Legal Practice Notes

A core tenet of the loan relationships regime is that a company’s borrowing, lending and other corporate debt are taxed by reference to the profits and losses recorded in its accounts. Put differently, the way a loan relationship is recognised and measured under accounting standards will, in most cases, dictate the debits and credits taken into account for corporation tax under the loan relationships code. Although the rules depart from this approach in a number of specific situations, the strong alignment of tax with the financial statements means it is essential to understand the accounting treatment of corporate finance arrangements in order to operate the computational provisions of the loan relationships rules. Consequently, applying tax computations correctly requires familiarity with how such instruments are accounted for......

Corporation tax applies to UK-resident companies (and some other entities), taxing their income and gains for each accounting period, which are apportioned across financial years to set the applicable rate payable. It equally covers non- UK resident companies that conduct UK trade via a permanent establishment ( PE), as well as in a few other defined situations arising under the legislation. Legislative basis for corporation tax The bulk of the corporation tax framework is set out in: Corporation Tax Act 2009 Corporation Tax Act 2010 Taxation ( International and Other Provisions) Act 2010 Parliament grants the charge to corporation tax annually. Each Finance Act includes a provision confirming that corporation tax is levied for that financial year. This annual mechanism underpins the relevant financial year. For further information on the yearly character of corporation tax and its effects, see Practice Note: The Budget and...

Large company R& D relief (pre–1 April 2016) [ Archived] ARCHIVED: This Practice Note has been archived and is no longer maintained. It explains the large company R& D relief, which ceased with effect from 1 April 2016 and was superseded by the R& D expenditure credit ( RDEC). The former relief remained in point until 1 April 2016 for expenditure incurred up to that date. Up to and including 31 March 2016, large companies—and SMEs claiming the large company equivalent where their spend did not meet the SME relief criteria—could make an irrevocable election to take the RDEC in place of the large company R& D relief for qualifying costs incurred on or after 1 April 2013. The RDEC is now the only R& D relief open to those businesses; for details, see Practice Note: R& D expenditure credit (pre-1 April 2024). This...

What is land remediation relief? ( LRR) LRR provides corporation tax relief on expenditure incurred in remediating contaminated land or in bringing derelict sites back into use. In 2009, the regime was broadened to address market failure by returning long-term derelict land to use, bringing such sites back into use. An incentive applies where land, whose development has been affected by various kinds of continuing dereliction, is brought back into productive use. The extension was intended to correct market failure by encouraging activity on sites blighted by ongoing dereliction. The relief was at risk of being discontinued after 2012; however, the 2012 Budget confirmed it would continue. The October 2024 HM Treasury Corporate Tax Roadmap, published alongside Autumn Budget 2024, notes the new Labour government’s commitment to a brownfield-first approach, prioritising the development of previously used land wherever possible. Given the time since the last review of LRR, and...

Under Part 8 of the Corporation Tax Act 2009 ( CTA 2009), the starting point for the corporate intangible assets regime is that a company measures gains and losses on its intangible fixed assets ( IFAs) as corporation tax credits and debits, for corporation tax purposes, by reference to the way those IFAs are accounted for. Put simply, accounts drawn up in line with generally accepted accounting practice ( GAAP) provide the basis from which the figures and categories that become taxable or relievable in relation to a company’s IFAs are determined. This approach is commonly known as ‘tax following the accounts’. That said, the regime contains a number of carve-outs: on certain matters the rules override the accounting outcome and mandate that IFA credits and debits are worked out using an alternative method instead, calculated on a different basis overall. For more on the tax...

Under the loan relationships regime, a fundamental rule is that a company must bring profits and losses on its loan relationships into account for corporation tax in line with how those relationships are recognised in its accounts, provided that treatment complies with GAAP. For more detail on the general framework governing how profits and losses on loan relationships are calculated and brought into account for corporation tax, see Practice Note: Loan relationships—the main tax rules. There are, however, circumstances in which the loan relationships legislation requires the tax position to move away from the amounts shown in the accounts. This can arise where a debt within the loan relationships rules: becomes impaired, or is released (in whole or in part) It should be made clear at the outset that these provisions—which can trigger a departure from the accounts in such cases—only apply where a...

Hybrid rules This Practice Note sets out the UK provisions (referred to in this Practice Note as the hybrid rules) that, for corporation tax purposes, neutralise hybrid and other mismatch outcomes. Such mismatches exploit differences in the tax treatment of an entity or instrument under the laws of two or more jurisdictions to produce double non-taxation, including extended deferral. Although the hybrid rules are said to be grounded in the OECD/ G20 Final Report on BEPS Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements (5 October 2015) and the OECD’s Report on BEPS Action 2: Neutralising the Effects of Branch Mismatch Arrangements (27 July 2017) (together, the Action 2 recommendations), HMRC guidance at INTM550020 also confirms that the UK hybrids legislation is intentionally broader than the OECD recommendations in certain areas, so the outcomes may diverge from those under the OECD...

ARCHIVED This Practice Note has been archived and is no longer maintained. It deals solely with the anti-diversion rule applying to accounting periods beginning before 1 January 2013. For the rule that applies to periods after that date, see: Foreign branch exemption—anti-diversion after 1 January 2013 Purpose of the anti-diversion rule The foreign branch exemption is constrained by an anti-avoidance measure intended to prevent a UK resident company from diverting profits away from the UK, ie to stop a UK company arranging for profits to arise in a foreign PE (and thus be exempt) rather than in the UK (where they would be taxable). This is known as the anti-diversion rule. The foreign branch exemption was introduced, alongside interim enhancements to the CFC regime, by Schedule 13 to the Finance Act 2011 ( FA 2011)......

Foreign branch exemption—anti-diversion after 1 January 2013 This Practice Note deals only with the anti-diversion aspects of the foreign branch exemption that apply to accounting periods beginning on or after 1 January 2013. The scope of that anti-diversion rule is set out in Practice Note: Foreign branch exemption—anti-diversion after 1 January 2013. For material covering the rules that were in force for periods starting before that date, which are now largely of historical interest, refer to Practice Note: Foreign branch exemption—anti-diversion before 1 January 2013 [ Archived]. Broadly aligned with, and derived from, the UK’s CFC rules, the anti-diversion rule reflects many of the same concepts and expressions, and it employs many equivalent operational mechanisms. Its purpose is to deny exemption to profits that have been diverted out of the UK, so that those profits are brought within UK corporation tax, with credit...

ARCHIVED This archived Practice Note outlines the criteria that must be satisfied for a distribution from a controlled company, received by a UK corporation tax payer before 1 January 2013, to qualify for exemption from UK corporation tax. For details on distributions from controlled companies received on or after 1 January 2013, see Practice Note: Distribution exemption—distributions from controlled companies on or after 1 January 2013. A non-small company will be chargeable to corporation tax on a distribution it receives unless, amongst other specified requirements, the distribution falls within an exempt class......

As set out in Practice Note: Scope of distributions for tax purposes, distributions are grouped into four categories: dividends—covering paragraph A and considered further in this note transfers of assets or liabilities—covering paragraphs B and G and examined further in Practice Note: Tax-types of distribution—transfers of assets and liabilities interest recharacterised as a distribution—covering paragraphs E and F and discussed in greater detail in Practice Notes: Types of distribution—interest recharacterised as a distribution: non-commercial securities and Types of distribution—interest recharacterised as a distribution: special securities bonus issues of shares or securities—covering paragraphs C, D and H and explored in greater detail in Practice Note: Types of distribution—bonus issues Paragraph A—dividends The first category of distribution is any dividend made by the company, including a capital dividend. To assess whether a specific payment or transaction falls within this paragraph, one must...

Scope of distributions for tax purposes For tax purposes, distributions fall into four principal classes: dividends—covering paragraph A and explored in Practice Note: Tax—types of distribution—dividends transfers of assets or liabilities—covering paragraphs B and G and discussed further in this note interest treated as a distribution—covering paragraphs E and F and considered in Practice Note: Types of distribution—interest recharacterised as a distribution: non-commercial securities, and Types of distribution—interest recharacterised as a distribution: special securities bonus issues of shares or securities—covering paragraphs C, D and H and examined in further detail in Practice Note: Types of distribution—bonus issues Where a distribution could be within both paragraph B and paragraph G, it is regarded as within paragraph B alone......

Eight anti-avoidance rules block the use of one or more exempt distribution classes for distributions received by companies that are not small. For an outline of the exempt classes, see Practice Note: How are non-small companies taxed on distributions received? For further guidance on the meaning of a small company, see Practice Note: What is a small company for the purposes of the distribution exemption? The four anti-avoidance rules discussed in this Practice Note apply generally; that is, where a distribution offends any one of these rules, it cannot fall within any exempt class and will, as a result, be automatically chargeable to tax......

Eight anti-avoidance rules block the use of one or more exemption classes for distributions received by companies that are not small. For an outline of the exempt categories, refer to Practice Note: How are non-small companies taxed on distributions received? For the definition of a small company, see Practice Note: What is a small company for the purposes of the distribution exemption? This Practice Note explains four of those anti-avoidance provisions, aimed at distributions which, absent such anti-avoidance rules, would otherwise fall within one or more particular exempt classes as set out in this Practice Note......

Unless a distribution falls within an exempt category (and subject to certain additional conditions), a non-small company will be chargeable to corporation tax on amounts received on such income; otherwise it remains taxable as received in the UK accordingly. Exempt classes of distribution dividends on shares presented as liabilities, discussed in more detail in this Practice Note distributions paid by controlled companies distributions relating to irredeemable ordinary shares distributions on portfolio holdings distributions arising from transactions not intended to reduce tax For details of the tax charge on distributions, see Practice Note: How are non-small companies taxed on distributions received? For the exemptions relevant to small companies, see Practice Note: How are small companies taxed on distributions received? For the meaning of 'small company', see Practice Note: What is a small company for the purposes of the...

A company that is not small is chargeable to corporation tax on any distribution it receives unless, subject to other conditions, the payment falls within an exempt category. There are five exempt categories of distribution: distributions from controlled companies, discussed further in this Practice Note (for receipts before 1 January 2013, see Practice Note: Distribution exemption—controlled companies before 1 January 2013 [ Archived]) distributions relating to non-redeemable ordinary shares distributions concerning portfolio holdings distributions arising from arrangements not intended to reduce tax, and dividends on shares recorded as liabilities For more detail on the corporation tax charge on distributions, see Practice Note: How are non-small companies taxed on distributions received? For guidance on the exemptions relevant to small companies, see Practice Note: How are small companies taxed on distributions received? and for an explanation of what counts as a small company, see Practice Note: What is a small company for the...

A 'loan relationship' means a monetary debt arising from the lending of money. Yet this wording does not capture every form of arrangement or transaction that is taxed under the loan relationships regime. The regime’s scope is specifically and expressly extended to include certain other arrangements and transactions that are treated as equivalent to debt finance. These, often labelled 'deemed loan relationships', cover arrangements which, though not meeting the strict definition of a 'loan relationship', generate a return that is economically the same as interest (sometimes described as an interest‑like return, i.e. an interest-like return). For further detail on the meaning of loan relationship and the various types of 'deemed loan relationships' within the scope of the loan relationships taxing regime, see Practice Note: Loan relationships—what are they? For the computation rules governing how profits and losses on loan...

There are several situations in which a company’s corporation tax position varies according to its size, e.g. the taxation of distributions, transfer pricing, and research and development reliefs. This Practice Note sets out how the definition of a small company operates in relation to the exemption from tax on distributions received by small companies—see Practice Note: How are small companies taxed on distributions received? The definition also matters for companies that are not small, as alternative rules apply—see Practice Note: How are non-small companies taxed on distributions received? What is a small company? For the purposes of the distribution exemption, a company is treated as small for an accounting period if it qualifies as a small or micro enterprise under the definition in the Annex to Commission Recommendation 2003/361/ EC, dated May 2003. The Commission’s criteria are determined by three specified thresholds or...

The corporate intangible assets regime sets out how a company’s gains and losses on intangible fixed assets ( IFAs) are taxed and relieved. The rules sit in Part 8 of the Corporation Tax Act 2009 ( CTA 2009). In broad terms, an IFA is within this regime if it: meets the asset conditions, and is not a pre- FA 2002 asset For the meaning of pre- FA 2002 asset, see Practice Note: What is a pre- FA 2002 asset? This Practice Note addresses the asset conditions. In outline, an IFA satisfies the asset conditions where it: falls within the tax definition of an IFA or constitutes goodwill, and is not specifically excluded from the corporate intangible assets regime (see Practice Note: Excluded intangible fixed assets) Tax definition of intangible fixed asset An asset is an IFA for a company if it is an...

Ordinarily, distributions take the form of cash dividends paid by a company to its shareholders—essentially a straightforward payment of profits to the company’s owners. However, the corporation tax meaning of distribution differs from the company law concept (see Practice Note: Dividends, distributions and scrip dividends). Why does it matter whether a payment is a distribution? It is vital to establish whether a particular payment by a UK company is a distribution because, if it is: the paying company is not permitted a deduction for the amount in its UK corporation tax computation; and a UK corporate recipient will be chargeable to corporation tax on the amount under CTA 2009, Part 9A, unless the payment falls within one of the specific exemptions—for further detail, see Practice Notes: How are small companies taxed on distributions received? and How are non-small companies taxed on...