building

society is transferred to a company in accordance with the relevantprovisions of the Building Societies Act, the transfer of any intangible fixedassets of the business which are “chargeable intangible assets” in thehands of both parties takes place on “tax-neutral” terms. A “chargeableintangible asset” is one within the computational provisions of theSchedule and is defined in paragraph O4 – see paragraph 347 below. A“tax-neutral” transfer is defined in paragraph O6 (see paragraph 350 to352 below). Similar rules apply to transfers of assets, whether in thecontext of company reorganisations generally under paragraph K1 orbetween group members under paragraph I1.

248. Paragraphs K6(2) to (6) are concerned with the consequences for thedegrouping provisions in Part I. The approach is similar to that to adoptedin section 216 TCGA in modifying the capital gains degrouping rules insection 179 of that Act.

Paragraph K7 – amalgamation or transfer of engagements by certainsocieties249. This paragraph also provides for tax-neutral treatment for transferred

intangible assets on similar lines to that in section 215 TCGA and section486(8)-(9) ICTA. The paragraph applies where there is an amalgamationor transfer of engagements involving a building society, a registeredindustrial and provident society or certain co-operative associations.

Part L – transactions between related parties250. This Part of the Schedule sets out the treatment of transactions

between “related parties” (paragraphs L1 to L4) and explains the meaningof that term (L5 to L10).

Paragraph L1 – transfer between company and related party treated as beingat market value251. Paragraph L1(1) sets out the rule which applies were there is a transfer

of an intangible fixed asset from a company to a related party or in theopposite direction. Where the asset is a “chargeable intangible asset” inthe hands of the company, the transfer is regarded as taking place atmarket value. That is for all tax purposes for both parties, whether thecompany in question is the transferor or transferee. The term “chargeableintangible asset” is defined in paragraph O4 – see paragraph 347 below.In broad terms it is an asset within the computational rules of theSchedule.

252. This rule ensures that a transaction takes place at the same price forboth parties even though one may be within the charge to capital gains tax(or possibly income tax) in respect of the transaction. It is subject to theexceptions in the next two sub-paragraphs.

253. Paragraph L1(2) provides that the transfer pricing rules in Schedule28AA take precedence over the market value rule in L1(1).

254. Paragraph L1(3) ensures that the market value rule does not overridethe “tax-neutral” treatment of the transfer of an asset, defined in paragraphO6 (see paragraph 350 to 352 below), by virtue of the provisions of Parts Ior K of the Schedule.

Paragraph L2 – exclusion of roll-over relief in case of part realisation involvingrelated parties255. This paragraph sets out a circumstance in which reinvestment relief

under Part G is not available. That is where a company partly realises anasset and the person who as a result acquires an interest of anydescription in that asset (or in an asset deriving its value from that asset) isa related party of the company. See paragraph 77 above for thebackground to this rule.

Paragraph L3 – restriction of roll-over relief in case of transfer betweencompany and related party at an undervalue256. This paragraph deals with circumstances where an asset within the

Schedule is transferred at an undervalue and the transfer pricing ruleslead to the imposition of a higher figure. In those circumstancesreinvestment relief under Part G cannot be used to defer recognition of thecredit representing difference between the arm’s length figure and theactual consideration. The amount of the proceeds of realisation for thepurpose of reinvestment relief is therefore the proceeds recognised by thetransferor of the asset for accounting purposes.

Paragraph L4 – delayed payment of royalty payable by company to relatedparty257. This paragraph is directed at attempts to exploit the adoption of the

accounting basis for the recognition of royalty deductions in order to defertax. There is a similar rule in the corporate debt provisions as regardsinterest – see paragraph 2 of Schedule 9 FA 1996. This rule applies wherea royalty payable by a company to or for the benefit of a related party isnot paid within twelve months of the end of the period of account in whichit is charged against profits. In those circumstances the royalty only countsas a deductible debit when it is actually paid. “Royalty” is defined inparagraph O5 – see paragraph 349 below.

Paragraph L5 – meaning of related party258. The draft legislation adopts a version of an approach which appears

elsewhere in current tax law, notably in the transfer pricing and controlledforeign companies provisions (in Schedule 28AA and Chapter 4 of Part 17of ICTA respectively). Similar rules have been proposed in the course ofthe current consultation exercise on reform of the corporate debt andrelated provisions. The outcome of that exercise, as well as commentsmade in response to this document, will be taken into account in finalisingthese rules.

259. Paragraph L5(1) sets out four cases in which a “person” (a term whichincludes, but is not confined to, companies) is a related party of acompany.

260. “Case One” is where one controls the others or has a major interest inthe other. The notions of “control” and “major interest” are defined in thesubsequent paragraphs of Part L. The definitions are a somewhatrestricted version of those in the other provisions mentioned in paragraph258 above.

261. “Case Two” is where a person and a company are under the control ofthe same person except (broadly) where that person is part of aGovernment or an international organisation – see paragraph L5(2).

262. “Case Three” is where the company is a “close company” (verybroadly, a family company) and the person is a participator or an associateof a participator in the company. “Case Four” is the reverse situationwhere the company is a participator or associate of a participator in theperson. These terms have the meaning given to them under section 417

ICTA (see paragraph L10(1)). The definition of a close company insections 414 and 415 ICTA also applies – see section 832(1).

Paragraph L6: meaning of “control” and “major interest”263. Paragraph L6(1) sets out the basic definition of “control”, modelled on

section 840 ICTA. Control (of a company) is the power of a person tosecure that the affairs of a company are conducted in accordance with hisor her wishes as a result of:

• holding shares or possessing voting power in relation to that or anyother company;

• powers conferred by the article of association or similar document.264. Paragraph L6(2) provides that a person has a major interest in a

company if two conditions are satisfied. First, that person and one otherperson, taken together, must have control of the company (as defined inL6(1)). Secondly, each must have control of 40% of the rights and powersby means of which they exercise control. The latter test reflects the factthat there is often particularly close commonality of interest between theparties to a joint venture.

265. Paragraph L6(3) provides that the further rules in L7 and L8 apply indetermining whether a person has control of a company.

Paragraph L7 – rights and powers to be taken into account: general266. This paragraph sets out the rights and powers which can be attributed

to a person for establishing whether he or she has control or a majorinterest in a company. Similar rules apply in relation to most equivalenttests in current tax law.

267. Broadly, the rights and powers are:

• his or her own future rights and powers;

• rights and powers of others (including future rights and powers) to theextent they may have to be exercised on behalf of, under the directionof, or for the benefit of the person concerned;

• those of connected persons and of persons connected with them.But they do not include right and powers over any property of a borrowerthat is conferred by virtue of any security relating to a loan.

268. The rules in section 839 of the Taxes Act apply to establish whether aperson is connected with another but with the omission of subsections 4(partnerships) and 7 (persons acting together to secure control). Seeparagraph L10(2). Paragraph L9 contains a special rule on the extent towhich the rights and powers of one partner can be attributed to another forthe purposes of the Schedule. See paragraph 270 below.

Paragraph L8 – rights and powers to be taken into account: rights and powersheld jointly269. This paragraph sets out the general rule: the rights or powers of a

person include those exercisable jointly with other persons. It is expresslysubject to the special provisions for partnerships in the next paragraph.

Paragraph L9 – rights and powers to be taken into account: partnerships270. This paragraph provides that the rights and powers of otherwise

unconnected partners are only to be attributed to a partner if he or she hascontrol of, or a major interest in, the partnership. If not that partner’s rightsand powers, as a partner, are to be disregarded. To determine whether apartner has control or a major interest in a partnership the rules in Part Lapply as if the partnership were a company.

Part M – supplementary provisionsParagraphs M1 and M2 – treatment of grants and other contributions toexpenditure271. Paragraph M1 ensures that grants and contributions in respect of

intangible fixed assets are generally taken into account under theSchedule, whether they are netted off against expenditure or recognisedseparately as incomings. Paragraph M2 preserves the effect of existingexemptions for certain specified grants.

Paragraph M3 - assets acquired or disposed of together272. Paragraph M3(1) ensures that references in the Schedule to the

acquisition or realisation of an asset includes its acquisition or disposalalong with other assets. Compare section 562(1) CAA 2001.

273. Paragraph M3(2) provides, on the lines of section 562(2) CAA, that forthe purposes of the Schedule assets acquired as a result of one bargainare treated as acquired or disposed of together. That is notwithstandingthat separate prices may have been agreed for them or that as a matter ofcontract law the assets may have been acquired or disposed ofseparately.

274. Paragraph M3(3) sets out the consequences for the company whichacquires assets together with other assets (or which is treated as doing sounder sub-paragraph 2). Since the treatment set out is for the purposes ofthe Schedule it has no effect on the value to be placed for tax on anyassets which are outside the Schedule acquired along with those within it.But it is not considered that any significant inconsistency will arise as aresult.

275. The treatment of the transaction depends on the accountancy position.First, where values are allocated to the assets acquired together undergenerally accepted accounting practice (defined in paragraph O1 – seeparagraph 334 to 337 above) those figures are adopted for tax. Thusvalues placed on assets acquired in accordance with Financial ReportingStandard 7 (fair values in acquisition accounting) are acceptable for tax.

276. Secondly, where no such valuation exercised is carried out the totalprice paid for the assets acquired together (or regarded as acquiredtogether) is apportioned on a reasonable basis to each asset. Comparesection 562(3) CAA.

277. Paragraph M3(4) sets out a parallel approach to that in the lastparagraph, that of a reasonable apportionment for the purposes of the

Schedule, where assets are disposed of together. Since the vendor is notsubject to accounting rules equivalent to those which apply to thepurchaser under Financial Reporting Standard 7 there is no equivalent inthis context to the rule described in paragraph 275. Nor does theSchedule contain any specific requirement that the apportionment ofproceeds by the vendor must match the attribution of values to assets bythe purchaser.

Paragraph M4 – treatment of fungible assets278. This paragraph sets out the general rule for intangible assets which are

“fungible”. That is to say of a nature to be dealt in without identifying theparticular assets involved. Fungible assets of the same kind held by thesame person in the same capacity are to be treated as indistinguishableparts of a single asset growing or diminishing with acquisitions ordisposals. In the field of intangibles milk quota would be an example ofsuch an asset. Compare section 104(1) and (3) TCGA.

279. This “pooling” approach should run with the grain of the accountancytreatment but it is in conflict with the need to distinguish “existing assets”from those within the computational provisions of the Schedule under therules in Part N. An obvious solution here would be to add a provision toPart N so that existing assets and those within the Schedule formedseparate pools.

280. A further provision would be necessary to determine from which pool arealisation of the fungible assets in question was made. This could takethe form of requiring identification of the holding realised as far as possiblewith one of the pools or work on a pro-rata principle. Identification inpriority with the pool of existing assets would minimise the period that thefungible assets in question were subject to different rules.

281. Some restriction may be necessary here on the extent to whichfungible assets acquired after commencement go into the pool of assetswithin the Schedule. Extra investment after commencement to supplementexisting fungible assets should clearly do so. But that treatment should notextend to what amounts to the recycling of existing fungible assets, bydisposing of them and acquiring replacements within a relatively shortperiod.

282. These considerations suggest a rule whereby the acquisition offungible assets, which would otherwise come within the Schedule, wouldcount as the acquisition of existing assets in defined circumstances. Thatwould be where the assets acquired could be identified with existingassets, realised shortly before or shortly after the acquisition. The periodover which disposals or acquisitions could be matched in this way wouldneed to be set so as to strike a balance between interfering as little aspossible with transactions undertaken in the ordinary course of businessand giving the Exchequer an adequate degree of protection.

283. What approach should be taken to the identification of fungible assetsin connection with the commencement rules?

Paragraph M5 – asset ceasing to be “chargeable intangible asset”: deemedrealisation at market value284. This paragraph is concerned with three situations where an intangible

fixed asset ceases to fall within the Schedule without changing ownership.In each case, the asset is deemed to be realised and reacquired at marketvalue.

285. The first is where a company ceases to be resident for tax in the UK.The second is simply where an asset held by a company already residentoutside the UK ceases to be “chargeable intangible asset” (defined inparagraph O4 – see paragraph 347 below). That will normally be becausethe asset stops being used for the purposes of a trading branch or agencyin the UK (compare section 25(3) TCGA). The third situation is where theasset begins to be used by the company for the purposes of a mutualbusiness. (Paragraph J7(b) provides that the Schedule does not apply tosuch an asset – see paragraph 216 above.).

Paragraph M6 – asset ceasing to be “chargeable intangible asset”:postponement of gain in certain cases286. This paragraph sets out a relief broadly equivalent to that in section

187 TCGA where a company ceases to be resident in the UK (the first ofthe three situations addressed in paragraph M5) and:

• the asset is held for the purposes of a trade carried on through aforeign branch or agency;

• the deemed realisation proceeds exceed the original tax cost of theasset; and

• the company and another company, of which the first company is a75% subsidiary, elect within two years of the change of residence forthe relief to apply.

In these circumstances recognition for tax of the excess of the deemedrealisation proceeds over original cost may be deferred, potentiallyindefinitely.

Paragraph M7 – asset becoming chargeable intangible asset287. This paragraph deals with situations, which are the obverse of those in

the previous paragraph. That is where an asset becomes a “chargeableintangible asset” as defined in paragraph O4 – see paragraph 347 below.The rule here is simply that the company in question is deemed to haveacquired the asset at its book value for accounting purposes immediatelyafter the asset’s change of status.

288. Paragraph M7(1) sets out the three situations in which this rule applies:

• where the company holding the asset becomes resident in the UK;

• where the company which is not resident starts to use the asset for thepurpose of a trade carried on through a branch or agency in the UK;

• where the asset ceases to be held for the purposes of a mutualbusiness.

289. Paragraph M7(2) sets out the consequence, namely that the asset istreated as acquired at the time of its change of status for its carrying valuefor accounting purposes. This rule does not apply the computational rulesof the Schedule to an asset, held for example by a non-resident companyprior to commencement date, by virtue of its becoming UK resident. Thatasset would not become a “chargeable intangible asset” as required byparagraph M7(1) because the commencement rule in paragraph N2 (seeparagraphs 307 to 311 below) is not overridden.

Paragraph M8 – tax avoidance arrangements to be disregarded290. Paragraph M8(1) sets out the effect of the existence of “tax avoidance

arrangements”. Those arrangements are to be disregarded in determiningthe amount of certain debits and credits within the Schedule. The debitsare those under paragraph B3 (the new amortisation and impairmentdeductions) and the credits are those under Part D (on the realisation ofan asset).

291. Paragraph M8(2) defines tax avoidance arrangements. They arearrangements the main object, or one of the main objects, of which iseither:

• to obtain a larger debit (including a debit where none would have due)than that to which the company would otherwise have been entitled; or

• to bring into account a smaller credit (including no credit) than wouldotherwise have been the case.

292. Paragraph M8(3) defines “arrangements” as including any scheme,agreement or understanding, whether or not legally enforceable.

293. This type of anti-avoidance rule has a number of precedents, mostrecently in paragraph 29 of Schedule 22 FA 2001 (relief for remediation ofcontaminated land) and paragraph 21 of Schedule 20 FA 2000 (relief forexpenditure on research and development). In the absence of a rule ofthis nature it is unclear whether the Exchequer would have a good defenceagainst a range of devices. These may seek to exploit, in particular, thereliance of the new rules on accounting practice in determining the sumswritten off intangible assets. Examples might include the extraction ofvalue from intangibles within the regime to accelerate tax deductions (inways which do not reduce the overall value of a business to a group ofcompanies). “Bed and breakfasting” of existing intangible assets to bringthem within the regime is another concern.

294. To fashion specific rules intended to counter all the possible schemesthat might be devised is simply not a practical proposition and wouldcertainly add to the complexity of the new provisions. On the other hand, amore general rule, aimed for example at the obtaining of (unspecified) “taxadvantages”, would create its own uncertainties for business. Theproposed approach is intended to steer a middle course between the needto protect the Exchequer and to avoid inhibiting ordinary commercialtransactions.

Paragraph M9 – debits not allowed in respect of expenditure not generallydeductible for tax purposes295. This paragraph preserves the effect of certain general rules prohibiting

the deduction of expenditure where the provisions of the Schedule wouldotherwise override them - by virtue of paragraph A1(3) (see paragraphs 9and 10 above). Debits are not to be brought into account to the extent thatthey represent expenditure which would be disallowed by virtue of section577 ICTA (entertaining and gifts), section 577A (crime relatedexpenditure), section 578A (expensive car hire) and section 76(1) to (3)FA 1989 (non-approved retirement benefits).

296. Other general rules, framed in terms of disallowing expenditure such asthose in section 74 ICTA, do not apply. Expenditure is not brought intoaccount directly under the computational provisions in the Schedule.Instead the Schedule applies to debits which are in turn derived fromaccounting losses – see paragraph 33 above. Even therefore where theamount of a debit is made expressly subject to adjustments required fortax purposes (see for example paragraph B2(2)), general rules framed interms of disallowing expenditure do not have effect without a specificproviso on the lines of those in paragraphs M9 to M12. On the other hand,the requirement that the amount of a debit within the Schedule is subjectto tax adjustments is sufficient, by overriding the rule in paragraph A1(3)(see paragraphs 9 and 10 above), to bring into play rules which are framedmore generally in terms of the computation of profits and losses. Anexample is the transfer pricing rules in Schedule 28AA ICTA.

Paragraph M10 – delayed payment of emoluments297. This paragraph is concerned with cases where a debit which would

otherwise be deductible, normally under paragraph B2 (expenditure writtenoff as incurred), is in respect of remuneration payable by the company(‘emoluments’). Payroll costs may come within the Schedule where theyrelate for example to staff employed in promoting a company’s productbrands. Where such remuneration is not paid within nine months from theend of the accounting period for which it is charged in the accounts section43 or 44 Finance Act 1989 defers the tax deduction for that remunerationuntil it is actually paid. Paragraph M6 makes similar provision in relation toremuneration within the Schedule.

Paragraph M11 – delayed payment of pension contributions298. This paragraph reproduces for the purposes of the Schedule other

general rules which defer deductions to the payer until the sum in questionis actually paid. These rules concern certain contributions into InlandRevenue approved pension schemes (section 592 ICTA) and expenses ofproviding benefits under non-approved retirement benefit schemes(section 76(5) or (6) Finance Act 1989).

Paragraph M12 – bad debts etc299. This paragraph preserves the effect of the general tax rules in section

74 concerned with deductions for bad debts in connection with sumsreceivable which count as taxable credits under the Schedule. Exceptwhere they arise in connection with “voluntary arrangements” made under

insolvency legislation the paragraph also ensures that accounting gainsconnected with bad debts give rise to taxable credits.

300. Paragraph M12(1) and (2) reproduce the effect of section 74(1)(j) and74(2) ICTA in the context of the Schedule.

301. Paragraph M12(3) ensures that where a debt is released as part of avoluntary arrangement any accounting gain recognised by the debtor isnot to give rise to a taxable credit (see section 94 ICTA).

302. Paragraph M12(4) puts beyond doubt that any other gain recognisedby a debtor in respect of an unpaid debt gives rise to a taxable credit. Thiswould encompass debts released other than as part of a voluntaryarrangement which are taxable under existing law by virtue of section 94.It would also encompass gains arising out of the informal waiver of debtsby creditors or by a failure to seek payment.

Paragraph M13: assumptions or computing chargeable profits of controlledforeign companies303. In applying the controlled foreign company (‘CFC’) rules (Section 747

onwards ICTA), debits and credits within the Schedule will need to becalculated, just like other elements of allowable expenditure and taxableincome (as against capital gains which are outside the CFC rules). Thisfollows from the classification of debits and credits under the Schedule asincome matters. Paragraph M13 sets out two assumptions to be made inapplying the rules of the Schedule to the calculation a CFC’s “chargeableprofits”.

304. The first assumption (paragraph M13(2)) is that intangible fixed assetsin existence before the first (relevant) accounting period for the purposesof the CFC rules are regarded as acquired or created at their carryingvalue for accounting purposes at the beginning of that period. The sub-paragraph defines that period in the same terms as used elsewhere in theCFC computational rules, for example in paragraph 2(1) of Schedule 24(assumptions about a CFC’s place of residence).

305. Paragraph M13(5) restricts this assumption in one important respect: itis not to be made in applying the commencement rule in paragraph N2(see paragraph 307 to 311 below) to the intangible assets of a CFC. Thus,for example, assets held prior to commencement remain outside theSchedule.

306. The second assumption creates an exception to the general rule forcomputing a CFC’s chargeable profits, that all available reliefs areassumed to have been claimed. Paragraph M13(3) provides that thecompany is assumed not to have claimed reinvestment relief under Part Gof the Schedule. That assumption may, however, be displaced by a noticeunder Schedule 24 specifying the relief to be regarded as claimed.

Part N – commencement and transitional provisionsParagraph N1 – commencement date

307. This paragraph provides definitions for the terms ‘aftercommencement’, ‘before commencement’ and ‘existing law’. TheGovernment’s intention announced as part of its Pre-Budget Report is thatsubject to consultation the new rules will apply from 1st April 2002.

Paragraph N2 – application of Schedule to assets created or acquired aftercommencement308. Paragraph N2(1) sets out the general rule. The Schedule applies only

to intangible fixed assets created or acquired by a company on or after thecommencement date. To prevent assets already held within the sameeconomic family from being converted into newly acquired assets thereare restrictions on the acquisitions after commencement which qualify.Assets which do not come within the Schedule because of this timing ruleare referred to as “existing assets” (paragraph N2(3)).

309. To come within the Schedule an asset must be acquired aftercommencement either from:

• a person who is not a “related party” of the acquirer (defined in Part L –see paragraphs 259 onwards above); or

• a company in whose hands the asset is already subject to the rules ofthe Schedule immediately prior to the transfer (a “chargeable intangibleasset”, defined in paragraph O4 – see paragraph 347 below); or

• a person who in turn acquired the asset from another person who wasnot a related party of the company at the time of either transfer.

310. In the last case, where either of the two persons mentioned was acompany, the one must not be a related party of the other.

311. Paragraph N2(3) and (4) identify exceptions to the rule describedabove:

• royalties (paragraph N3 – see paragraph 312 below);

• telecommunications rights currently subject to the rules in Schedule 23FA 2000 (paragraph N10 – see paragraph 324 below);

• syndicate rights at Lloyd’s (paragraph N11) – see paragraph 325 to327 below)

Paragraph N3 – application of Schedule to royalties312. Paragraph N3(1) provides that the Schedule applies to royalties

recognised for accounting purposes on or after commencement, no matterwhen the intangible fixed asset to which they relate was created oracquired. The practical effect is that from commencement the timing of therecognition of royalties for tax is determined by the accounting treatmentrather than on some other basis (such as the cash basis for royaltieswhich count as charges under current law).

313. Paragraph N3(2) to (4) provide transitional rules to switch royaltiesfrom whatever timing basis is currently used for tax to the accounts basis.The principle is that all royalties are brought to account once and onceonly. Where therefore royalties have been brought to account before thecommencement date they are not to be brought to account again. Where

royalties have not been brought into account in that period but would havebeen on the accounts basis they are to be recognised as arising on thecommencement date. Compare paragraphs 66 and 67 Schedule 5 FA1998 (concerned with the introduction of trading profits principles forcomputing companies’ property income).

Paragraph N4 – assets regarded as created or acquired when expenditureincurred314. This and paragraphs N5 to N9 explain what is meant by an asset being

created or acquired on or after the commencement date. The approachtaken is intended to achieve as smooth a transition as possible from thecurrent timing rules for capital gains and capital allowances purposes to aregime which follows the timing of transactions for accounting purposes.Thus, for example, where expenditure on a patent would count for capitalallowances as incurred before commencement that position is preservedeven though more generally the Schedule treats expenditure as incurredwhen it is recognised for accounting purposes.

315. Paragraph N4(1) provides that the general rules which follow aresubject to the exception in Paragraphs N5 and N6 in relation to internally-generated goodwill and other internally-generated assets which do notcurrently qualify for capital allowances.

316. Paragraph N4(2) and (3) set out the general rules. An asset isregarded as created or acquired on or after commencement to the extentthat expenditure was incurred on it at that time, as defined in paragraphsN7 to N9 (see paragraphs 321 to 323 below). Where expenditure on anasset was incurred either side of commencement the corporation tax rulesapply as if there were two separate assets. Any apportionment necessaryin connection with this rule is to be on a reasonable basis. That may arisefor example where part of the asset, treated as two separate assets, isrealised and it is necessary to allocate the proceeds between them.

N5 – internally generated goodwill: whether created after commencement317. The rule is that a company’s internally-generated goodwill is to be

regarded as created after commencement only if neither the company nora related party held the asset (by carrying on the business in question)prior to commencement. Thus the proceeds of sale of internally-generatedgoodwill, built up over a period which straddles the commencement date,will remain within the capital gains rules.

318. Since expenditure in building up goodwill will normally be a revenuematter under current law this rule is unlikely to prejudice the treatment ofcompanies’ expenditure. At the same time it should significantly restrict theneed for a (potentially difficult) apportionment of the proceeds from thesale of internally-generated goodwill between sums within the regime andsums which represent existing assets. Such an apportionment will only benecessary where goodwill within the paragraph has been supplemented bythe acquisition of more goodwill after commencement.

N6 – certain other internally-generated assets: whether created before or aftercommencement319. For the same reasons this paragraph sets out a similar rule to that in

N5 in relation to internally-generated assets, other than goodwill, which donot currently qualify for capital allowances. They are also to be regardedas created after commencement only if neither the company nor a “relatedparty” held the asset in question prior to commencement.

320. Where part of a block of expenditure is on such assets, and part not,paragraph N6(2) provides that the expenditure is treated as giving rise toseparate assets. For this purpose expenditure is to be apportioned on areasonable basis.

N7 – when expenditure treated as incurred: general rule321. This paragraph sets out the general rule to determine when

expenditure on the creation or acquisition of an asset is incurred for thepurpose of paragraph N4 (and therefore when the asset was created oracquired). The general rule, in keeping with the thrust of the Schedule, isthat expenditure is incurred when it is recognised for accounting purposes.That is subject to the exceptions in paragraphs N8 and N9 to limit anyconflict with existing timing rules for capital gains and capital allowances.

N8 – when expenditure treated as incurred: chargeable gains rule to befollowed in certain cases322. The first exception to the rule in N7 relates to expenditure on the

acquisition of an asset which would not qualify for capital allowances (orpossibly some other relief against income) under existing law, for examplegoodwill. In these circumstances the expenditure is treated as incurredbefore commencement if that would be the date of the transaction forcapital gain purposes (see section 28 TCGA). That is the case even if theexpenditure is incurred after commencement under the general rule in N7.

N9 – when expenditure treated as incurred: capital allowances general rule tobe followed in certain cases323. The second exception to the rule in N7 relates to expenditure on the

acquisition or creation of an asset which is of a type to qualify for capitalallowances under existing law, for example the acquisition of a patent.Such expenditure is to be regarded as incurred when an unconditionalobligation to pay it comes into being (even if the due date for payment islater). This is essentially the rule for capital allowances.

N10 – application of Schedule to certain existing telecommunications rights 324. This paragraph applies the Schedule to existing telecommunications

rights to the extent they are already subject to similar tax rules by virtue ofSchedule 23 FA 2000. The rules of this Schedule apply to them from theaccounting period ending after commencement. Amounts brought intoaccount under Schedule 23 are treated as brought into account under thisSchedule, for example in computing the tax value under Part E of rightsacquired during a period to which Schedule 23 applied. This approach willenable Schedule 23 to be repealed.

N11 – application of Schedule to existing Lloyd’s syndicate capacity325. Assets consisting of Lloyd’s syndicate capacity are already within an

income regime (by virtue of sections 230(2) and 219(3) FA 1994). It istherefore possible to bring companies’ existing syndicate capacity into thenew rules, as well as capacity which satisfies general commencement rulein paragraph N2 (see paragraphs 307 to 311 above). Paragraph N11(2)therefore provides that the Schedule has effect for all such assets foraccounting periods ending after commencement.

326. Unlike telecommunications assets within paragraph N10, however,existing law does not give relief for sums written off syndicate capacitywhile it is still held. Any change in value over the period of ownership isinstead effectively taken into account on realisation. To ensure that sumswritten off capacity in accounting periods ending prior to commencementdo not augment the debits in respect of the sums written off forsubsequent periods, a special rule is needed.

327. Paragraph N11(3) therefore provides that accounting losses (typicallyamortisation deductions) in respect of capacity for accounting periodsending prior to commencement are to be deducted in calculating the taxwritten down value of the asset under paragraph B3(4) for later periods(see paragraphs 42 to 45 of the Schedule). This rule will normally ensurethat the tax value and the book value of the asset will be the same andthat therefore the deductible debit for these periods under the sub-paragraph will be the same as the accounting loss for that period.

328. Without the rule the tax value of the asset would normally have been itsoriginal cost and the deductible debit would therefore have exceeded theaccounting loss. This rule has no effect on the calculation of the credit ordebit on realisation of the syndicate capacity. That will take into accountthe capitalised cost of the asset reduced only by tax deductions actuallygiven.

329. Paragraph N11(4) makes it explicit that the capital gains roll-over reliefrules are of no application to syndicate capacity for the purposes ofcorporation tax.

N12 – roll-over relief: application to realisation of existing assets aftercommencement330. In general capital gains roll-over relief ceases to be available where

existing intangible fixed assets, currently qualifying for the relief, aredisposed of after commencement (see paragraph N13). This paragraphreplaces capital gains roll-over relief in these circumstances withreinvestment relief under Part G of the Schedule. This is achieved byrequiring the rules in Part G relating to the “old asset” to be applied to adisposal within the capital gains code with minor adaptations.

331. The restriction in paragraph L2 (part realisations involving a relatedparty – see paragraph 255 below) does not apply to the extended versionof reinvestment relief described above.

N13 – roll-over relief: transitory interaction with relief on replacement ofbusiness asset

332. Paragraph N13(1) prevents capital gains roll-over relief being claimedon a disposal after commencement of existing intangible assets by virtueof the acquisition of a new asset, also after commencement. Instead,reinvestment relief under Part G is available in these circumstances, asextended by paragraph N12. But capital gains roll-over relief can still beclaimed, subject to the usual rules, on such a disposal against theacquisition of a new asset prior to commencement. In view of the timelimits for reinvestment the disposal would normally have to take place lessthan twelve months after commencement for such a claim to be valid.

333. Paragraph N13(2)-(4) allows the capital gain on the disposal of anexisting asset after commencement to be partly rolled over againstexpenditure on “chargeable intangible assets” (see paragraph O4) underthe provisions of Part G of the Schedule (as extended by paragraph N12)and partly against the pre-commencement acquisition of assets within thecapital gains code.

Part O – index of defined expressionsParagraph O1 – meaning of “generally accepted accounting practice”334. This paragraph defines “generally accepted accounting practice” for the

purposes of the Schedule.335. Paragraph O1(1)(a) sets out the basic definition: “generally accepted

accounting practice” is that with respect to the accounts of UK companiesintended to give a true and fair view. That practice is codified in thestandards and other statements of the Accounting Standards Board. Theaccounts which companies have to produce under the Companies Act arerequired to give such a view.

336. Paragraph O1(1)(b) provides that the term has the same meaning inrelation to entities which are not companies (which may be within thecharge to corporation tax) and non UK companies.

337. Paragraph O1(2) defines a UK company as one incorporated or formedunder United Kingdom law. That is the Companies Act or its NorthernIreland equivalent. A company resident in the UK for tax purposes may falloutside this definition. If so, it would fall into the category of non UKcompanies within paragraph O1(1)(b)(iii).

Paragraph O2 – meaning of expenditure on an asset338. This paragraph explains the meaning of references to “expenditure on

an asset” earlier in the Schedule.339. Paragraph O2(1) sets out the three types of expenditure which are

included. The first is expenditure for the purpose of acquiring, creating orestablishing title to an intangible asset. These words are themselves apt todescribe abortive expenditure for these purposes, as well as successfulexpenditure but the matter is put beyond doubt by a specific reference toabortive expenditure in the opening words of the paragraph.

340. The second category is expenditure by way of royalties or otherpayments for the use of an intangible asset. This provision, together with

earlier provisions, will normally ensure that patent royalties, and thosewhich count as “annual payments”, can be deducted in accordance withtheir accounting treatment rather than allowed as a charge on incomewhen paid.

341. Thirdly, there is expenditure for the purpose of maintaining, preservingor enhancing or defending title to an intangible asset.

342. Expenditure on an intangible asset for the purpose of the Scheduletherefore encompasses sums of a revenue, as well as a capital, nature. Inthe case of revenue expenditure for the purposes of a trade (or propertybusiness) these rules will usually preserve the treatment under existinglaw. So the question whether expenditure of that nature is within theSchedule or outside it will be largely academic.

343. Paragraph O2(2) specifically excludes capital expenditure on tangibleassets from the expenditure within sub-paragraph 1. In particular, thisensures that expenditure on such assets does not come within theSchedule by virtue of having a purpose within sub-paragraph 1(a) (seeparagraph 339 above). The term, “capital expenditure” is defined byreference to the Capital Allowances Act 2001. In essence that isexpenditure which is not a revenue deduction – see section 4 of that Act.

344. Paragraph O2(3) provides for the apportionment of expenditure fallingpartly within and partly outside the categories described above. Theapportionment is to be made on a reasonable basis.

Paragraph O3 – reference to amounts recognised in profit and loss account345. This paragraph provides that references in the Schedule to amounts

recognised in the profit and loss account of a company are to be read asreferences to amounts recognised in the statement of total recognisedgains and losses. Where consolidated accounts are prepared, there is norequirement to draw up such a statement for the parent company itself; sothe paragraph also covers amounts which would be recognised in thestatement if one were in fact drawn up.

346. The Accounting Standards Board is currently consulting on changes tothe presentation of the information currently provided in statutoryaccounts. In anticipation of possible changes the paragraph also includesa reference to any other ‘statement of items brought into account incomputing a company’s profits and losses’.

Paragraph O4 – meaning of “chargeable intangible asset” and “chargeablerealisation gain”347. Paragraph O4(1) defines an asset as a “chargeable intangible asset” if

any gain on its realisation would be a “chargeable realisation gain”. A“chargeable realisation gain” is one which would give rise to a taxablecredit under Part D of the Schedule.

348. Paragraph O4(2) defines a gain on realisation. Effectively there is again on realisation if under Part D of the Schedule the proceeds exceedthe cost to be set against them. The possibility of reinvestment relief or a“tax-neutral” transfer are to be disregarded in applying this test.

Paragraph O5 – meaning of “royalty”349. Paragraph O5 defines a royalty as any payment in respect of the

enjoyment or exercise of rights which amount to an “intangible fixed asset”(as defined in Parts A and J).

Paragraph O6 – tax-neutral transfers350. This paragraph explains what is meant by a “tax-neutral” transfer

wherever that expression is used in the Schedule. That is principally inconnection with intra-group asset transfers within paragraph I1 and thetransfer of a business within Part K.

351. Paragraph O6(2) sets out what tax-neutral treatment entails. Thetransfer is not treated as the realisation of the asset by the transferor or itsacquisition by the transferee. Furthermore, the history of the asset in thehands of the transferor is taken over so that anything done in relation tothe asset by the transferor is treated as done by the transferee. Theapproach is essentially similar to that under section 343 ICTA (concernedwith continuity of treatment on a company reconstruction without a changeof ownership).

352. Paragraph O6(3) highlights two particular consequences of thestatutory fiction. First, the original cost of the asset for tax purposes in thehands of the transferor is treated as the transferee’s cost. Secondly, all thedeductible debits and taxable credits brought into account by the transferorunder the schedule are treated as having been brought into account by thetransferee.

Paragraph O7 – meaning of “the Inland Revenue”353. This paragraph provides that references to the Inland Revenue are

references to any officer of the Board. That is except in relation to theextension of the time limits for group relief under Part F, reinvestment reliefunder Part G and clearance applications under Part K. The Board’s powerto delegate those functions under the Inland Revenue Regulation Act isunaffected by the paragraph.

Paragraph O8 – meaning of “the Taxes Acts”354. This paragraph gives the Taxes Acts their usual meaning, namely the

enactments relating to income tax, corporation tax and capital gains tax.Paragraph O9 – index of defined expressions 355. This paragraph provides a list of terms and references to where they

are defined in the Schedule.

Annex 3 - Partial Regulatory Impact Assessment

REFORM OF THE TAXATION OF INTANGIBLE ASSETS

Introduction

1. This partial Regulatory Impact Assessment reviews the benefits and costs of theproposed reform of the taxation of intellectual property, goodwill and other intangibles.Draft legislation setting out the details of the proposals was published on 27November.

Comments would be welcome on the effects of the reform. These will be takeninto account in producing the full Assessment.

Purpose and intended effects

2. The existing corporation tax regime for intangibles has developed in a piecemeal wayas the nature of these assets has evolved. It involves:

• different rules for the various types of intangible assets. Some are eligible forcapital allowances but there is no tax relief on the purchase of goodwill and manyother intangible assets;

• a range of treatments for taxing sales of intangible assets.

3. The purpose of the reforms is to produce a comprehensive tax regime for intangibleassets that gives relief on a consistent basis and reflects the key role of intangibleassets in the knowledge-based economy. The proposals form part of theGovernment’s programme to create a modern tax system for companies based on theprinciples of fairness and competitiveness.

Options

No change

4. Keeping the present system was considered. But it would have major drawbacks:

• the different treatment of different assets involves complexity and difficultborderlines. It also creates distortions for which there is no economic justification;

• the absence of relief for many intangibles means they are treated much lessfavourably than in other countries, putting businesses based in the UK at acompetitive disadvantage;

• retaining outdated rules would be a brake on the Government’s drive to create amodern tax system.

5. Responses to consultations have said that reform is needed and is overdue.

Options considered in consultations

6. Various options for the key elements of the structure of the new regime have beenexamined and subjected to consultation. These include:

• basis for relief. An accounts based approach and an expanded system ofcapital allowances have been considered. Responses to consultations generallyfavoured the former as simpler and in tune with commercial decision-making;

• assets included. The original idea was to include only intellectual property in thenew regime. But this has been extended to all intangible assets and goodwill inpart to avoid the boundary issues resulting from a more limited regime;

• treatment of proceeds of sales of intangible assets. Under the initial proposal,all sales would have been taxed in line with accounting figures. But the approachhas been developed following consultations to include a new roll-over relief thatdefers the tax charge;

• coverage. The proposals have been focused on company taxation where theneed for reform is pressing and the proposed approach is easier to apply;

• transitional arrangements. A number of options for handling the change to thenew regime have been examined. A rapid change with existing assets brought inimmediately was considered. But in the light of concerns that reliefs on sales ofsuch assets should be maintained, the proposals have been developed to allowfor a gradual transition, with the new rules generally applying only to assetsacquired after commencement.

Present proposal

7. The present proposal has been developed in the light of extensive consultation. It isdesigned to provide a system that balances the objectives of fairness andcompetitiveness and is sufficiently straightforward that it will encourage companies toexploit intangible assets.

8. Its main components are:

• relief for expenditure on the full range of intangible assets and goodwill based onamortisation rates in companies’ accounts;

• profits on sales of assets to be taxed as income;

• tax on sale profits in excess of original cost can be deferred through a new form ofroll-over relief if the company reinvests in newly acquired intangibles;

• transitional rules under which existing assets continue to be taxed under currentrules, although the new roll-over relief will apply to sales of such assets.

Risks

9. Without reform, the UK would continue to treat intangible assets less favourably thanmany other countries to the disadvantage of companies based here.

10. Maintaining tax rules for intangibles that are complex, inconsistent and out-of-datewould also be a barrier to the Government’s drive to create a modern tax system.

11. The proposed new approach involves novel features, particularly basing relief onaccounting amortisation. It has also had to take into account trade-offs betweendifferent objectives. In particular, the design of safeguards has had to balance theneed to prevent abuse of the new reliefs against the importance of facilitating theefficient pursuit of genuine commercial activity. The transitional regime has had tobalance the importance of preserving expectations for existing assets against thebenefits of moving rapidly to a single system that covers all assets.

12. The risks involved have been considered in detail in the consultations. This hashelped produce proposals that the Government believes provide the best way forwardfor the taxation of intangible assets.

Benefits from the reforms

Impact on businesses

13. The new regime will provide relief for depreciation on goodwill and other intangibles –including brands, franchises and a range of other rights and commercial information –where none had previously been available. This will reduce corporation tax bills forcompanies that acquire such assets. Investment in assets such as patents andcomputer software that currently qualify for capital allowances will also be relieved inline with the accounts. The impact will depend on companies’ particular accountingpolicies, but for many it will mean relief is obtained faster than now.

14. The new income basis for taxation will mean that companies will no longer be entitledto capital gains reliefs on sales of assets created after the commencement of the newregime. But the transitional rules mean that indexation and capital loss relief will stillbe available on sales of existing assets. Companies that sell intangible assets willalso be able to defer tax on sales of all intangibles where they reinvest in newintangible assets.

15. The new regime will in principle apply to all companies. But in practice only a smallproportion of companies undertakes transactions in intangible assets in any year andhence will be directly affected by the reforms. Our provisional estimate is that thenumber affected will build up to some 20 to 30 thousand companies. We will belooking further at the scale of the impact for the final Assessment.

Wider economic impact

16. The reforms will eliminate the distortions created by the varying rules for differenttypes of intangible asset. The more neutral treatment should create a more efficientallocation of investment between different types of intangible assets.

17. A modern system for taxing these assets will encourage UK business to takeadvantage of new opportunities in knowledge based activities. With the growing roleof such activities in the economy, this will help meet the Government’s goal ofincreasing productivity and improving overall economic performance.

Effect on compliance costs

18. The proposed new regime will reduce companies’ compliance costs in a number ofways. The use of accounting depreciation will reduce the computational burdencompared to a system of capital allowances. A single income based regime for allintangibles will also remove borderline issues that arise at present and eliminate theneed for some complex capital gains calculations.

19. There will be some additional one-off costs as companies and their advisers will needto familiarise themselves with the new rules.

20. There are also some aspects of the new regime that will offset some of the savings.The new rollover relief will operate by reducing the amortisation reliefs that can beclaimed on replacement assets and will require adjustments to be made to accountingentries. The transitional arrangements will also involve separate regimes for new andexisting assets for a period, which will impose additional costs on some companies.Both these features were the subject of consultation, and respondents generallywished them to be included in the new regime despite their extra compliance burden.

21. There are unlikely to be major effects on Inland Revenue administration costs. Therewill be some one-off costs in training staff for the new regime, but it is not anticipatedthat there will be significant on-going costs.

Effect on small businesses

22. The new regime will apply to all companies regardless of their size. In practice, it islikely that the proportion of small companies involved in transactions in intangibleassets will be smaller than that for larger companies. We will be looking further at theimpact on small companies for the full Assessment, including consultation with theSmall Business Service. We would particularly welcome comments on the impact onsmall businesses.

Enforcement and monitoring

23. The draft legislation contains targeted anti-avoidance measures. The Revenue willmonitor how these work in practice.

24. The new regime will be administered as part of the corporation tax self-assessmentsystem and will be subject to the existing compliance procedures.

25. The Inland Revenue plans to provide guidance and support to companies on thepractical operation of the new regime. It also intends to put in place arrangements tomonitor the effectiveness of the new regime and of its administration.

Consultation

26. The present proposals follow active consultations with industry and representativebodies, including discussions with a consultative group. They have been developed inthe light of responses to a series of consultative documents:

• Innovating for the Future: investing in R&D (HM Treasury and Department ofTrade and Industry, 17 March 1998).

• Reform of the Taxation of Intellectual Property (Inland Revenue, 9 March 1999).

• Reform of the Taxation of Intellectual Property, Goodwill and Other IntangibleAssets (Inland Revenue, 23 June 2000).

• Reform of the Taxation of Intellectual Property, Goodwill and Other IntangibleAssets: The Next Stage (Inland Revenue 8 November 2000).

• Taxation of Intellectual Property, Goodwill and Other Intangible Assets: the NewRegime (Inland Revenue, 7 March 2001).

Contacts

27. The present Assessment has benefited from discussions with companies on theimpact of the proposed new regime. The Inland Revenue would welcome furthercomments on the effects of the proposals, especially their compliance costs, to help inproducing the full Assessment. If you have any comments or would be willing todiscuss the impact on your business please contact by 31 January 2002:

Jon ShermanRevenue Policy, Business TaxRoom 4W322 KingswayLondon WC2B 6NRe-mail: [email protected]

Annex 4 – Summary of responses to March 2001 Technical Note1. The March 2001 Technical Note set out detailed proposals on the new tax

regime for intangible assets. 40 responses were received.

General

2. A number of the responses expressed appreciation for the way theconsultation process had been conducted and the Government’s willingness totake on board the concerns raised by business (for example in including areinvestment relief and transitional arrangements which preservedexpectations with regard to companies’ existing intangible assets).

Scope and computational approach

Scope

3. There were suggestions that consolidation goodwill should qualify for reliefunder the new regime and in particular that this could be achieved, possiblyover the longer term, by means of a provision along the lines of Section 338 ofthe US Internal Revenue Code. There were also more general concerns thatthe intangibles reform should be implemented in a way that was compatiblewith the new relief for substantial shareholdings and so provided a coherentframework for dealing with the purchase and sale of a business, whether inshare or asset form.

4. The Technical Note asked for views on the suggested exclusions from the newregime. These were generally welcomed but it was suggested that the scopeof the regime should be extended to include farm quotas.

Computational approach

5. A number of respondents expressed concern about the ‘backstop rule’ whichwould apply where the accounting treatment adopted in a company’s accountsdid not properly reflect generally accepted accounting practice (GAAP). Thisrule would provide for the actual treatment to be replaced with a treatment thatwas conformant with GAAP. The principal concern was that Inland Revenueinspectors should only invoke the rule in exceptional cases. There were alsosome objections to the provision allowing the treatment in the accounts of anoverseas parent company to be taken into account in determining theacceptability of a UK company’s accounting treatment.

6. The Technical Note suggested that the tax treatment would follow theaccounts figures in cases where intangibles were acquired along with otherassets and these were subject to a ‘fair value’ exercise under FRS7. Thisapproach was generally welcomed. But there were some expressions ofconcern about the treatment of the vendor where a just and reasonable rulewould apply. A number of respondents wanted the Inland Revenue to issueguidance on how these rules would operate. There were also suggestions that

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the parties to a transaction should be able to require agreed transfer values tobe used for tax.

7. The proposal to allow a measure of tax relief for the cost of ‘indefinite life’assets was welcomed by most of those who commented on the point. It wassuggested that relief should be given over fixed rate periods varying from 10 to25 years. 20 years was the most common suggestion.

Reinvestment

8. There was a broad welcome for the proposal to include a roll-over relief withinthe new regime, although almost half of the respondents thought that the reliefshould be more generous or more flexible.

9. The most common suggestion was that it should be possible to roll profits onthe sale of intangibles into the acquisition of assets which qualified for capitalgains roll-over relief and vice versa. There were also suggestions that thewhole of the taxable profit on sale should qualify for relief rather than just theprofit over and above the original cost. And a small number of respondentsthought that there should be no restriction of the base cost of the newintangibles, in which the reinvestment took place, for the purposes ofamortisation relief.

10. The Technical Note invited comments on a proposed approach to determiningwhen roll-over relief would be available in the case of a part disposal. Themajority of those who commented were unhappy with the proposal that reliefshould be available only where the book value of the part of the asset retainedwas less than 25% of the book value immediately prior to the part disposal.They generally regarded this approach as overly restrictive or difficult tooperate in practice. The most common suggestion was that roll-over reliefshould be available wherever a transaction was correctly treated as a disposalin a company’s accounts.

11. The Technical Note also invited comments on the suggestion that roll-overrelief should be extended to the acquisition of shares in a company where thecompany in question had intangible assets within the new regime. This ideawas generally welcomed, although there were some concerns at the possiblecomplexity this might involve.

12. A number of respondents suggested that there should be the facility to make anon-deductible/non-taxable payment to compensate for the reduction inamortisation relief suffered by the newly acquired company (or by thereinvesting company in the situation where a company claimed roll-over reliefin respect of reinvestment by a fellow group member). This was seen asparticularly relevant to the situation where minority shareholders wereinvolved.

Groups and related parties

13. The proposed rules on intra-group transfers and business reorganisationswere generally welcomed, although there were some concern at the fact that a

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market value transfer within a group would lead to a tax charge in somecircumstances.

14. Some respondents thought that there was no need for an intangiblesdegrouping charge and that this would add unnecessary complexity to theregime. The idea that the charge should fall on the vendor group and shouldbe subject to roll-over relief was welcomed by several respondents. But therewere also concerns that there should be consistency between the intangiblesand capital gains rules.

15. A number of respondents thought that the exit charge should be accompaniedby a deferral relief (along the lines of section 187 TCGA 1992) for assets usedin a trade outside the UK.

16. Some respondents suggested that there should be no need for the regime toinclude further anti-avoidance rules to counter contrived or artificialtransactions.

Transition and commencement

17. There was considerable support for ‘grandfathering’. Despite its difficulties,this was seen as a fair approach to transition. But there were someexpressions of disappointment that relief would not be available for existingassets and also concerns at the compliance cost implications of a protractedtransition. The identification of internally generated assets as pre- and post-commencement was a particular concern.

18. There were suggestions that companies should be able to make a one-offelection to bring all their existing assets into the new regime. A furthersuggestion was that disposals of pre-commencement internally generatedassets could be taxed under the new rules, with the option to elect for capitalgains treatment where that was advantageous.

19. A number of respondents suggested that capital gains roll-over relief should beavailable on the disposal of pre-commencement assets. And some queriedwhether it would be possible to roll over capital gains made shortly after thecommencement of the new regime into acquisitions made beforecommencement (but within the 12 month period prior to the disposal) or to rollover capital gains on goodwill made in the three year period beforecommencement into post-commencement acquisitions of intangibles.

20. A number of respondents called for an exception to be made to thecommencement rules to allow relief where a UK company acquires assetsfrom an overseas associate. They saw the rules as set out in the TechnicalNote as a disincentive to relocate these intangibles in the UK.

Special situations

21. There were mixed views from those who commented on the proposedexclusion of finance leased assets from the regime. In the case of Lloyd’s

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syndicate capacity, which is already taxed on an income basis, there wassupport for bringing companies’ existing capacity into the new regime.

Other issues

22. A significant number of respondents asked for clarification on or expressedconcern over the impact of the new intangibles rules on controlled foreigncompanies (CFCs). The treatment of intra-group transfers involving CFCs wasa particular concern and there were suggestions that special rules would beneeded or that the CFC rules should continue to apply as they currently do inthe absence of the intangibles regime. A further suggestion was that thereshould be a period of delay between the introduction of the new intangiblesregime and its application for CFC purposes, in order to allow companies toundertake any restructuring that they thought was needed. Respondents alsoqueried how the intangibles transition and commencement rules would readacross to CFCs.

23. There were calls for deduction at source on royalty payments to be abolishedaltogether, or for the process for claiming treaty relief to be reformed. Therewere also calls for the abolition (or for a reduction in the rate) of stamp duty ongoodwill.

taxation of intellectual property, goodwill and other intangible...

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